<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
ARCO Chemical Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF ARCO CHEMICAL COMPANY APPEARS HERE]
NOTICE OF
ANNUAL MEETING
OF STOCKHOLDERS
TO BE HELD
ON MAY 14, 1998
AND PROXY STATEMENT
--------------------------------------------------
PLEASE COMPLETE, SIGN, DATE, AND RETURN
YOUR PROXY PROMPTLY
--------------------------------------------------
<PAGE>
ARCO CHEMICAL COMPANY
3801 West Chester Pike
Newtown Square, Pennsylvania 19073-2387
April 21, 1998
Dear Stockholder:
You are cordially invited to join us at the 1998 Annual Meeting of Stockholders
on Thursday, May 14, 1998, at the Conference Center at the Company's
Headquarters, 3801 West Chester Pike, Newtown Square, Pennsylvania, beginning
at 10:00 a.m.
It is important that your shares be voted whether or not you plan to be present
at the meeting. Please complete, sign, date, and return the enclosed form of
proxy promptly. If you attend the meeting and wish to vote your shares in
person, you may revoke your proxy.
This booklet includes the notice of the meeting and the Proxy Statement, which
contains information about the formal business to be acted upon by the
stockholders. The meeting will also feature a report on the operations of your
Company, followed by a question and discussion period.
Sincerely yours,
/s/ Anthony G. Fernandes
Chairman of the Board
/s/ Alan R. Hirsig
President and Chief Executive Officer
<PAGE>
ARCO CHEMICAL COMPANY
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 14, 1998
TO THE STOCKHOLDERS:
The Annual Meeting of Stockholders of ARCO Chemical Company ("ARCO Chemical" or
the "Company") will be held at the Conference Center at the Company's
Headquarters, 3801 West Chester Pike, Newtown Square, Pennsylvania, on
Thursday, May 14, 1998, at 10:00 a.m. local time, for the following purposes,
as more fully described in the attached Proxy Statement:
(1) To elect 12 directors to hold office for a one-year term;
(2) To approve and ratify the ARCO Chemical Company 1998 Long-Term Incentive
Plan;
(3) To approve the appointment of Coopers & Lybrand L.L.P. as independent
auditors for ARCO Chemical for the year 1998; and
(4) To transact such other business as may properly come before the meeting.
The Board of Directors has fixed April 14, 1998 as the record date for the
meeting. Accordingly, only stockholders of record of the common stock of the
Company at the close of business on such date are entitled to vote at the
meeting.
Each such stockholder of record will receive a form of proxy pertaining to the
shares of common stock of the Company registered in his or her name. Each
participant in employee stock benefit plans will also receive a form of proxy
pertaining to shares of the Company's common stock credited to his or her
account in the plans.
YOU ARE URGED TO READ THE PROXY STATEMENT, AND THEN TO COMPLETE, SIGN, AND DATE
THE FORM OF PROXY AND RETURN IT IN THE ENCLOSED SELF-ADDRESSED POSTAGE-PAID
ENVELOPE.
/s/ Robert J. Millstone
ROBERT J. MILLSTONE Newtown Square,
Vice President, Pennsylvania
General Counsel and April 21, 1998
Secretary
<PAGE>
ARCO CHEMICAL COMPANY
3801 WEST CHESTER PIKE
NEWTOWN SQUARE, PENNSYLVANIA 19073-2387
----------------
PROXY STATEMENT
APRIL 21, 1998
----------------
INTRODUCTION
The accompanying proxy is solicited by the Board of Directors of ARCO
Chemical Company ("ARCO Chemical" or the "Company"). The proxy may be revoked
by the stockholder at any time prior to the time it is voted by giving notice
of such revocation either personally or in writing to the Secretary of ARCO
Chemical. Shares represented by a properly executed proxy will be voted in
accordance with the instructions of the stockholder. In the absence of such
instructions, the persons named in the accompanying proxy will vote FOR the
election of the 12 nominees for director listed in this Proxy Statement, FOR
the approval and ratification of the ARCO Chemical Company 1998 Long-Term
Incentive Plan, and FOR the approval of the appointment of Coopers & Lybrand
L.L.P. as independent auditors for the Company for the year 1998. As to other
items of business that may come before the meeting, such persons will vote in
accordance with their best judgment.
VOTING SECURITIES
Holders of record of outstanding common stock of the Company ("Common Stock")
at the close of business on April 14, 1998 will be entitled to one vote per
share. The Company had 97,276,339 shares of Common Stock outstanding on such
record date. Fractional shares will not be voted. The presence, in person or by
proxy, of stockholders entitled to cast at least a majority of the votes that
all stockholders are entitled to cast shall constitute a quorum.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS; CONTROL OF THE COMPANY
Atlantic Richfield Company, the Company's majority stockholder, owns the
number and percent of Common Stock shown in the table below as of the record
date. Based upon information contained in a Schedule 13D filed with the Company
and dated June 13, 1991, Archer-Daniels-Midland Company ("Archer-Daniels-
Midland") owns beneficially approximately five percent of the Common Stock as
of the record date as set forth below:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
NAME AND OWNERSHIP OF PERCENT
TITLE OF CLASS ADDRESS SHARES OF CLASS
-------------- -------- ------------ --------
<S> <C> <C> <C>
Common Stock......... Atlantic Richfield Company
515 South Flower Street
Los Angeles, California 90071 80,000,001(a) 82.2
Common Stock......... Archer-Daniels-Midland Company
4666 Faries Parkway
Decatur, Illinois 62526 4,815,300(b)(c) 5.0
</TABLE>
- --------
(a) Sole voting power, sole dispositive power.
(b) According to the Schedule 13D filed with the Company by Archer-Daniels-
Midland, Archer-Daniels-Midland has sole voting power and sole dispositive
power.
(c) In addition, according to the above-referenced Schedule 13D, M. L. Andreas,
Senior Vice President of Archer-Daniels-Midland, owns 17% 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.
<PAGE>
Under applicable provisions of the Delaware General Corporation Law and the
Company's Certificate of Incorporation, Atlantic Richfield Company, a Delaware
corporation ("ARCO"), is able, acting alone, to elect the entire Board of
Directors of the Company and to approve any action requiring stockholder
approval. ARCO's current level of ownership of the outstanding voting stock
precludes any acquisition of control of the Company not favored by ARCO. ARCO
has informed the Company that it intends to vote its shares in favor of the 12
nominees for director, for the approval and ratification of the ARCO Chemical
Company 1998 Long-Term Incentive Plan, and for the approval of the appointment
of Coopers & Lybrand L.L.P. as independent auditors for the Company for the
year 1998.
The Company and ARCO entered into an agreement, dated as of June 30, 1987,
granting ARCO certain rights as a stockholder of the Company. In order to allow
ARCO to continue to include the Company as part of its "affiliated group" for
federal income tax purposes, ARCO has been granted the cumulative, continuing
right to purchase from the Company, at the then current market price, such
number of shares of Common Stock as may be necessary to preserve that status.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Common Stock and the
number of shares of common stock of ARCO ("ARCO Common Stock") owned
beneficially as of February 1, 1998 by each director and nominee, each
executive officer named in the Summary Compensation Table, and all directors
and nominees and executive officers as a group. Other than as disclosed in the
following table and accompanying footnotes, the directors and nominees, the
named executive officers, and the directors and nominees and executive officers
as a group did not own any equity securities of the Company or ARCO. As of
February 1, 1998, the percentage of shares of any class of equity securities of
the Company or ARCO beneficially owned by any director and nominee or any named
executive officer, or by all directors and nominees 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 ARCO
SHARES OF COMMON STOCK COMMON STOCK
OWNED BENEFICIALLY AS OF OWNED BENEFICIALLY AS OF
NAME FEBRUARY 1, 1998(A)(B) FEBRUARY 1, 1998(C)(D)
- -------------------------------------------------------------------------------
<S> <C> <C>
Walter F. Beran 8,453 0
Anthony G. Fernandes 1,000 254,386
Morris Gelb 59,751 6,478
Mark L. Hazelwood 0 66,482
Alan R. Hirsig 223,804 2,355
John H. Kelly 0 40,168
Marie L. Knowles 100 115,755
James A. Middleton 2,485 217,449
Robert J. Millstone 25,002 237
Stephen R. Mut 1,000 93,896
Frank Savage 8,739(e) 0
Marvin O. Schlanger 126,216 1,164
Robert H. Stewart, III 1,000(f) 0
Walter J. Tusinski 60,095 27,920(g)
Donald R. Voelte, Jr. 0 39,291
All directors and nominees
and all executive officers
as a group, including
those named above 547,571(h) 867,339(i)
- -------------------------------------------------------------------------------
</TABLE>
(a) The amounts shown include shares of Common Stock held by the trustees of
the ARCO Chemical Company Capital Accumulation Plan (the "Capital
Accumulation Plan") and the ARCO
(Continued on next page)
2
<PAGE>
(Continued from previous page)
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.
(b) 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 nominees and all executive officers as a group (including
those just named), 468,800.
(c) The amounts shown include shares of ARCO Common Stock held by the trustees
of the Capital Accumulation Plan, the Savings Plan, and ARCO's Capital
Accumulation and Savings Plans for the accounts of participants. The
amounts shown include shares of restricted ARCO Common Stock granted under
ARCO's 1985 Executive Long-Term Incentive Plan as follows: Mr. Fernandes,
3,240; Mr. Hazelwood, 842; Mr. Kelly, 968; Mrs. Knowles, 2,431; and Mr.
Mut, 1,202. Shares of restricted ARCO Common Stock include voting rights
and the right to receive dividends.
(d) The amounts shown include shares of ARCO Common Stock that may be acquired
within the 60-day period following February 1, 1998 through the exercise of
stock options as follows: Mr. Fernandes, 205,903; Mr. Hazelwood, 52,861;
Mr. Kelly, 33,334; Mrs. Knowles, 96,260; Mr. Middleton, 168,000; Mr. Mut,
74,241; Mr. Tusinski, 17,740; Mr. Voelte, 39,270; and all directors and
nominees and all executive officers as a group (including those just
named), 687,609. The amounts also include the following number of shares of
ARCO Common Stock issuable in respect of the conversion of dividend share
credits allocated to such options: Mr. Fernandes, 40,793; Mr. Hazelwood,
11,498; Mr. Kelly, 4,952; Mrs. Knowles, 15,983; Mr. Middleton, 49,449; Mr.
Mut, 17,257; Mr. Tusinski, 7,428; and all directors and executive officers
as a group, 147,360.
(e) The amount shown includes 100 shares subject to shared voting and
investment power with spouse.
(f) Mr. Stewart resigned from the Board effective as of February 19, 1998.
(g) The amount shown includes 354 shares subject to shared voting and
investment power with spouse.
(h) The amount shown includes 100 shares subject to shared voting and
investment power. Does not include 4,963 shares held for or by family
members, as to which beneficial ownership is disclaimed.
(i) Includes 354 shares subject to shared voting and investment power. Does not
include 10,300 shares held by spouses (two of whom are employees of ARCO)
or adult children, as to which beneficial ownership is disclaimed.
ELECTION OF DIRECTORS
Item 1 on Proxy Card
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 12
and has selected the nominees listed below, who were recommended by the
Nominating Committee (described below), for election to a term of one year.
3
<PAGE>
Except for Mark L. Hazelwood, John H. Kelly and Donald R. Voelte, Jr., each of
the nominees is currently a director of the Company. Robert H. Stewart, III
retired from the Board effective as of February 19, 1998 and is not a nominee
for re-election. Unless authority to vote for any nominee is withheld in the
proxy, the persons named in the accompanying proxy intend to vote FOR the
election of the 12 nominees for director listed below.
All nominees have indicated a willingness to serve as directors, but if any
of them should decline or be unable to act as a director, the persons named in
the proxy will vote for the election of such nominee or nominees as may be
recommended by the Board of Directors.
Under the Delaware General Corporation Law, each of the nominees must
receive a plurality of the votes of shares of Common Stock present in person
or by proxy at the meeting to be elected as a director. Abstentions will be
counted as shares present at the meeting.
The following biographical information is furnished with respect to each of
the nominees. The information includes age as of May 14, 1998, the date of the
annual meeting, present position, if any, with ARCO Chemical, period served as
a director, and other business experience during the past five years. Unless
stated otherwise, the offices referred to below are offices with the Company
or, prior to June 1987, the ARCO Chemical Division of ARCO. See "Transactions
Between the Company and ARCO" at page 21. Alan R. Hirsig has decided to resign
as President and Chief Executive Officer, effective as of May 14, 1998. Mr.
Hirsig will assume the position of Vice Chairman. The Board has elected Marvin
O. Schlanger as President and Chief Executive Officer, effective as of May 14,
1998. Mr. Fernandes and Mrs. Knowles have decided not to stand for re-election
as ARCO directors following the expiration of their current term on May 4,
1998.
WALTER F. BERAN, 72
[PHOTO OF WALTER F. BETAN Mr. Beran was elected a Director of the Company
APPEARS HERE] 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.
ANTHONY G. FERNANDES, 52
Chairman of the Board
[PHOTO OF ANTHONY G. Mr. Fernandes was elected a Director of the
FERNANDES APPEARS HERE] Company on May 10, 1996 and Chairman of the Board
on July 17, 1997. Mr. Fernandes has been an
Executive Vice President and Director of ARCO
since September 1994. Previously, he was Senior
Vice President of ARCO and President of ARCO Coal
Company from July 1990 to September 1994 and Vice
President and Controller of ARCO from July 1987
to July 1990.
4
<PAGE>
MARK L. HAZELWOOD, 48
[PHOTO OF MARK L. Mr. Hazelwood has been a Senior Vice President of
HAZELWOOD APPEARS HERE] External Affairs of ARCO since July 1997. He
served as President of ARCO Alaska
Transportation, Inc. (September 1996-July 1997),
Senior Vice President of NGC Corp. (April 1996 to
August 1996), President of ARCO Pipe Line Company
(January 1994-April 1996), Senior Vice President
of Marketing of ARCO Oil and Gas Company (April
1991-January 1994), and Vice President and
General Tax Officer of ARCO (August 1988-March
1991).
ALAN R. HIRSIG, 58
President and Chief Executive Officer
[PHOTO OF ALAN R. HIRSIG Mr. Hirsig was elected President and Chief
APPEARS HERE] Executive Officer of the Company on January 1,
1991. 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 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
[PHOTO OF JOHN H. KELLY Mr. Kelly has been a Senior Vice President, Human
APPEARS HERE] Resources of ARCO since January 1997. He was Vice
President, Corporate Human Resources of ARCO
(June 1993-January 1997) and Vice President,
Human Resources of ARCO Oil and Gas Company (July
1991-June 1993).
MARIE L. KNOWLES, 51
[PHOTO OF MARIE L. KNOWLES Mrs. Knowles was elected a Director of the
APPEARS HERE] 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, Chief Financial
Officer and a Director of ARCO since July 1996.
Previously, she was Senior Vice President of ARCO
and President of ARCO Transportation Company from
June 1993 to July 1996, Vice President and
Controller of ARCO from July 1990 to May 1993,
and Vice President of Finance, Control, and
Planning of ARCO International Oil and Gas
Company from July 1988 to July 1990. Mrs. Knowles
is also a Director of Vastar Resources, Inc. and
Phelps Dodge Corporation.
5
<PAGE>
JAMES A. MIDDLETON, 62
[PHOTO OF JAMES A. Mr. Middleton was elected a Director of the
MIDDLETON APPEAR HERE] 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 ARCO from October 1987 until he
resigned from those positions in September 1994.
Mr. Middleton retired as an employee of ARCO 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.
STEPHEN R. MUT, 47
[PHOTO OF STEPHEN R. MUT Mr. Mut was elected a Director of the Company on
APPEARS HERE] January 1, 1997. Mr. Mut has been Senior Vice
President of ARCO 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.
FRANK SAVAGE, 59
[PHOTO OF FRANK SAVAGE Mr. Savage was elected a Director of the Company
APPEARS HERE] 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.
6
<PAGE>
MARVIN O. SCHLANGER, 50
Executive Vice President and Chief Operating
Officer
[PHOTO OF MARVIN O. Mr. Schlanger was elected an officer of the
SCHLANGER APPEARS HERE] Company on September 1, 1987 and a Director of
the Company on November 14, 1989. He assumed his
current position in November 1994. Previously, he
was 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
Senior Vice President and Chief Financial Officer
[PHOTO OF WALTER J. Mr. Tusinski was elected Senior Vice President
TUSINSKI APPEARS HERE] 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.
DONALD R. VOELTE, JR., 45
[PHOTO OF DONALD R. Mr. Voelte has been a Senior Vice President of
VOELTE, JR., APPEARS HERE] ARCO since April 1997. He previously worked for
the Mobil Corporation for 22 years. His most
recent position was Executive Vice President of
Mobil Corporation and President of Mobil's New
Exploration and Producing Ventures and Global
Exploration (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).
7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------- -------------
OTHER ALL
NAME AND ANNUAL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK OPTIONS COMPENSATION
------------------ ---- ------ ----- ------------ ------------- ------------
($) ($) ($) (#) ($)
(A) (B) (C)(D)
<S> <C> <C> <C> <C> <C> <C>
Alan R. Hirsig ......... 1997 640,385 100,000 35,972 50,200 87,922
President and 1996 592,308 450,000 71,728 55,900 82,240
Chief Executive Officer 1995 542,308 585,000 45,852 44,300 76,571
Morris Gelb............. 1997 283,269 30,000 18,640 13,700 41,807
Senior Vice President 1996 247,846 140,000 29,322 14,500 37,872
1995 234,615 200,000 16,134 12,500 33,554
Robert J. Millstone..... 1997 257,884 25,000 8,241 13,200 39,456
Vice President, 1996 237,692 120,000 10,087 12,600 35,558
General Counsel and 1995 224,520 140,000 6,888 8,900 32,186
Secretary
Marvin O. Schlanger..... 1997 457,788 65,000 10,017 30,100 61,030
Executive Vice President 1996 421,154 300,000 16,736 30,800 52,793
and Chief Operating Of- 1995 400,000 385,000 8,458 24,600 49,954
ficer
Walter J. Tusinski...... 1997 332,308 40,000 10,613 16,900 57,020
Senior Vice President 1996 307,692 169,000 13,170 18,200 55,031
and Chief Financial
Officer............... 1995 292,692 235,000 8,486 17,700 49,256
</TABLE>
- --------
(a) Includes amounts related to tax gross-ups in respect of financial
counseling reimbursements and other miscellaneous items, and incremental
interest accrued under the Key Management Deferral Plan that exceeds 120%
of a specified IRS rate.
(b) These options were granted under the Company's 1990 Long-Term Incentive
Plan. Options granted in 1997, 1996 and 1995 accrue dividend share credits.
For a description of dividend share credits under the 1990 Long-Term
Incentive Plan, see footnote (d) of this Summary Compensation Table.
(c) Includes 1997 contributions to the Executive Supplementary Savings Plan,
incremental Executive Medical Insurance Plan (the "Executive Medical Plan")
premiums, financial counseling reimbursements, certain amounts in respect
of the Key Management Life Insurance Plan, employee stock ownership plan
incentive program ("ESOP Incentive") payments, and imputed income in
respect of the Long-Term Disability Plan (the "LTD Plan"), as follows:
<TABLE>
<CAPTION>
MR. MR. MR. MR. MR.
HIRSIG GELB MILLSTONE SCHLANGER TUSINSKI
------ ------ --------- --------- --------
($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
Executive Supplementary Savings
Plan............................ 38,423 16,996 15,473 27,467 19,939
Incremental Executive Medical
Plan premiums................... 4,983 4,983 4,983 4,983 4,983
Financial counseling reimburse-
ments........................... 2,900 5,000 4,800 2,500 7,870
Key Management Life Insurance
Plan............................ 27,559 9,743 10,294 15,099 14,937
ESOP Incentive payments.......... 3,890 1,661 1,254 2,686 229
LTD Plan imputed income.......... 10,167 3,423 2,652 8,295 9,062
</TABLE>
(Continued on next page)
8
<PAGE>
(Continued from previous page)
The amounts disclosed in respect of the Key Management Life Insurance Plan
include certain reimbursements of premiums paid by the executive officer as
well as the dollar value of the benefit to the executive officer of the
premium paid by the Company during the fiscal year. The dollar value of the
latter benefit is calculated by (i) treating the annual premium paid by the
Company, less the portion of the premium attributable to death benefits
payable to the Company and certain policy charges, as a demand loan from the
Company to the executive officer and (ii) imputing interest on the demand
loan at the applicable federal rate. The deemed amount of the benefit to the
executive officer is the amount of interest imputed less the executive
officer's contribution to the policy.
(d) Dividend share credits accrue on options granted under the Company's 1990
Long-Term Incentive Plan. Dividend share credits are allocated to an
optionee's account whenever dividends are declared on shares of Common
Stock. The number of dividend share credits to be allocated on each
dividend record date to an optionee's account is computed by multiplying
the dividend rate per share of Common Stock by the sum of (x) the number of
shares subject to outstanding options and (y) the number of dividend share
credits then credited to the optionee's account and dividing the resulting
figure by the fair market value of a share of Common Stock ("FMV") on such
dividend record date. Upon the exercise, expiration or surrender of an
option, an optionee may receive a cash payment in respect of the dividend
share credits attributable to such option provided that certain
performance-based conditions are satisfied. If FMV on the date of exercise,
expiration or surrender is greater than the exercise price of the option,
then the optionee is entitled to receive a cash payment equal to the number
of dividend share credits attributable to such option multiplied by FMV on
such date. If the option exercise price is greater than FMV on such date
(i.e., the option is out of the money) and the fair market value of the
dividend share credits (equal to FMV on such date multiplied by the number
of dividend share credits) is equal to or less than the amount by which the
aggregate exercise price of the option exceeds the aggregate FMV of the
shares of Common Stock underlying such option (the "Out-of-the-Money
Spread"), then the optionee is not entitled to receive any cash payment in
respect of the dividend share credits. If the option is out of the money
but the fair market value of the dividend share credits is greater than the
Out-of-the-Money Spread, then the optionee is entitled to receive a cash
payment in respect of the dividend share credits equal to the fair market
value of the dividend share credits less the Out-of-the-Money Spread. The
dividend share credit values realized in the table below and the dividend
share credit values in the table set forth at footnote (c) of the
Aggregated Option Exercises in 1997 and Year-End Option Values table at
page 11. reflect the application of the foregoing cash payment formula.
Dividend share credits accrued on Company options during 1995, 1996 and
1997 to the account of the named executive officers, and the value realized
on exercise, were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------------- ----------------- -----------------
DIVIDEND DIVIDEND DIVIDEND
SHARE VALUE SHARE VALUE SHARE VALUE
NAME CREDITS REALIZED CREDITS REALIZED CREDITS REALIZED
---- -------- -------- -------- -------- -------- --------
# $ # $ # $
<S> <C> <C> <C> <C> <C> <C>
Mr. Hirsig.......... 13,761 0 13,951 106,085 21,849 112,228
Mr. Gelb............ 4,469 0 4,633 0 6,235 224,372
Mr. Millstone....... 1,582 0 2,238 46,117 3,169 0
Mr. Schlanger....... 7,807 0 9,855 0 12,827 0
Mr. Tusinski........ 2,753 0 3,894 0 5,306 0
</TABLE>
Dividend share credit totals are rounded to the nearest whole number. FMV
of Common Stock on December 31, 1995 was $48.625. FMV of Common Stock on
December 31, 1996 was $49.375. FMV of Common Stock on December 31, 1997 was
$46.875.
Certain officers and employees of the Company also have options for ARCO
Common Stock granted by ARCO for services rendered to ARCO. Dividend share
credits accrue on options for
(Continued on next page)
9
<PAGE>
(Continued from previous page)
ARCO Common Stock in the same manner that dividend share credits accrue on
options for Common Stock. Upon an ARCO employee becoming employed by the
Company, the Company assumes ARCO's contingent future cash payment
obligation with respect to all dividend share credits accrued on ARCO
options allocated to such employee. Set forth below are cash payments
received by the named individuals with respect to dividend share credits in
connection with the exercise of ARCO options. During 1997: Mr. Tusinski,
$79,422. During 1996: Mr. Gelb, $89,664; Mr. Schlanger, $106,229; and Mr.
Tusinski, $93,435. During 1995: Mr. Gelb, $11,516 and Mr. Tusinski,
$47,727.
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZED VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS(A) OPTION TERM(B)
------------------------------------------- ---------------------------
% OF TOTAL
OPTIONS GRANTED
OPTIONS TO EMPLOYEES EXERCISE EXPIRATION
NAME GRANTED IN 1997 PRICE DATE 5% 10%
---- ------- --------------- -------- ---------- ------------- -------------
# ($/SH) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Alan R. Hirsig.......... 50,200 18.10 47.1875 2/19/07 1,489,733 3,775,277
Morris Gelb............. 13,700 4.94 47.1875 2/19/07 406,561 1,030,305
Robert J. Millstone..... 13,200 4.76 47.1875 2/19/07 391,723 992,702
Marvin O. Schlanger..... 30,100 10.85 47.1875 2/19/07 893,247 2,263,662
Walter J. Tusinski...... 16,900 6.09 47.1875 2/19/07 501,524 1,270,960
Stock Price(c).......... 76.8635 122.3922
All Stockholders(c)..... 2,883,828,096 7,308,186,600
</TABLE>
- --------
(a) These options were granted under the Company's 1990 Long-Term Incentive
Plan at an exercise price equal to the FMV on the date of grant, become
exercisable on February 20, 2001, and earn dividend share credits. The
options and the dividend share credits associated with such options are
canceled upon an optionee's termination of employment under certain
specified circumstances. For a description of dividend share credits under
the 1990 Long-Term Incentive Plan, see footnote (d) of the Summary
Compensation Table at page 9.
(b) The potential realizable values presented are exclusive of the value, if
any, that might be realized in the future in respect of dividend share
credits.
(c) Based on total number of shares outstanding on December 31, 1997 of
97,177,230 and assumed purchase price of $47.1875 per share.
AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF IN-THE-MONEY
NUMBER OF UNEXERCISED UNEXERCISED OPTIONS AT
SHARES OPTIONS AT YEAR-END(A) YEAR-END(B)(C)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
(#) ($) (#) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Alan R. Hirsig.......... 3,500 54,688 200,200 106,100 1,109,824 0
Morris Gelb............. 7,000 109,250 57,200 28,200 355,907 0
Robert J. Millstone..... 0 0 22,500 25,800 108,394 0
Marvin O. Schlanger..... 0 0 117,100 60,900 698,344 0
Walter J. Tusinski...... 0 0 45,300 35,100 115,444 0
</TABLE>
- --------
(a) Each option carries with it the right to dividend share credits, as
described in footnote (d) of the Summary Compensation Table at page 9.
(Continued on next page)
10
<PAGE>
(Continued from previous page)
(b) FMV of Common Stock on December 31, 1997 was $46.875.
(c) Set forth below are the values of aggregate dividend share credits accrued
with respect to options held at year-end based on FMV of Common Stock on
December 31, 1997 of $46.875. The dividend share credit values have been
calculated based on the cash payment formula described in footnote (d) of
the Summary Compensation Table at page 9, assuming the exercise of the
corresponding options (even if not exercisable in fact) on December 31,
1997, as follows:
<TABLE>
<CAPTION>
YEAR-END DIVIDEND SHARE CREDIT VALUES
-----------------------------------------
EXERCISABLE OPTIONS UNEXERCISABLE OPTIONS
------------------- ---------------------
($) ($)
<S> <C> <C>
Mr. Hirsig......................... 3,174,151 434,550
Mr. Gelb........................... 1,002,847 114,225
Mr. Millstone...................... 307,286 102,133
Mr. Schlanger...................... 1,966,431 244,849
Mr. Tusinski....................... 505,196 142,715
</TABLE>
PENSION PLAN TABLE
The following table shows estimated annual pension benefits payable to
employees, including executive officers of the Company, upon retirement at age
65 under the provisions of the ARCO Chemical Company Retirement Plan and the
ARCO Chemical Company Supplementary Executive Retirement Plan as in effect on
December 31, 1997.
<TABLE>
<CAPTION>
AVERAGE FINAL
EARNINGS
(SALARY PLUS BONUS)
HIGHEST THREE
CONSECUTIVE YEARS APPROXIMATE ANNUAL BENEFIT FOR YEARS OF
SINCE DECEMBER 31, 1978(A) MEMBERSHIP SERVICE INDICATED(B)(C)
- -------------------------- -----------------------------------------------------
15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 300,000 $ 66,345 $ 89,960 $113,575 $137,190 $160,805 $184,805
400,000 88,845 120,460 152,075 183,690 215,305 247,305
500,000 111,345 150,960 190,575 230,190 269,805 309,805
600,000 133,845 181,460 229,075 276,690 324,305 372,305
700,000 156,345 211,960 267,575 323,190 378,805 434,805
800,000 178,845 242,460 306,075 369,690 433,305 497,305
900,000 201,345 272,960 344,575 416,190 487,805 559,805
1,000,000 223,845 303,460 383,075 462,690 542,305 622,305
1,100,000 246,345 333,960 421,575 509,190 596,805 684,805
1,200,000 268,845 364,460 460,075 555,690 651,305 747,305
- ---------------------------------------------------------------------------------
</TABLE>
(a) The Retirement Plan and the Supplementary Executive Retirement Plan cover
the compensation reported as salary and bonus in the Summary Compensation
Table. Retirement benefits are based on years of participation service and
the employee's compensation during the highest three consecutive years of
service since December 31, 1978.
(b) The amounts shown in the above table are necessarily based upon certain
assumptions, including retirement of the employee on December 31, 1997 and
payment of the benefit under the basic form of allowance provided under the
Retirement Plan (payment for the life of the employee only with a
guaranteed minimum payment period of 60 months). The benefits shown are not
subject to deduction for Social Security benefits or other offset amounts.
(c) As of December 31, 1997, the credited years of service under the Retirement
Plan for the five named executive officers were as follows: Mr. Hirsig, 36
years, 7 months; Mr. Gelb, 28 years, 4 months; Mr. Millstone, 9 years; Mr.
Schlanger, 23 years; and Mr. Tusinski, 5 years and 4 months.
11
<PAGE>
CHANGE OF CONTROL ARRANGEMENTS
The Compensation Committee of the Board of Directors of the Company adopted a
Change of Control Plan (the "Change of Control Plan"), effective as of February
19, 1998, that applies generally to employees, including the named executive
officers, and becomes operative upon a change of control of the Company./1/ The
Change of Control Plan provides for the acceleration of certain benefits and
the payment of severance and other allowances upon a change of control of the
Company and subsequent termination of employment by the acquiring entity
without cause or by the employee for good reason. The definition of good reason
varies depending on the employee's grade level within the Company.
Certain benefits accrue upon the occurrence of a change of control. These
benefits include the immediate vesting of stock options and phantom stock units
("VIP units") as well as the accrued dividend share credits ("DSCs"), if any,
allocated to such options or VIP units. In addition, any DSCs that would be
earned through the remainder of the term of the associated options or VIP units
will be computed and become vested. Shares of unvested restricted Common Stock,
and, subject to certain other conditions, a pro rata portion of contingent
restricted Common Stock awarded under the ARCO Chemical Company 1998 Long-Term
Incentive Plan (the "1998 LTIP") will immediately vest upon a change of
control. A portion of a supplemental award of restricted Common Stock, based on
the Company's performance and calculated under the 1998 LTIP as of the date of
the change of control event, may also become vested.
If an eligible employee is terminated under specified circumstances within
two years following a change of control, the employee will be entitled to
receive one times to three times pay, depending upon the employee's grade
level. Severance payments are paid based upon length of service for employees
who are not executives or key managers of the Company. The named executive
officers will receive a payment equal to three times the sum of their current
base salary plus the greater of (i) the average of their bonuses for the last
three years or (ii) their target bonus for the year in which the termination or
change of control occurs. The named executive officers may also receive a
payment equal to a pro rata portion of their target bonus for the year in which
the change of control occurs. Employees will receive additional specified
coverage under the Company's sponsored medical, dental and life insurance
plans, depending on the employee's grade level. The named executive officers
will receive 36 months of coverage. These officers will also receive a gross up
payment from the Company for the amount of the excise tax liability, if any,
imposed pursuant to Internal Revenue Code Section 4999 with respect to any
benefits paid in connection with a change of control.
- --------
/1/Under the Change of Control Plan, a change of control means any one of the
following events: (i) the acquisition by any person or group (other than
ARCO) of 25% or more of the outstanding shares of Common Stock, (ii) the
merger, consolidation or sale of substantially all of the assets of the
Company, unless after the consummation of such a transaction, the
stockholders of the Company immediately prior to such transaction own at
least 60% of the outstanding shares of stock of the resulting entity, (iii)
the liquidation or dissolution of the Company, (iv) the incumbent directors
of the Company (directors as of February 19, 1998 or individuals recommended
or approved by a majority of the then incumbent directors) cease to
constitute at least a majority of the Company's Board of Directors, and (v) a
change of control of ARCO under ARCO's then current change of control plans
or arrangements.
12
<PAGE>
PERFORMANCE GRAPH
COMPARISONS OF CUMULATIVE TOTAL RETURN
The performance graph below compares the cumulative total stockholder return
of the Company with the cumulative total return of the S&P 500 Stock Index and
the S&P Chemicals Index for the five-year period ended December 31, 1997. The
performance graph assumes an initial investment of $100 in the Company's Common
Stock and in each of the comparative indices and assumes the reinvestment of
all dividends.
Five-Year Cumulative Total Return
[GRAPH APPEARS HERE]
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
ARCO Chemical $100.00 $104.78 $112.66 $131.44 $139.99 $141.18
S&P 500 Stock Index $100.00 $110.08 $111.53 $153.45 $188.68 $251.63
S&P Chemical Index $100.00 $111.83 $129.47 $169.12 $223.42 $274.61
13
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee approves the design of, assesses the effectiveness
of, and administers the Company's executive compensation programs in support of
the Company's compensation philosophy. The Compensation Committee is composed
of the individuals listed below, all of whom are non-employee directors. This
report describes the components of the Company's executive officer compensation
program, explains the basis on which fiscal year 1997 compensation
determinations were made by the Compensation Committee and discusses the
changes being implemented in 1998 with respect to the Company's executives.
COMPENSATION PHILOSOPHY
ARCO Chemical's executive compensation policy is designed to link the
elements of executive pay to Company and individual performance. The
compensation program is intended to attract, motivate and retain high caliber
executive talent, and to deliver short- and long-term compensation predicated
on the achievement of financial and strategic objectives and returns to
stockholders.
Each year, the Compensation Committee reviews ARCO Chemical's performance and
executive compensation. The evaluation of Company performance historically has
been based on an assessment of financial performance as compared to the S&P
Chemicals group and the achievement of the Company's financial and other
business objectives. Financial performance comparisons to the S&P Chemicals
group included such factors as relative net income, net income growth, return
on sales, return on capital employed, return on stockholders' equity, and total
return to stockholders. The Compensation Committee did not, however, apply any
specific quantitative formulas in arriving at its compensation decisions.
COMPONENTS OF EXECUTIVE COMPENSATION FOR 1997
For 1997, the Company's executive compensation program was designed to
emphasize incentive compensation through the use of annual cash bonuses and
equity-based long-term incentives. These incentive opportunities represent a
variable component of pay which, when combined with base pay, provide total
compensation that should closely correlate with both Company and individual
performance. Total compensation levels are measured against other chemical
companies whose size and character are similar to ARCO Chemical. The universe
of companies used for compensation comparisons is broader than those that
comprise the S&P Chemicals Index (used in the performance graph on page 13)
because the Company competes for executive talent beyond the group of companies
included in the S&P Chemicals Index.
ARCO Chemical's 1997 full-year performance, measured on the relative bases
noted above, did not meet either its financial objectives or attain
satisfactory annual performance relative to the competitor group. Additionally,
the Company's longer-term performance through 1997 was below the median of the
competitor group on several key measures, including total return to
stockholders. Although the Company also established specific internal non-
financial goals and objectives for 1997 and met or made substantial progress in
achieving them, the Compensation Committee determined that, overall, the
Company's performance was less than satisfactory. The Compensation Committee
has, therefore, approved total compensation below the level paid last year and
below the expected competitor average for the current year.
During 1997, the following components of executive compensation each played a
specific role in the achievement of the desired total compensation position.
14
<PAGE>
Base Pay
The Company maintains a target executive base pay structure at approximately
the average of the competitor group. Base pay levels are reviewed regularly,
and individual pay adjustments are considered based on individual performance,
the executive's contribution to corporate results, and relative position to
peers both within and outside the Company. The Compensation Committee
determined that no increases to base pay levels should be granted in 1998, as
prevailing base pay levels are considered to approximate the average of the
competitor group.
Annual Incentive Plan
The Annual Incentive Plan provides for cash payments based on Company and
individual performance. Target annual incentive levels as a percent of base pay
are based upon competitive comparisons; and actual payout levels are determined
based on the Company performance criteria described above, which are the same
measures used for the broad-based incentive plan applicable to the majority of
the Company's employees worldwide. Individual awards under the plan vary based
on differences in individual performance. The Compensation Committee assessed
Company performance to be below that of the competitor group. Annual incentive
payouts for plan year 1997 will be well below target levels and are expected to
be below competitor payout levels.
1990 Long-Term Incentive Plan
The ARCO Chemical Company 1990 Long-Term Incentive Plan (the "1990 LTIP") has
been a key component in positioning total compensation at levels reflecting
Company performance. The 1990 LTIP provided for grants of non-qualified stock
options, which carry the right to receive dividend share credits, or DSCs. The
DSCs are calculated based on Common Stock dividend payments. Based on an
assessment of annual and longer-term Company performance, a target level of
total compensation as measured against the competitor group was established for
awards under the 1990 LTIP. Stock option grant guidelines for each executive
grade were set at levels which, when combined with base pay and target annual
incentives, resulted in total compensation approximating the target level.
Variations in individual awards were based on differences in contributions and
performance. No additional awards will be made under the 1990 LTIP after 1997.
Long-term incentive awards granted in 1998 were made under the ARCO Chemical
Company 1998 Long-Term Incentive Plan (the "1998 LTIP"), subject to stockholder
approval.
REVISED EXECUTIVE COMPENSATION PROGRAM
During 1997, the Compensation Committee and senior management initiated a
comprehensive examination of the Company's executive compensation program with
the assistance of an independent consulting firm. As a result, ARCO Chemical
introduced a redesigned compensation program commencing with plan year 1998.
This program is largely predicated upon economic value-based measures and
provides rewards that are intended to further focus executives' attention upon
sustained business performance and creation of stockholder value. In 1998, the
executive compensation program will be administered as described below.
1998 Base Pay
The Company intends to continue its practice of setting executive base pay
levels at approximately the average of its peer group.
1998 Annual Incentive Plan
Beginning in 1998, the 1998 Annual Incentive Plan will include an economic
value-based approach to measuring the financial performance of the Company.
Designated as Return on Capital
15
<PAGE>
Managed, or RCM, the measure calculates after-tax operating profit minus a
charge for the use of the capital employed in the business. This primary
financial measure, together with other strategic performance measures, will
form the basis for determining annual cash incentive compensation for plan
years 1998 and beyond. The Compensation Committee believes the redesigned 1998
Annual Incentive Plan more closely aligns executive compensation with value
creation for stockholders.
1998 Long-Term Incentive Plan
Beginning in 1998, long-term executive compensation will be delivered in two
components under the 1998 LTIP: (i) through awards of non-qualified stock
options, granted with an exercise price at fair market value on the date of
award (but without DSCs, which have been discontinued for all stock option
grants after 1997); and (ii) through awards of contingent restricted Common
Stock earned by subsequent performance.
Contingent restricted Common Stock is a new element of compensation that
allows executives to earn shares of performance-based restricted Common Stock
by achieving RCM objectives established by the Long-Term Incentive Plan
Administration Subcommittee at the start of the plan period. Contingent
restricted Common Stock is awarded at the beginning of each performance period.
For the performance period beginning in 1998, compensation depends upon the
Company's attainment of four successive, cumulative RCM objectives (set at
levels consistent with stockholder expectations over a four-year time period).
As each of the four RCM performance objectives is achieved, 25% of the
contingent restricted Common Stock awards will be converted to shares of
performance-based restricted Common Stock. Once all four objectives are
achieved or at the end of six years, whichever occurs first, the current plan
cycle ends and a new plan cycle begins. Contingent restricted Common Stock
awards not earned through the attainment of RCM objectives are forfeited at the
end of six years. A supplemental award of additional shares of restricted
Common Stock will be received by participants if the total RCM performance goal
is met within four years or less and the Company's total stockholder return
("TSR"), relative to the S&P Chemicals group, for the performance period is
above the median. The supplemental performance award is graduated such that
participants may receive up to a maximum of 50% of the number of the contingent
restricted Common Stock awards made at the beginning of the performance period,
if the Company is at the top ranked TSR position. Performance-based restricted
Common Stock granted during the current plan cycle will vest half on the first
anniversary and half on the second anniversary of its conversion from
contingent restricted Common Stock.
The Compensation Committee believes that, in linking executive compensation
directly with RCM and performance, the 1998 LTIP will be effective in focusing
management's attention on the primary factors driving stockholder value
creation and total return to stockholders.
EXECUTIVE STOCK OWNERSHIP GUIDELINES
In order to further align the interests of executives with the Company's
stockholders, the Committee has established stock ownership guidelines that
encourage the accumulation and retention of the Company's Common Stock by
executives. The guidelines suggest that, within the next two years, executives
(depending on responsibility level) hold shares of the Company's Common Stock
valued at approximately one to four times base salary (not including
unexercised stock options).
CEO COMPENSATION
The compensation level for the CEO is set based on Company performance and on
competitive pay levels. CEO compensation is measured against the average of
similar positions reported in the proxy statements of competitor companies
whose size and character are similar to ARCO Chemical.
16
<PAGE>
In establishing the compensation of Alan R. Hirsig, the Company's CEO, the
Compensation Committee recognized that the Company did not achieve several of
its 1997 goals and objectives. Multi-year return on stockholders' equity and
return on capital employed through 1997 are below the average of the competitor
group. The Compensation Committee recognized that 1997 was a particularly
challenging year for the Company and that the management formulated and
implemented a number of tactical actions and strategic programs to reposition
the Company for future success.
Based on the Company's performance, and consistent with the long-standing
compensation philosophy outlined above, the Compensation Committee approved the
following compensation for Mr. Hirsig:
In 1998, the Compensation Committee recommended no increase in base pay for
the CEO or any other executive-grade personnel.
Mr. Hirsig's Annual Incentive Plan award for plan year 1997 was $100,000,
substantially reduced from the 1996 level of $450,000 and below the average
actual incentive awards paid by competitors. This significant decline
reflected the Compensation Committee's judgment regarding 1997 Company
performance.
In February, 1997, Mr. Hirsig was awarded 50,200 options (with related
rights to DSCs) under the 1990 LTIP. This placed Mr. Hirsig's 1997 total
compensation below the average of the competitor group.
In February, 1998, Mr. Hirsig was awarded 99,900 options (without rights to
DSCs) and 67,900 contingent restricted Common Stock awards under the 1998
LTIP. Conversion of contingent restricted Common Stock to shares of
performance-based restricted Common Stock is dependent on achieving
financial objectives as described in the 1998 LTIP. These grants are
intended to result in average total compensation if the Company's future
business performance is at an average level, above average compensation for
superior performance, and below average compensation for inferior
performance.
DEDUCTIBILITY OF COMPENSATION UNDER INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code limits the deductibility of
annual compensation in excess of $1,000,000 paid to the Company's CEO or any
one of the four other most highly compensated officers, unless such
compensation qualifies as "performance-based" within the meaning of Section
162(m). In 1997, no ARCO Chemical officer realized qualifying compensation in
excess of $1,000,000. Consistent with Section 162(m), the Board of Directors is
recommending stockholder approval of the 1998 LTIP to qualify awards under the
plan as "performance-based" compensation.
SUMMARY
The Compensation Committee believes that compensation levels of the Company's
executives clearly and appropriately reflect Company and individual
performance. Base pay levels recognize principally competitive pay for
comparable positions in the peer group but are also reflective of sustained
individual performance. Awards under the Annual Incentive Plan have been based
on several measures of Company performance relative to its peers (and in future
years will be predicated more strongly upon RCM value creation) and against
internally established strategic performance measures. Grants of stock options
and contingent restricted Common Stock under the 1998 LTIP are designed to
achieve a total compensation target that reflects both annual and longer-term
Company performance that is consistent with performance of the Company's stock
and total returns to the stockholders.
Robert H. Stewart III, Chairman
Walter F. Beran
Anthony G. Fernandes
James A. Middleton
Frank Savage
17
<PAGE>
BOARD OF DIRECTORS
DIRECTORS' MEETINGS
An annual meeting of the Board of Directors will be held each year in
conjunction with the annual meeting of stockholders (held in May) for the
purposes of organization, election or appointment of officers and the
transaction of other business. Regular meetings of the Board may be held
without notice at such times as the Board may determine. The Board generally
holds regular meetings in January, February, May, July, October, and November.
Special meetings may be called by the Chairman of the Board, the President, or
a majority of the directors in office. The By-Laws permit action to be taken
without a meeting if all members of the Board consent to such action in
writing.
The Board of Directors met five times during 1997. All of the Company's
incumbent directors attended 75% or more of the aggregate of all meetings of
the Board of Directors and committees on which they served during 1997.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors reviews the integrity of the
Company's accounting and financial reporting standards and practices, maintains
communications between the Board 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 ARCO (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 ARCO (including their
subsidiaries and affiliates). The Audit Committee met three times during 1997.
The Audit Committee currently consists of Messrs. Beran (Chairman) and
Savage.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors reviews and approves
employee compensation plans and such other benefits as it deems advisable,
makes recommendations to the Board as to management succession plans, and
administers the Company's Annual Incentive Plan. No member of the Compensation
Committee is an employee of the Company, no member is eligible to participate
in any benefit plan of the Company that is administered by the Compensation
Committee, and no member is eligible or will be eligible to participate in any
benefit plan of the Company other than, as described below, the Restricted
Stock Plan for Outside Directors and the Deferral Plan for Outside Directors.
The Compensation Committee met two times during 1997. A special subcommittee of
the Compensation Committee, the Long-Term Incentive Plan Administration
Subcommittee (the "Subcommittee"), administers the Company's long-term
incentive plans. The Subcommittee consists of those members of the Compensation
Committee who are "outside directors" within the meaning of Section 162(m) of
the Internal Revenue Code. The Subcommittee met once during 1997.
The Compensation Committee Report on Executive Compensation begins at page
14.
The Compensation Committee currently consists of Messrs. Beran, Fernandes,
Middleton, and Savage. The Subcommittee currently consists of Messrs. Beran and
Savage. Mr. Stewart, the
18
<PAGE>
previous Chairman of the Compensation Committee and the Subcommittee, retired
from the Board effective as of the close of business on February 19, 1998.
CONTRIBUTIONS COMMITTEE
The Contributions Committee of the Board of Directors reviews and approves
the Company's charitable contributions budget, approves contributions involving
multi-year commitments, and assures accountability for charitable contributions
and activities. The Contributions Committee met once during 1997.
The Contributions Committee currently consists of Messrs. Hirsig, Savage
(Chairman), and Tusinski.
ENVIRONMENT, HEALTH, AND SAFETY COMMITTEE
The Environment, Health, and Safety Committee reviews and assesses the
Company's policies, procedures, and practices relating to (i) the protection of
the environment and the health and safety of employees, customers, contractors,
and the public, (ii) compliance with applicable laws and regulations, (iii)
cleanup or remediation of waste sites or excursions, and (iv) the development
of the Company's environmental, health, and safety goals and objectives, and
makes recommendations to the Board as to such policies, procedures, and
practices. The Environment, Health, and Safety Committee met three times during
1997.
The Environment, Health, and Safety Committee currently consists of Messrs.
Hirsig, Middleton, Mut, and Savage (Chairman).
EXECUTIVE COMMITTEE
The Executive Committee of the Board of Directors has and may exercise all
the authority of the Board of Directors in the management of the Company in the
interim between meetings of the Board. The Executive Committee did not meet
during 1997.
The Executive Committee currently consists of Messrs. Fernandes (Chairman),
Hirsig, and Savage.
FINANCE COMMITTEE
The Finance Committee of the Board of Directors reviews and makes
recommendations to the Board regarding proposals for the issuance of securities
to the public, proposed loans, borrowings and credit agreements, proposed
capital projects over $25 million, proposed business acquisitions and
divestitures, mergers and joint ventures, all budgets and long range plans,
dividend policy and the capital structure of the Company. The Finance Committee
met four times during 1997.
The Finance Committee currently consists of Mrs. Knowles (Chair) and Messrs.
Hirsig, Mut, and Tusinski.
NOMINATING COMMITTEE
The Nominating Committee of the Board of Directors considers and makes
recommendations to the Board as to persons who it believes should be considered
for Board membership, and makes recommendations relating to the selection,
tenure, and retirement of directors. The Nominating Committee met once during
1997. The Nominating Committee will consider nominees recommended by
stockholders. Such recommendations should be submitted to the Secretary of the
Company.
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<PAGE>
The Nominating Committee currently consists of Messrs. Fernandes, Hirsig, and
Savage (Chairman).
COMPENSATION OF DIRECTORS
Director's Fees
Directors who are employees of the Company or of ARCO are not paid any fees
or additional compensation for service as members of the Board or any committee
thereof. Directors who are not employees of either the Company or ARCO
("outside directors") receive an annual retainer of $52,000 for serving on the
Board, plus $1,000 for each Board and committee meeting attended. Meeting fees
are paid in cash. Directors are also reimbursed for travel and other related
expenses incurred to attend such meetings. In addition, the Chairman of the
Audit Committee receives $18,000 per year and the Chairman of the Environment,
Health and Safety Committee receives $10,000 per year. The Chairmen of the
Compensation Committee, the Contributions Committee and the Nominating
Committee receive $18,000, $5,000, and $5,000 per year, respectively, but these
committee chair fees will be reduced after the 1998 Annual Meeting of
Stockholders, to $10,000, $3,000, and $3,000 per year, respectively.
In 1997, the Company changed its fee structure for outside directors by
implementing the ARCO Chemical Company Restricted Stock Plan for Outside
Directors ("Restricted Stock Plan"), described below. With the adoption of the
Restricted Stock Plan, the annual Board retainer was increased from $40,000 to
$52,000 effective as of October 1, 1997. One former director, Robert H.
Stewart, III, who retired in February 1998, did not participate in the
Restricted Stock Plan or revised compensation structure.
Outside directors are not eligible to participate in the Company's stock
option or other benefit plan programs, but may participate in the plans
described below, which, except as otherwise described, are administered by a
committee of three Company officers who are not members of the Board of
Directors.
Restricted Stock Plan for Outside Directors
Under the Restricted Stock Plan, at least 65% of an outside directors' annual
retainer and committee chair fees are paid in shares of restricted Common
Stock, which are subject to transferability and forfeiture restrictions.
Outside directors may also elect to receive the remaining 35% of their
aggregate Board and committee chair retainer fees in cash or shares of
restricted Common Stock. The shares are deposited in accounts maintained for
the participants by First Chicago Trust Company of New York. Such shares remain
restricted until retirement from the Board in accordance with the Company's By-
Laws, death, disability or a change in control of the Company, or resignation
from the Board with the consent of a majority of the remaining Board members
(which includes the failure to be nominated for re-election or the failure to
be re-elected to the Board). If outside directors end their service on the
Board for any other reason, shares of restricted Common Stock held in their
accounts will be forfeited. Outside directors may vote their shares of
restricted Common Stock and receive dividends on such shares. Dividends will be
reinvested in additional shares of restricted Common Stock.
When the Restricted Stock Plan was implemented, Messrs. Beran, Middleton and
Savage also converted the present value of certain accrued retirement benefits
to shares of restricted Common Stock as of October 1, 1997. Effective as of
February 20, 1998, the ARCO Chemical Company Retirement Plan for Outside
Directors ("Retirement Plan") was terminated and no current or future outside
directors will participate in that plan. Benefits will continue to be paid
under the Retirement Plan to former outside directors who have retired from the
Board.
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<PAGE>
Deferral Plan for Outside Directors
The ARCO Chemical Company Deferral Plan for Outside Directors permits outside
directors to defer up to 100% of the cash portion of the annual retainer and
meeting fees and any committee chairmanship and meeting fees to which they are
entitled. The deferral accounts of Messrs. Beran, Middleton, Savage, and
Stewart accrued interest that exceeded 120% of a specified IRS rate in the
amounts of $3,722, $747, $998, and $3,333, respectively, in 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mike R. Bowlin and Anthony G. Fernandes served on the Compensation Committee
during 1997. Mr. Bowlin is Chairman of the Board and Chief Executive Officer of
ARCO. Mr. Fernandes replaced Mr. Bowlin as Chairman of the Board and Chairman
of the Compensation Committee on July 17, 1997. The Chairman of the Board of
the Company is ex officio an officer of the Company under its By-Laws. The
Chairman of the Board receives no compensation from the Company and is not
eligible to participate in any Company benefit plan.
TRANSACTIONS BETWEEN THE COMPANY AND ARCO
In June 1987, ARCO transferred substantially all the assets and liabilities
of the oxygenates and polystyrenics businesses of the then ARCO Chemical
Division to the Company in exchange for 80,000,001 shares of Common Stock,
representing all of the issued and outstanding Common Stock of the Company
prior to October 5, 1987 (the date of the initial public offering of the Common
Stock) and approximately 82.2% of the outstanding Common Stock at the record
date.
In conjunction therewith, the Company and ARCO entered into a number of
agreements for the purpose of defining the ongoing relationship between them.
These agreements were developed in connection with the establishment of the
Company by ARCO and, therefore, were not the result of arm's length
negotiations between independent parties.
Certain of these agreements are between the Company and Lyondell
Petrochemical Company ("Lyondell"). The Company believes that all significant
agreements with Lyondell have been negotiated on an arm's length basis.
However, because ARCO had a 49.9 percent ownership interest in Lyondell, the
Company historically treated Lyondell as a related party. During September
1997, ARCO divested its 49.9 percent ownership interest in Lyondell.
Accordingly, after September 30, 1997, the Company stopped reporting
transactions with Lyondell as related party transactions.
It was the intention of the Company and ARCO that the 1987 agreements and the
transactions provided for therein, taken as a whole, should accommodate the
parties' interests in a manner that was fair to both parties, while continuing
certain mutually beneficial joint arrangements.
Subsequent to 1987, additional or modified agreements, arrangements, and
transactions have been entered into by the Company and ARCO, 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 ARCO, or their respective subsidiaries, as the case may be.
Periodically, and at least annually, the Audit Committee of the Board of
Directors reviews these agreements to assure that such agreements are fair to
the Company and its stockholders. See "Board of Directors-Audit Committee" on
page 18. 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.
21
<PAGE>
The following is a summary of the principal arrangements between the Company
and ARCO, and between the Company and Lyondell.
AGREEMENTS WITH ARCO
Supply, Sales, and Services
The Company has a number of ongoing supply, sales, and services agreements
with various divisions and subsidiaries of ARCO, including Vastar Resources,
Inc. ("Vastar"). For the year ended December 31, 1997, the Company purchased
from ARCO and its subsidiaries approximately $23 million of products and plant
services. The Company sold to ARCO and its subsidiaries, approximately $263
million of products during the same period.
Administrative Services Agreement
The Company and ARCO are parties to an agreement (the "Administrative
Services Agreement") under which ARCO has provided various services to the
Company and the Company has provided various services to ARCO since October 1,
1987. The services that ARCO currently provides thereunder to the Company
include insurance, telecommunications, payroll and employee benefits
administration, employee assistance program services, certain tax and legal
services, and services relating to the issuance of commercial paper and the
investment of excess cash. The services that the Company currently provides
thereunder to ARCO include environmental technical services, research and
development assistance, information and communication systems support, and
certain legal services. The Administrative Services Agreement continues in
effect from year to year unless terminated by either party upon 12 months prior
notice. Either party may terminate any type of service that it receives under
the Administrative Services Agreement at any time upon 90 days prior notice.
For the year ended December 31, 1997, the Company paid ARCO a total of
approximately $27 million and ARCO paid the Company a total of approximately $1
million under the Administrative Services Agreement and other such agreements
(principally including the lease described below).
Leases
The Company leases its facility in Newtown Square, Pennsylvania from ARCO. In
1997, the Company renewed the lease for an additional term of five years,
ending in 2002. In 1997, ARCO sold a portion of the leased premises to a third
party and, effective as of October 1, 1997, the annual rent payable by the
Company to ARCO during the renewal term for the remainder of the leased
premises was reduced to $5 million. During 1997, the Company made lease
payments to ARCO of $6 million, representing a combination of old and new
rental rates for the Newtown Square premises.
Cross-Indemnification Agreement
The Company and ARCO are parties to a cross-indemnification agreement (the
"Cross-Indemnification Agreement") that obligates the Company to indemnify ARCO
against substantially all claims relating to the oxygenates and polystyrenics
businesses transferred to the Company and certain assets relating thereto.
Conversely, the Cross-Indemnification Agreement obligates ARCO to indemnify the
Company against claims not relating to the assets, subsidiaries, or business
operations transferred to the Company.
Tax Sharing Agreement
The Company and its subsidiaries are members of an affiliated group of
corporations that files a consolidated federal income tax return with ARCO. The
Company and ARCO are parties to a Tax Sharing Agreement, which applies to all
taxable years in which the Company and its subsidiaries are
22
<PAGE>
included in the ARCO affiliated group's consolidated return and the five
taxable years thereafter. Subject to certain exceptions, for periods after June
30, 1987 and prior to January 1, 1995, the Company's share of the ARCO
affiliated group's federal income tax liability is determined under the Tax
Sharing Agreement as if the Company and its subsidiaries filed a hypothetical
separate consolidated federal income tax return.
The Company and ARCO entered into an amended and restated version of the Tax
Sharing Agreement (the "Amended Agreement") effective as of January 1, 1995.
Except as noted below, the Company and its subsidiaries will continue to
compute their share of the ARCO affiliated group's federal income tax liability
on a stand-alone basis. The Amended Agreement will permit the Company to reduce
its federal income tax liability through the use of certain tax attributes that
produce a benefit to the ARCO affiliated group, but would not otherwise benefit
the Company on a stand-alone basis. ARCO must keep the Company informed of
audits and related litigation that may affect the Company, and the Company has
rights to participate in such audits and related litigation. In addition, under
certain limited circumstances and after consultation with the Company, ARCO may
adjust, compromise or settle issues common to ARCO and the Company, on terms
that, in the opinion of independent counsel are at least as favorable as the
likely results of continuing to contest such issues, without indemnifying the
Company for the increased tax liability arising therefrom. In 1997, the Company
did not use any of ARCO's tax attributes against the Company's pro forma
federal income tax liability.
Intellectual Property
ARCO has assigned to the Company various United States and foreign
trademarks, together with the registrations and applications therefor, and has
granted the Company a non-exclusive license to use other trademarks which
contain the word "ARCO" and to use ARCO's spark design as a logo. ARCO also has
assigned to the Company over 300 U.S. patents and patent applications and many
corresponding foreign patents and patent applications relating to the Company's
areas of interest.
CERTIFICATE OF INCORPORATION PROVISIONS RELATING TO CORPORATE OPPORTUNITIES
In order to address certain potential conflicts of interest between the
Company and ARCO, the Company's Certificate of Incorporation contains
provisions regulating and defining the conduct of certain affairs of the
Company as they may involve ARCO and its officers and directors, and the
powers, rights, duties, and liabilities of the Company and its officers,
directors, and stockholders in connection therewith. In general, these
provisions recognize that from time to time the Company and ARCO may engage in
the same or similar activities or lines of business and have an interest in the
same areas of corporate opportunity. The Certificate of Incorporation provides
that ARCO shall have no duty to refrain from (1) engaging in business
activities or lines of business the same as or similar to those of the Company,
(2) doing business with any customer of the Company, or (3) employing any
officer or employee of the Company, and neither ARCO nor any officer or
director of ARCO will be liable to the Company or to its stockholders for
breach of any fiduciary duty by reason of any such activities of ARCO or of
such person's participation therein. The Certificate of Incorporation provides
certain directives as to how a corporate opportunity is to be handled when
presented to an officer or director of either company. It also provides that
ARCO is not under any duty to present any corporate opportunity to the Company
that may be a corporate opportunity for both ARCO and the Company, and ARCO
will not be liable to the Company or its stockholders for breach of any
fiduciary duty as stockholder of the Company by reason of the fact that ARCO
pursues or acquires such corporate opportunity for itself, directs such
corporate opportunity to another person, or does not present the corporate
opportunity to the Company.
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<PAGE>
AGREEMENTS WITH LYONDELL
Lyondell provides to the Company a portion of the feedstocks purchased by the
Company for its manufacturing facilities located at Bayport and Channelview,
Texas. Lyondell also provides processing services and products to the Company,
as well as certain plant services at Channelview, Texas. The Company in turn
provides certain products and services to Lyondell. The Company granted
Lyondell royalty-free, non-exclusive licenses for the technology necessary to
produce methyl tertiary butyl ether and isopropyl alcohol at Lyondell's
petrochemical complex in Channelview, Texas. For the nine-month period ended
September 30, 1997, the Company purchased from Lyondell approximately $164
million of feedstocks, products, and plant services. The Company sold Lyondell
approximately $1 million of products and services during the same period.
Effective after September 30, 1997, the Company no longer treated Lyondell as a
related party.
PROPOSAL TO APPROVE AND RATIFY THE ARCO CHEMICAL COMPANY
1998 LONG-TERM INCENTIVE PLAN
Item 2 on Proxy Card
DESCRIPTION OF PLAN
The Board of Directors proposes that the stockholders approve the ARCO
Chemical Company 1998 Long-Term Incentive Plan (the "1998 LTIP"). The 1998 LTIP
is designed to align the interests of management with those of the stockholders
and to attract, motivate and retain key employees. A copy of the 1998 LTIP is
attached as Appendix A, and the following description of the 1998 LTIP is
qualified in its entirety by reference to Appendix A.
The Long-Term Incentive Plan Administration Subcommittee (the "Subcommittee")
of the Compensation Committee of the Board of Directors adopted the 1998 LTIP
on February 19, 1998, subject to stockholder approval. The 1998 LTIP provides
for the issuance of stock options, contingent restricted Common Stock, and
shares of performance-based restricted Common Stock to executives and other key
employees of the Company. The 1998 LTIP is designed to operate so that the
total value of an award to a participant in any performance plan cycle is
divided approximately equally between grants of stock options and contingent
restricted Common Stock.
The Subcommittee administers the 1998 LTIP. All of the members of the
Subcommittee are outside directors within the meaning of Section 162(m) of the
Internal Revenue Code. The Subcommittee has full power and authority to
administer and interpret the 1998 LTIP and to establish the terms of awards
under the 1998 LTIP. The Subcommittee may establish such vesting and other
conditions for awards as it deems appropriate and may accelerate vesting at any
time.
The Subcommittee will fix the terms of any stock options granted under the
1998 LTIP, provided that the option price may not be less than the fair market
value of Common Stock on the date of grant and the option period may not exceed
ten years. Stock options awarded under the stock option portion of the 1998
LTIP do not carry the right to receive dividend share credits. Participants may
pay the option exercise price in cash or, if the Subcommittee so permits, by
delivering shares of Common Stock.
Contingent restricted Common Stock awards are made at the beginning of a
performance plan cycle. The contingent restricted Common Stock may be earned in
successive increments over a performance plan cycle by achieving pre-determined
Return on Capital Managed, or RCM, goals for the Company. RCM is a measure that
calculates after-tax operating profit minus a charge for the use of the capital
employed in the Company's business. Once earned, contingent restricted Common
Stock awards convert to shares of performance-based restricted Common Stock. At
the beginning of
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<PAGE>
a performance plan cycle the Subcommittee will establish the length of the
cycle, the RCM targets and the vesting and other terms of the awards for the
cycle. As the RCM performance goals are met, the Subcommittee will certify the
results of the performance goals. For example, the performance plan cycle for
the awards of contingent restricted Common Stock issued on February 19, 1998
contains four cumulative RCM targets. As each RCM target is achieved during the
performance plan cycle, 25% of the contingent restricted Common Stock award
will be converted to shares of performance-based restricted Common Stock. After
all four RCM objectives have been achieved, or at the end of six years,
whichever occurs first, the current performance plan cycle will end. Contingent
restricted Common Stock that is not earned will be forfeited at the end of the
six years.
Performance-based restricted Common Stock will be held in an account for the
participant with First Chicago Trust Company of New York. Performance-based
restricted Common Stock will carry the right to vote and receive dividends.
Such dividends are reinvested in shares of performance-based restricted Common
Stock. Performance-based restricted Common Stock (including all shares received
through the reinvestment of dividends) will vest according to the schedule
established by the Subcommittee. Performance-based restricted Common Stock
granted during the current plan cycle will vest 50% on the first anniversary
and 50% on the second anniversary of the date on which such shares were
converted from contingent restricted Common Stock.
Participants may also receive a supplemental award of performance-based
restricted Common Stock if the Company's aggregate RCM goals for the
performance plan cycle are met within a period specified by Subcommittee and
the Company's total stockholder return ("TSR") is above the median for the
companies included in the S& P Chemicals Index or such other peer group as the
Subcommittee deems appropriate. The supplemental award will be graduated
depending on the Company's performance. A participant may receive additional
shares of performance-based restricted Common Stock equal in amount of up to
50% of the contingent restricted Common Stock awards made at the beginning of
the performance plan cycle, if the Company achieves the top ranked TSR
position.
If a change of control of the Company occurs, stock options and shares of
performance-based restricted Common Stock will vest, and a portion of the
outstanding contingent restricted Common Stock (and any supplemental awards)
will be converted into fully vested performance-based restricted Common Stock,
based on the Company's achievement of RCM objectives (and, with respect to
supplemental awards, the Company's performance as compared to its peer group),
determined as of the date of the change of control. (See "Change of Control
Arrangements," page 12.)
The 1998 LTIP authorizes up to 6,000,000 shares of Common Stock (subject to
adjustment in the event of a merger or other corporate change) to be granted
pursuant to stock options and performance-based restricted Common Stock. No
individual may be granted more than 300,000 shares (subject to adjustment in
the event of a merger or other corporate change) of stock options and
performance-based restricted Common Stock (including any supplemental awards)
in any calendar year. Shares of Common Stock subject to stock options that
terminate, expire or are canceled, and shares of performance-based restricted
Common Stock that are canceled, may again be subject to grant under the 1998
LTIP.
The Subcommittee has the power to amend or discontinue the 1998 LTIP, except
that stockholder approval shall be required for any amendment that increases
the number of shares that may be issued under the plan, reduces the minimum
stock option price or extends the maximum stock option period.
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FEDERAL INCOME TAX TREATMENT
The grant of non-qualified stock options generally will have no current
federal income tax consequences to either the Company or the employee. Upon
exercise of the options, the employee will recognize ordinary income, and the
Company will be entitled to a deduction, in an amount equal to the excess of
the fair market value of the optioned shares over the option price.
The grant of contingent restricted Common Stock, and its conversion into
performance-based restricted Common Stock, will generally have no current
federal income tax consequences to either the Company or the employee. Upon
vesting of performance-based restricted Common Stock, the employee will
recognize ordinary income, and the Company will be entitled to a deduction, in
an amount equal to the fair market value of the Common Stock on the date of
vesting.
Both the stock options and restricted Common Stock are intended to qualify as
performance-based compensation, and are intended to be deductible by the
Company under Section 162(m) of the Internal Revenue Code. (See "Compensation
Committee Report on Executive Compensation; Deductibility of Compensation under
Internal Revenue Code Section 162(m)" page 17.)
The table below sets forth the number of stock options and contingent
restricted Common Stock awards granted under the 1998 LTIP on February 19, 1998
to the named executive officers of the Company, to all of the Company's current
executive officers as a group, and to all of the Company's employees as a group
(excluding the preceding executive group). The 1998 stock option grants and
contingent restricted Common Stock awards are subject to stockholder approval
and ratification of 1998 LTIP.
<TABLE>
<CAPTION>
AWARDS OF
CONTINGENT
NUMBER OF RESTRICTED
OPTIONS COMMON
NAME GRANTED(1) STOCK(2)
---- ---------- ----------
<S> <C> <C>
Alan R. Hirsig............................................ 99,900 67,900
Morris Gelb............................................... 29,400 20,000
Robert J. Millstone....................................... 20,600 14,000
Marvin O. Schlanger....................................... 52,800 35,900
Walter J. Tusinski........................................ 29,400 20,000
Executive Group........................................... 255,400 173,600
Non-Executive Officer Employee Group...................... 201,600 133,000
</TABLE>
- --------
(1) Options granted under the 1998 LTIP on February 19, 1998 have an exercise
price of $46.7188 and will become exercisable four years after the date of
grant.
(2) Contingent restricted Common Stock awards made on February 19, 1998 may be
converted to shares of performance-based restricted Common Stock in
successive increments of 25% if certain performance goals are met during
the 1998-2001 plan cycle (or extended cycle).
As of April 14, 1998, the fair market value of the Common Stock as reported
on the New York Stock Exchange was $54.50.
VOTES REQUIRED FOR APPROVAL
This proposal will be approved if it receives the affirmative vote of a
majority of the shares of Common Stock present in person or by proxy at the
meeting. Abstentions will be counted as shares present at the meeting. Broker
non-votes, if any, will not be counted as shares present at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL AND RATIFICATION
OF THE ARCO CHEMICAL COMPANY 1998 LONG-TERM INCENTIVE PLAN. PROXIES SOLICITED
BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY
OTHERWISE.
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PROPOSAL TO APPROVE THE APPOINTMENT OF INDEPENDENT AUDITORS
Item 3 on Proxy Card
The Board of Directors has appointed Coopers & Lybrand L.L.P., independent
accountants, to audit the consolidated financial statements of the Company and
its subsidiaries for the year ending December 31, 1998. Coopers & Lybrand
L.L.P. has acted as the Company's independent auditors since June 1987. The
firm has acted as the independent auditor (i) for ARCO, the Company's principal
stockholder, for many years and (ii) for Vastar since July 5, 1994. In
addition, from time to time, the firm performs consulting work for the Company
and for ARCO. The firm has no other relationship with the Company or ARCO or
any of their subsidiaries or affiliates except the existing professional
relationships of independent accountants.
Representatives of Coopers & Lybrand L.L.P. will be present at the meeting
and will have the opportunity to make a statement if they desire to do so.
These representatives will also be available to respond to appropriate
questions.
This proposal will be approved if it receives the affirmative vote of a
majority of the shares of Common Stock present in person or by proxy at the
meeting. Abstentions will be counted as shares present at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE
APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT AUDITORS FOR THE COMPANY
FOR THE YEAR 1998. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED
UNLESS STOCKHOLDERS SPECIFY OTHERWISE.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Executive officers, directors and beneficial owners of more than ten percent
of the Common Stock must file initial reports of ownership (Form 3) and reports
of changes in ownership (Forms 4 and 5) with the Securities and Exchange
Commission and the New York Stock Exchange pursuant to Section 16(a) of the
Securities Exchange Act of 1934.
We have reviewed the reports and written representations from the directors
and executive officers of the Company and persons who own more than ten percent
of the Common Stock. Based on this review, the Company believes that all filing
requirements were met during 1997, except that an initial report of ownership,
which was timely filed by Van Billet, Vice President and Controller of the
Company, inadvertently omitted a small number of phantom stock units. An
amended report was filed to include the units.
OTHER BUSINESS
The Board of Directors is not aware of any other matters to be presented at
the meeting. If any other matters should properly come before the meeting, the
persons named in the enclosed proxy form will vote the proxies in accordance
with their best judgment.
VOTING OF STOCK IN PLAN ACCOUNTS
The Company's Capital Accumulation and Savings Plans, and certain employee
benefit plans of ARCO and other affiliates in which Common Stock may be held,
permit plan participants to direct the plan trustees how to vote the Common
Stock allocated to their accounts. The trustee for each such plan will vote all
shares of Common Stock for which no participant directions are received in the
same proportion as all the shares of Common Stock for which directions are
received.
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<PAGE>
PROXY SOLICITATION
The expense of soliciting proxies will be paid by the Company. Solicitations
will be made primarily through the use of the mails. In addition, some of the
officers and other employees of the Company may solicit proxies personally, by
telephone and by mail, if deemed appropriate. Brokers and nominees will be
requested to obtain voting instructions from beneficial owners of stock
registered in their names.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Stockholder proposals intended to be presented at the 1999 Annual Meeting
must be received by December 22, 1998. Such proposals should be addressed to
the Secretary.
ADDITIONAL INFORMATION AVAILABLE
THE COMPANY FILES AN ANNUAL REPORT ON FORM 10-K WITH THE SECURITIES AND
EXCHANGE COMMISSION. STOCKHOLDERS MAY OBTAIN A COPY OF THIS REPORT (WITHOUT
EXHIBITS), WITHOUT CHARGE, BY WRITING TO THE COMPANY'S INVESTOR RELATIONS
DEPARTMENT.
By order of the Board of Directors
/s/ Robert J. Millstone
Robert J. Millstone
Vice President,
General Counsel and
Secretary
Newtown Square, Pennsylvania
April 21, 1998
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APPENDIX A
ARCO CHEMICAL COMPANY
- --------------------------------------------------------------------------------
1998 LONG-TERM INCENTIVE PLAN
<PAGE>
ARCO CHEMICAL COMPANY
1998 LONG-TERM INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I GENERAL PROVISIONS.................................... 1
Section 1. Purpose of the Plan................................... 1
Section 2. Overview of the Plan.................................. 1
Section 3. Definitions........................................... 1
Section 4. Administration of the Plan............................ 3
ARTICLE II STOCK OPTIONS......................................... 3
Section 1. Grant of Stock Options................................ 3
Section 2. Terms and Conditions of Stock Options................. 3
ARTICLE III RESTRICTED STOCK...................................... 5
Section 1. Grant of Contingent Restricted Stock.................. 5
Section 2. Conversion of Contingent Restricted Stock into Perfor-
mance-Based Restricted Stock......................... 5
Section 3. The End of the Performance Period..................... 6
Section 4. The Performance Supplement............................ 6
Section 5. Termination of Employment Prior to Completion of
Performance Period................................... 7
Section 6. Vesting of Performance-Based Restricted Stock......... 9
Section 7. Change of Control..................................... 9
ARTICLE IV MISCELLANEOUS PROVISIONS.............................. 10
Section 1. Option and Restricted Stock Limits.................... 10
Section 2. Adjustment in Terms of Award.......................... 10
Section 3. Governmental Regulations.............................. 11
Section 4. No Guaranty of Employment............................. 11
Section 5. Relation to Benefit Plans............................. 11
Section 6. Assignment or Transfer................................ 11
Section 7. Rights as Stockholder................................. 11
Section 8. Withholding Taxes..................................... 12
Section 9. Amendment and Discontinuance of the Plan.............. 12
Section 10. Effective Date........................................ 13
Section 11. Term of Plan.......................................... 13
Section 12. Miscellaneous......................................... 13
</TABLE>
i
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ARTICLE I
GENERAL PROVISIONS
SECTION 1. PURPOSE OF THE PLAN
The purpose of the Plan is to provide a select group of Company executives
and other key employees with specific incentives to work for long-range value
creation for the Company's stockholders and to enable the Company to attract,
retain, and motivate employees of superior capability.
SECTION 2. OVERVIEW OF THE PLAN
The Plan encourages the creation of stockholder value over the long-term by
measuring Return on Capital Managed (RCM) and Total Stockholder Return (TSR),
and compensating executives and other key employees for differential
performance. The Plan has two components:
The Performance Share Plan (PSP) measures the Company's RCM generation and
consists of a series of cumulative RCM goals for each Performance Period. Under
the PSP, the recipients of awards of Contingent Restricted Stock become
entitled to shares of Performance-Based Restricted Stock upon the achievement
of RCM performance objectives during the Performance Period. Once all
successive RCM objectives are achieved (or at the end of a period specified by
the Subcommittee, if earlier), the prevailing Performance Period ends and a new
period begins.
The Stock Option Plan (SOP) provides for grants of non-qualified stock
options of the Company at the Fair Market Value of a share of Common Stock of
the Company on the date of grant.
Typically, approximately one-half of each participant's Long-Term Incentive
Target Value will be delivered by the PSP, and one-half will be delivered by
the SOP.
SECTION 3. DEFINITIONS
As used herein, the following terms shall have the following meanings:
a. "Affiliate" means any entity directly or indirectly controlled by,
controlling or under common control with the Company.
b. "Board" and "Board of Directors" mean the Board of Directors of the
Company.
c. "Change of Control" means a change of control as defined in the Change
of Control Plan.
d. "Change of Control Plan" means the ARCO Chemical Company Change of
Control Plan as adopted by the Compensation Committee of the Board of
Directors on February 19, 1998 and as amended from time to time.
e. "Code" means the Internal Revenue Code of 1986, as amended.
f. "Common Stock" means the common stock of the Company, having par value
of $1.00 per share.
g. "Company" means ARCO Chemical Company.
h. "Comparison Group" means the S&P Chemicals group, as defined or
redefined by Standard & Poors, or such other comparison group of peer
companies as the Subcommittee may designate for a Performance Period.
i. "Contingent Restricted Stock" means a contingent grant of shares,
under the terms and conditions set forth in Article III, Section 1, that
has no indicia of ownership of Common Stock, that is granted in connection
with a Performance Period and that may be converted to an award
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of Performance-Based Restricted Stock, following the achievement of
Performance Objectives under the terms and conditions set forth in Article
III, Section 2.
j. "Eligible Employee" means a member of a select group of executives or
other key employees of the Company who, in the sole discretion of the
Subcommittee, are in a position to contribute significantly to long-term
stockholder value creation.
k. "Employment" means continuous service with the Company from the most
recent date of hire.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
m. "Fair Market Value" or "FMV" of a share of Common Stock means the mean
of the highest and lowest sale prices, or the closing sale price, of a
share of Common Stock, whichever is higher, on the date in question as
reported on the composite tape for issues listed on the New York Stock
Exchange. If no transaction was reported on the composite tape for the
Common Stock on such date, the FMV shall be computed using the prices
reported on the nearest trading day preceding the date in question. If the
Common Stock should not then be listed or admitted to trading on such
Exchange, FMV shall be the mean of the closing bid and asked prices on the
date in question as furnished by any member firm of the New York Stock
Exchange selected from time to time by the Subcommittee for that purpose.
n. "Long-Term Incentive Target Value" and "LTI Target Value" mean the
dollar value of all restricted stock and stock options to be granted to an
Eligible Employee.
o. "Performance-Based Restricted Stock" means shares of Common Stock that
have been converted from Contingent Restricted Stock and that remain
subject to restriction on transfer and assignment and to other conditions
during the applicable Restriction Period.
p. "Performance Objective" means a specified level of Company
performance, measured by cumulative RCM achievement.
q. "Performance Period" means the period of time established by the
Subcommittee at the time of a grant of Contingent Restricted Stock over
which the Company's RCM performance will be measured and Performance-Based
Restricted Stock may be earned.
r. "Performance Ranking" means the ranking of the Company in Total
Stockholder Return as measured among the Comparison Group over the
applicable Performance Period.
s. "Performance Supplement" means the share multiplier that may be
applied to the shares of Performance-Based Restricted Stock at the end of a
Performance Period.
t. "Plan" means the ARCO Chemical Company 1998 Long-Term Incentive Plan,
including any amendments hereof and rules and regulations hereunder.
u. "Restricted Stock Target Value" means the target dollar value of
Contingent Restricted Stock to be awarded to an Eligible Employee.
v. "Restriction Period" means the period of time specified by the
Subcommittee during which the restriction and forfeiture conditions of
Performance-Based Restricted Stock apply.
w. "Retirement Plan" means a retirement plan of the Company that provides
a retirement allowance to an Eligible Employee, other than a Section 401(k)
plan or other savings plan, as determined by the Subcommittee.
x. "Return on Capital Managed" and "RCM" mean the financial measure equal
to the difference between net operating profit after tax (NOPAT) and a
capital charge, where the capital charge equals average capital multiplied
by the Company's weighted average cost of capital rate, as determined by
the Subcommittee.
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<PAGE>
y. "Stock Option Target Value" means the target dollar value of Stock
Options to be awarded to an Eligible Employee.
z. "Stock Options" means options to purchase Common Stock under the terms
and conditions set forth in Article II of the Plan.
aa. "Subcommittee" means the Long-Term Incentive Plan Administration
Subcommittee of the Compensation Committee of the Board of Directors.
bb. "Total Stockholder Return" and "TSR" mean the sum of the dividends
and appreciation or depreciation of the price of a share of Common Stock
over an applicable Performance Period.
SECTION 4. ADMINISTRATION OF THE PLAN
a. The Plan shall be administered by the Subcommittee. The Subcommittee shall
have full power and authority to interpret the Plan, to adopt such rules and
regulations as it may from time to time deem necessary for the effective
operation of the Plan, to make factual determinations, to correct any defects
in the Plan, to reconcile any inconsistencies, to supply any omissions and
generally to act upon all matters relating to awards under the Plan. Without
limiting the foregoing, the Subcommittee may (i) establish such vesting and
other conditions with respect to awards under the Plan as it deems appropriate,
(ii) accelerate the vesting and exercisability of any or all outstanding Stock
Options and Performance-Based Restricted Stock at any time for any reason,
(iii) provide that Stock Options may be transferable to family members, trusts
of which family members are the only beneficiaries or partnerships or other
entities of which family members are the only owners, on such terms as the
Subcommittee deems appropriate, (iv) establish such terms for awards as may be
appropriate to comply with applicable foreign laws, and (v) take any other
actions consistent with the terms of the Plan. Any determination,
interpretation, construction, or other action made or taken pursuant to the
provisions of the Plan by or on behalf of the Subcommittee shall be final,
binding, and conclusive for all purposes and upon all persons including,
without limitation, the Company, the Company's stockholders and Eligible
Employees, and their respective successors in interest.
b. It is intended that the Subcommittee consist of "outside directors" as
defined under Section 162(m) of the Code, and related Treasury regulations, and
"non-employee directors" as defined under Rule 16b-3 under the Exchange Act.
c. All grants under the Plan shall be subject to the terms and conditions set
forth herein and to such other terms and conditions consistent with this Plan
as the Subcommittee deems appropriate and as are specified in writing by the
Subcommittee to the individual in a grant instrument or an amendment to the
grant instrument. The Subcommittee shall approve the form and provisions of
each grant instrument.
ARTICLE II
STOCK OPTIONS
SECTION 1. GRANT OF STOCK OPTIONS
The Subcommittee may make grants of Non-Qualified Stock Options to Eligible
Employees in such amounts, at such times and upon such terms as the
Subcommittee deems appropriate.
SECTION 2. TERMS AND CONDITIONS OF STOCK OPTIONS
All Stock Options granted under the Plan shall be subject to the following
terms and conditions:
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<PAGE>
a. Option Price. The option price per share with respect to each Stock Option
shall be fixed by the Subcommittee, but shall not be less than the Fair Market
Value of the Common Stock on the date the Stock Option is granted.
b. Period of Option. A Stock Option shall expire and all rights thereunder
shall end at the expiration of such period (not exceeding ten years) after the
date the Stock Option is granted as shall be fixed by the Subcommittee at the
time it grants the Stock Option.
c. Exercise of Option. The Subcommittee may establish such vesting dates and
other conditions on the exercise of Stock Options as the Subcommittee deems
appropriate. Stock Options may be exercised during the term of the Options at
any time after the vesting dates specified by the Subcommittee, subject to the
provisions of Subsection 2(d) of this Article II and Section 7 of Article III.
d. Termination of Employment.
i. If a participant's Employment terminates for any of the following
reasons, but not for cause, the participant's Stock Options that are not
vested shall continue to vest according to the applicable vesting
schedule as if the participant's Employment with the Company had
continued, and the participant (or his or her estate or distributee, in
the event of death) may retain his or her outstanding Stock Options for
the balance of the Option term:
1. Death,
2. Total and permanent disability,
3. Termination of Employment with a right to an immediate retirement
allowance under a Retirement Plan of the Company,
4. Termination of employment as a result of a Change of Control, as
described in Subsection (v) below, or
5. Any other termination of Employment in connection with which the
Subcommittee, in its sole discretion, determines that the
participant's Stock Options shall not be canceled.
ii. If a participant's Employment terminates for one of the following
reasons, but not for cause (and under circumstances not covered by
Subsection (i) above), the participant may retain his or her vested Stock
Options for the balance of the Option term, and the participant's non-
vested Stock Options shall be canceled, unless the Subcommittee
determines otherwise:
1. Resignation with the approval of the Company, or
2. Reduction in force.
iii. If a participant's Employment terminates for cause or for any other
reason not described in Subsection (i) or (ii) above, all of the
participant's vested and non-vested Stock Options shall be canceled,
unless the Subcommittee determines otherwise.
iv. If a participant transfers employment to an Affiliate, the
participant's Stock Options shall not be canceled, and the
participant's Stock Options shall continue to vest during the
participant's employment with the Company and its Affiliates. If the
participant's employment with the Company and its Affiliates
subsequently terminates under circumstances that would require
cancellation of the Stock Options pursuant to Subsection (ii) or (iii)
above, the applicable Stock Options shall be canceled.
v. For purposes of the Plan, a "termination of Employment as a result of a
Change of Control" shall be considered to occur if a participant's
employment terminates under circumstances that entitle the participant
to receive plan benefits under the Change of Control Plan.
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<PAGE>
e. Payment for Shares. Every share purchased through the exercise of a Stock
Option shall be paid for in full, in cash, within ten business days following
the time of exercise, or, if the Subcommittee so permits, in shares of Common
Stock valued at their Fair Market Value on the date on which such Stock Option
is exercised, or in a combination of cash and such shares. The participant may
exercise a Stock Option through a broker.
ARTICLE III
RESTRICTED STOCK
SECTION 1. GRANT OF CONTINGENT RESTRICTED STOCK
a. At the commencement of each Performance Period, the Subcommittee may grant
Contingent Restricted Stock to Eligible Employees in an amount approximately
equal to the Eligible Employee's Restricted Stock Target Value as established
by the Subcommittee. The Subcommittee may also make such other grants of
Contingent Restricted Stock to Eligible Employees as it deems appropriate.
b. Contingent Restricted Stock is only the potential right of an Eligible
Employee to receive Performance-Based Restricted Stock. Contingent Restricted
Stock is not vested and cannot vest. It can be converted, if earned, into
Performance-Based Restricted Stock in accordance with Section 2 of this
Article. Contingent Restricted Stock is non-transferable and may not be pledged
or otherwise encumbered.
SECTION 2. CONVERSION OF CONTINGENT RESTRICTED STOCK INTO PERFORMANCE-BASED
RESTRICTED STOCK
a. At the commencement of each Performance Period, the Subcommittee will
establish, in its sole discretion, the term of the Performance Period, the RCM
Performance Objectives for the Performance Period, the methodology to be used
to compute RCM, and the other terms of the Contingent Restricted Stock grants
and Performance-Based Restricted Stock grants. The Subcommittee will establish
the methodology to be used to compute RCM, based on the methodology used by the
Company to compute RCM for other corporate purposes. The Subcommittee may
establish a basic Performance Period (for example, four years) and an extended
period (for example, six years), in which case the Performance Objectives may
be attained at any time during the extended period. However, the Performance
Supplement, if any, as described in Section 4 of this Article will only be
payable if the Performance Objectives are attained during the basic Performance
Period.
b. The Subcommittee will establish the Performance Objectives and the terms
of the Contingent Restricted Stock grants and Performance-Based Restricted
Stock grants in writing either before the beginning of the Performance Period
or during a period ending no later than the earlier of (i) 90 days after the
beginning of the Performance Period or (ii) the date on which 25% of the
Performance Period has been completed, or such other date as may be required or
permitted under Section 162(m) of the Code. It is intended that the Performance
Objectives and terms of the Contingent Restricted Stock and Performance-Based
Restricted Stock shall satisfy the requirements for "qualified performance-
based compensation" under Section 162(m) of the Code for employees covered by
Section 162(m), including the requirement that the achievement of the
Performance Objectives be substantially uncertain at the time the Performance
Objectives are established and the Performance Objectives be established in
such a way that a third party with knowledge of the relevant facts could
determine whether and to what extent the Performance Objectives have been met.
Except for the Performance Supplement (which shall be calculated based on the
formula in
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Section 4 of this Article III), the Subcommittee shall not have discretion to
increase the amount of compensation that is payable upon achievement of the
Performance Objectives.
c. RCM performance will be measured quarterly or on another schedule
established by the Subcommittee to determine whether the Performance Objectives
have been achieved. If specified Performance Objectives are achieved, the
appropriate portion of Contingent Restricted Stock will be converted to
Performance-Based Restricted Stock effective as of the date on which the
Subcommittee determines that the Performance Objectives have been achieved.
d. The Subcommittee will review the RCM performance of the Company according
to its pre-established schedule and will certify in writing that the
Performance Objectives have been met and that conversion is authorized before
Contingent Restricted Stock is converted into Performance-Based Restricted
Stock.
e. The Subcommittee shall have the right, in its discretion, to modify,
amend, or otherwise adjust the Performance Objectives or terminate a
Performance Period, subject to compliance with the requirements of Section
162(m) with respect to awards covered by that Section, if it determines an
adjustment or termination would be consistent with the objectives of the Plan,
taking into account the interests of the participants and the stockholders of
the Company. The Subcommittee may consider, without limitation, accounting
changes which substantially affect the determination of the Performance
Objectives, changes in applicable laws or regulations which affect the
Performance Objectives, corporate reorganizations, including spin-offs or other
distributions of assets or stock, or other material events which the
Subcommittee determines require an adjustment to the Performance Objectives or
termination of a Performance Period.
f. Notwithstanding the foregoing, the Subcommittee may make Contingent
Restricted Stock and Performance-Based Restricted Stock grants that are not
intended to satisfy the requirements for "qualified performance-based
compensation," in which case the requirements of Subsection (b) above shall not
apply to such grants.
SECTION 3. THE END OF THE PERFORMANCE PERIOD
a. A Performance Period ends at the earlier of the following:
i. The time when all the pre-established Performance Objectives have been
achieved, or
ii. The end of the Performance Period (including for this purpose any
extended period as described in Section 2(a) of this Article).
b. At the end of a Performance Period (including for this purpose any
extended period as described in Section 2(a) of this Article), the following
shall occur:
i. The portion of the initial grant of Contingent Restricted Stock that has
not been earned and converted into Performance-Based Restricted Stock
shall be canceled.
ii. The Performance Supplement may be applied, as described in Section 4 of
this Article, if all the Performance Objectives were met within the
basic Performance Period as described in Section 2(a) of this Article,
and
iii.If the Subcommittee so determines, a new Performance Period shall
begin, including the award of an initial grant of Contingent
Restricted Stock applicable to the new Performance Period to Eligible
Employees in accordance with this Article.
SECTION 4. THE PERFORMANCE SUPPLEMENT
a. If all the Performance Objectives are met within the basic Performance
Period (excluding any extended period as described in Section 2(a) of this
Article), immediately following the end of
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such Performance Period the Subcommittee shall apply the Performance
Supplement. The Performance Supplement is a share multiplier between 0% and 50%
used to supplement the shares of Performance-Based Restricted Stock previously
earned and awarded to Eligible Employees under the Plan for the immediately
concluded Performance Period in recognition of the Company's superior
stockholder value creation.
b. To determine the Performance Supplement, the Total Stockholder Return
during the elapsed Performance Period for the Company and for each company in
the Comparison Group is measured. The TSR values are then ranked. Using the
following table as an example, the Performance Supplement is determined as
follows:
<TABLE>
<CAPTION>
COMPANY TSR
RANK RELATIVE TO PERFORMANCE
COMPARISON GROUP SUPPLEMENT
-----------------------------------------------------------
<S> <C>
1 50%
2 40%
3 30%
4 20%
5 10%
6-11 0%
</TABLE>
The Performance Supplement will be calculated based on linear interpolation
of the Company's TSR between the company ranked number 1 (100th percentile,
with a Performance Supplement of 50%) and the company ranked at the median
(50th percentile, with a Performance Supplement of 0%). If the number of
companies in the Comparison Group is different from the number used in the
foregoing table, the percentages between 50% and 0% will be adjusted to take
into account the number of companies in the Comparison Group.
c. If the TSR value for one or more companies from the Comparison Group is
within one percentage point of the TSR value for the Company, the Performance
Supplement percentages for such companies will be averaged with the Company's
percentage to determine the Performance Supplement.
d. For each Eligible Employee, the Performance Supplement is multiplied by
the number of shares of Contingent Restricted Stock that were earned and
converted into Performance-Based Restricted Stock during the Performance
Period, resulting in the grant of additional shares of Performance-Based
Restricted Stock. The additional shares of Performance-Based Restricted Stock
will be granted to the Eligible Employee as soon as practical after calculation
and certification by the Subcommittee and will begin to vest according to the
same schedule as other Performance-Based Restricted Stock as determined by the
Subcommittee (for example, fifty percent on the first anniversary of the grant
of the Performance-Based Restricted Stock pursuant to the Performance
Supplement and fifty percent on the second anniversary of the grant).
SECTION 5. TERMINATION OF EMPLOYMENT PRIOR TO COMPLETION OF PERFORMANCE PERIOD
a. If, prior to the end of a Performance Period, a participant who has been
granted Contingent Restricted Stock terminates Employment for one of the
following reasons, but not for cause, the participant shall be entitled to
receive a pro rata share (as described below) of Performance-Based Restricted
Stock for the Performance Period:
i. Death,
ii. Total and permanent disability,
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iii. Termination of Employment with a right to an immediate retirement
allowance under a Retirement Plan of the Company, or
iv. Any other termination of Employment in connection with which the
Subcommittee, in its sole discretion, determines that the participant
should receive a pro rata share of Performance-Based Restricted Stock.
Such a participant will be entitled to receive a conversion of the
participant's Contingent Restricted Stock for the Performance Period into
Performance-Based Restricted Stock as follows:
i. If and when the Performance Objectives are attained during the
Performance Period, the participant shall be entitled to receive a
conversion of the participant's Contingent Restricted Stock as if the
participant had continued in Employment, provided that the total number
of shares of Performance-Based Restricted Stock that the participant may
receive during the Performance Period (including any shares previously
received) shall not exceed the maximum amount described in subsection
(ii) below. The remaining shares of Contingent Restricted Stock, if any,
shall be forfeited.
ii. The maximum number of shares of Performance-Based Restricted Stock that
the participant may receive during the Performance Period (excluding any
Performance Supplement under subsection (iii) below) shall be the number
of shares of Contingent Restricted Stock awarded to the participant for
the Performance Period, multiplied by a fraction, the numerator of which
is the number of full months during which the participant was employed
during the Performance Period and the denominator of which is the number
of months in the Performance Period (for this purpose, the Performance
Period shall be the basic Performance Period as described in Section 2(a)
of this Article III, unless the participant's termination occurs within
the extended period described in that Section). However, if the number of
shares of Performance-Based Restricted Stock previously received by the
participant before his or her termination of Employment exceeds the
maximum number of shares computed above, the participant shall not be
required to return any such shares to the Company.
iii. In addition to the foregoing, at the end of the Performance Period, if
a Performance Supplement is payable for the Performance Period, the
participant will be entitled to receive a Performance Supplement with
respect to the Performance-Based Restricted Stock earned and awarded
to the participant for the Performance Period.
iv. Any Performance-Based Restricted Stock received by a participant after
termination of employment shall vest according to the vesting schedule
established by the Subcommittee pursuant to Section 6 of this Article
III as if the participant's Employment with the Company had continued.
b. If, prior to the end of a Performance Period, a participant who has been
granted Contingent Restricted Stock terminates Employment for cause or for any
other reason not described in Subsection (a) above, all Contingent Restricted
Stock held on behalf of the participant shall be forfeited.
c. If a participant transfers employment to an Affiliate, the participant
will be entitled to receive a pro rata share of Performance-Based Restricted
Stock for the Performance Period as described in Subsection (a) above. The
participant's Performance-Based Restricted Stock shall vest during the
participant's Employment with the Company and its Affiliates, as described in
Section 6(f) of this Article III.
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SECTION 6. VESTING OF PERFORMANCE-BASED RESTRICTED STOCK
a. The Subcommittee shall determine the vesting schedule for Performance-
Based Restricted Stock at the beginning of the Performance Period. Unless the
Subcommittee determines otherwise, Performance-Based Restricted Stock shall
become vested fifty percent on the first anniversary and fifty percent on the
second anniversary after its conversion from Contingent Restricted Stock, if
the Eligible Employee remains in Employment during each period.
b. Dividends accrue on shares of Performance-Based Restricted Stock during
the vesting period and are invested in additional shares of Performance-Based
Restricted Stock, which become vested simultaneously with the underlying
shares.
c. During the period in which Performance-Based Restricted Stock is not
vested, such stock shall be non-transferable and may not be pledged or
otherwise encumbered. Each certificate for a share of Performance-Based
Restricted Stock shall contain a legend giving appropriate notice of the
restrictions in the grant. The participant shall be entitled to have the legend
removed from the stock certificate covering the shares when all restrictions on
such shares have lapsed. The Subcommittee may determine that the Company will
not issue certificates for shares of Performance-Based Restricted Stock until
all restrictions on such shares have lapsed, or that the Company will retain
possession of certificates for shares of Performance-Based Restricted Stock
until all restrictions on such shares have lapsed.
d. If a participant's Employment terminates for one of the following reasons,
but not for cause, before a grant of Performance-Based Restricted Stock has
vested, the participant's non-vested shares of Performance-Based Restricted
Stock shall continue to vest according to the applicable vesting schedule as if
the participant's Employment with the Company had continued:
i. Death,
ii. Total and permanent disability,
iii. Termination of Employment with a right to an immediate retirement
allowance under a Retirement Plan of the Company, or
iv. Any other termination of Employment in connection with which the
Subcommittee, in its sole discretion, determines that the participant's
Performance-Based Restricted Stock should continue to vest.
e. If a participant terminates Employment within any vesting period following
the grant of Performance-Based Restricted Stock for cause or for any other
reason not described in Subsection (d) above, all of the participant's non-
vested Performance-Based Restricted Stock shall be forfeited.
f. If a participant transfers employment to an Affiliate, the participant's
Performance-Based Restricted Stock shall not be forfeited and the participant's
Performance-Based Restricted Stock shall continue to vest during the
participant's employment with the Company and its Affiliates. If the
participant's employment with the Company and its Affiliates subsequently
terminates under circumstances that would require forfeiture of the
Performance-Based Restricted Stock pursuant to Subsection (e) above, the
participant's non-vested Performance-Based Restricted Stock shall be forfeited.
SECTION 7. CHANGE OF CONTROL
a. In the event of a Change of Control, each participant's Contingent
Restricted Stock for the next Performance Objective level shall be converted
pro rata into Performance-Based Restricted Stock based on the Company's
progress to the next Performance Objective level as of the date of
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the Change of Control. The Performance-Based Restricted Stock received upon
such conversion shall be fully vested. The remaining shares of Contingent
Restricted Stock, if any, shall be forfeited.
b. Additionally, the Performance Supplement will be calculated and applied as
of the effective date of the Change of Control, using the stock price on the
effective date of the Change of Control, assuming the Change of Control occurs
during the basic Performance Period (and not during an extended period as
described in Section 2(a) of this Article). The Performance-Based Restricted
Stock received pursuant to the Performance Supplement shall be fully vested.
c. All Performance-Based Restricted Stock and Stock Options will become
immediately vested upon the occurrence of a Change of Control.
d. Upon a Change of Control where the Company is not the surviving
corporation (or survives only as a subsidiary of another corporation), unless
the Subcommittee determines otherwise, all outstanding Stock Options that are
not exercised shall be assumed by, or replaced with comparable options by, the
surviving corporation.
e. Notwithstanding anything in the Plan to the contrary, in the event of a
Change of Control, no actions shall be taken under the Plan that would make the
Change of Control ineligible for pooling of interests accounting treatment if,
in the absence of such actions, the Change of Control would qualify for such
treatment and the Company intends to use such treatment with respect to the
Change of Control.
ARTICLE IV
MISCELLANEOUS PROVISIONS
SECTION 1. OPTION AND RESTRICTED STOCK LIMITS
a. The maximum number of shares of Common Stock for which Stock Options may
be granted and which may be the subject of a grant of Performance-Based
Restricted Stock (including, without limitation, awards pursuant to the
conversion of Contingent Restricted Stock and awards pursuant to Performance
Supplements) under the Plan is in the aggregate 6,000,000 shares (subject to
adjustment as described in Section 2 of this Article). The shares shall be made
available from authorized Common Stock, issued or unissued, or from Common
Stock issued and held in the treasury of the Company, as shall be determined by
the Subcommittee. Shares of Common Stock subject to Stock Options that
terminate, expire or are canceled without having been exercised, or shares of
Performance-Based Restricted Stock that are canceled, may again be subject to
grant under the Plan.
b. No individual may be granted more than 300,000 shares of Performance-Based
Restricted Stock (including, without limitation, awards pursuant to the
conversion of Contingent Restricted Stock and awards pursuant to Performance
Supplements) and/or Stock Options, regardless of the combination, in any
calendar year.
SECTION 2. ADJUSTMENT IN TERMS OF AWARD
In the event of a reorganization, recapitalization, stock split, stock
dividend, distribution of assets other than pursuant to a normal cash dividend,
combination of shares, merger, consolidation, rights offering, split-up, split-
off, spin-off or any other change in the corporate structure or shares of the
Company, the Subcommittee may, in its discretion, after consultation with the
Chairman of the Board and the President, make appropriate adjustments to
reflect such event in respect of (a) the limitations in Section 1 of this
Article IV, (b) the number of shares of Common Stock covered by, and the
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<PAGE>
exercise price per share applicable to, outstanding Stock Options, and (c) the
number of shares of Common Stock covered by outstanding awards of Contingent
Restricted Stock or Performance-Based Restricted Stock. In the event that the
Subcommittee, after consultation with the Chairman of the Board and the
President, determines that, because of a change (other than a Change of
Control) in the Company's business, operations, corporate structure, capital
structure, assets or manner in which it conducts business, which it deems to be
extraordinary and material, the terms of awards theretofore made are no longer
suitable to the objectives which the Subcommittee sought to achieve when it
made such awards, it may modify the terms of any or all of such awards in such
manner as it may decide is advisable; provided, however, that no award may be
modified in a manner which would be inconsistent with Section 162(m) of the
Code, with respect to awards covered by Section 162(m), or the intent of
Subsection 1(b) or Section 9 of this Article, or which would result in an
increase in the shares of Performance-Based Restricted Stock.
SECTION 3. GOVERNMENTAL REGULATIONS
The Plan and the grant and exercise of Stock Options and the award of
Contingent Restricted Stock and Performance-Based Restricted Stock hereunder
shall be subject to all applicable rules and regulations of governmental or
other authorities. With respect to persons subject to Section 16 of the
Exchange Act, it is the intent of the Company that the Plan and all
transactions under the Plan comply with all applicable provisions of Rule 16b-3
or its successors under the Exchange Act. In addition, it is the intent of the
Company that the Plan and grants under the Plan to covered executives comply
with the applicable provisions of Section 162(m) of the Code, except as
provided in Section 2(f) of Article III. To the extent that any legal
requirement of Section 16 of the Exchange Act or Section 162(m) of the Code as
set forth in the Plan ceases to be required under Section 16 of the Exchange
Act or Section 162(m) of the Code, that Plan provision shall cease to apply.
The Subcommittee may revoke any grant if it is contrary to law or modify a
grant to bring it into compliance with any valid and mandatory government
regulation.
SECTION 4. NO GUARANTY OF EMPLOYMENT
The grant of a Stock Option or award of Contingent Restricted Stock or
conversion to Performance-Based Restricted Stock under the Plan shall not
confer upon a recipient any right to continue in the employ of the Company nor
shall it interfere with or restrict in any way the right of the Company to
discharge an Eligible Employee at any time for any reason, with or without good
cause.
SECTION 5. RELATION TO BENEFIT PLANS
Stock Options, Contingent Restricted Stock, Performance-Based Restricted
Stock and dividends on Performance-Based Restricted Stock will not be
considered as compensation for the purpose of any other benefit plans
maintained by the Company.
SECTION 6. ASSIGNMENT OR TRANSFER
Unless the Subcommittee determines otherwise, no Stock Option or share of
Contingent Restricted Stock or Performance-Based Restricted Stock shall be
assignable or transferable by an Eligible Employee otherwise than by will or
the laws of descent and distribution.
SECTION 7. RIGHTS AS STOCKHOLDER
a. An Eligible Employee under the Plan shall have no rights of a holder of
Common Stock by virtue of an award of Stock Options or Contingent Restricted
Stock hereunder, unless and until he or she becomes entitled to have shares of
Common Stock or Performance-Based Restricted Stock issued to him or her
pursuant to the Plan.
11
<PAGE>
b. An Eligible Employee who has received an award of Performance-Based
Restricted Stock shall have the right to vote such stock. All dividends paid
with respect to Performance-Based Restricted Stock shall be reinvested in
additional shares of Restricted Stock, based on the Fair Market Value of Common
Stock on the date the dividend is paid, and shall be subject to the same
restrictions, including the date on which such restrictions lapse, as the
shares of Performance-Based Restricted Stock with respect to which the
dividends are paid. Stock received with respect to an award of Performance-
Based Restricted Stock pursuant to a stock split, stock dividend, or other
change in the capitalization of the Company will be held subject to the same
restrictions on transferability that are applicable to such shares of
Performance-Based Restricted Stock.
c. No Common Stock shall be issued or transferred in connection with any
grant hereunder unless and until all legal requirements applicable to the
issuance or transfer of such Common Stock have been complied with to the
satisfaction of the Subcommittee. The Subcommittee shall have the right to
condition any grant hereunder on the participant's undertaking in writing to
comply with such restrictions on his or her subsequent disposition of such
shares of Common Stock as the Subcommittee shall deem necessary or advisable as
a result of any applicable law, regulation or official interpretation thereof,
and certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing shares of Common Stock issued or
transferred under the Plan will be subject to such stop-transfer orders and
other restrictions as may be required by applicable laws, regulations and
interpretations, including any requirement that a legend be placed thereon.
SECTION 8. WITHHOLDING TAXES
a. The Company shall have the right to withhold from salary or other
compensation or to cause the employee (or the executor or administrator of his
or her estate or his or her distributee) to make payment of any federal, state,
local, or foreign taxes required to be withheld with respect to any exercise of
a Stock Option or award or vesting or deemed vesting of Performance-Based
Restricted Stock.
b. In the case of an exercise of Stock Options or the vesting of Performance-
Based Restricted Stock, an Eligible Employee may elect to have the withholding
obligation satisfied by having the Company withhold shares of Common Stock
received upon the exercise of the Stock Option or the vesting of Performance-
Based Restricted Stock, as the case may be.
SECTION 9. AMENDMENT AND DISCONTINUANCE OF THE PLAN
The Subcommittee may amend or discontinue the Plan as it shall from time to
time consider desirable, provided that:
a. No amendment shall, without further approval by the holders of a
majority of the shares which are represented in person or by proxy and
entitled to vote on the subject at a meeting of stockholders of the
Company, change the terms of the Plan so as to increase the maximum number
of shares upon which Stock Options may be granted or which may be issued
upon a grant of Performance-Based Restricted Stock from the amounts
described in Subsections 1(a) and (b) of this Article, reduce the minimum
Stock Option price, or extend the maximum Stock Option period; and
b. No amendment, discontinuance, or termination shall deprive persons who
hold shares of Contingent Restricted Stock or Performance-Based Restricted
Stock, or who are entitled to exercise Stock Options pursuant to the terms
and provisions of the Plan, of their rights with respect thereto.
12
<PAGE>
c. If required by Section 162(m) of the Code, the Plan must be reapproved
by the stockholders of the Company no later than the first stockholders
meeting that occurs in the fifth year following the year in which the
stockholders previously approved the Plan.
SECTION 10. EFFECTIVE DATE
The effective date of the Plan is February 19, 1998.
SECTION 11. TERM OF PLAN
The Plan will terminate at the end of the third consecutive Performance
Period (including for this purpose any extended period as described in Section
2(a) of Article III), unless terminated earlier by the Subcommittee.
SECTION 12. MISCELLANEOUS
The Plan shall be unfunded. The Company shall not be required to establish
any special or separate fund or to make any other segregation of assets to
assure the payment of any grants under this Plan. The participants shall in all
respects be unsecured creditors of the Company. The validity, construction,
interpretation and effect of the Plan and grant instruments issued under the
Plan shall exclusively be governed by and determined in accordance with the law
of the Commonwealth of Pennsylvania.
13
<PAGE>
ARCO CHEMICAL COMPANY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE COMPANY FOR THE ANNUAL MEETING ON MAY 14, 1998
The undersigned hereby constitutes and appoints Robert J. Millstone,
Marvin O. Schlanger and Walter J. Tusinski, and each of them, true and
lawful agents and proxies with full power of substitution in each, to
represent the undersigned at the Annual Meeting of Stockholders of ARCO
CHEMICAL COMPANY to be held at the Conference Center at the Company's
Headquarters, 3801 West Chester Pike, Newtown Square, Pennsylvania, on
Thursday, May 14, 1998, and at any adjournments thereof, on all matters
coming before said meeting, including (1) the election of 12 directors,
(2) approval of the ARCO Chemical Company 1998 Long-Term Incentive Plan,
and (3) approval of the appointment of Coopers & Lybrand L.L.P. as
independent auditors for the year 1998.
Nominees for election as director:
Walter F. Beran Stephen R. Mut COMMENTS OR CHANGE OF ADDRESS
Anthony G. Fernandes Frank Savage -----------------------------
Mark L. Hazelwood Marvin O. Schlanger -----------------------------
Alan R. Hirsig Walter J. Tusinski -----------------------------
John H. Kelly Donald R. Voelte, Jr. -----------------------------
Marie L. Knowles
James A. Middleton
(If you have written in the above space, please
mark the corresponding box on the reverse side of
this card.)
THE NUMBER OF SHARES SPECIFIED ON THE
REVERSE SIDE OF THIS PROXY REPRESENTS
THE AGGREGATE NUMBER OF SHARES HELD FOR SEE
YOUR ACCOUNT IN THE ARCO CHEMICAL REVERSE
COMPANY CAPITAL ACCUMULATION AND/OR SIDE
SAVINGS PLANS OR IN CERTAIN EMPLOYEE
BENEFIT PLANS OF ATLANTIC RICHFIELD
COMPANY OR VASTAR RESOURCES, INC. THIS PROXY COVERS ALL SHARES CREDITED TO
YOUR ACCOUNT IN THESE PLANS.
P R O X Y
<PAGE>
X PLEASE MARK YOUR
VOTES LIKE THIS. 6016
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF
DIRECTORS, FOR PROPOSAL 2, AND FOR PROPOSAL 3, IN ACCORDANCE WITH THE
RECOMMENDATIONS OF THE BOARD OF DIRECTORS.
- --------------------------------------------------------------------------------
FOR WITHHELD
1. Election of Directors [_] [_]
For, except vote withheld for the following nominee(s):
- ------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of the ARCO [_] [_] [_]
Chemical Company 1998
Long-Term Incentive Plan
FOR AGAINST ABSTAIN
3. Approval of appointment of [_] [_] [_]
Coopers & Lybrand L.L.P. as
independent auditors
Comments or change of address on reverse side. [_]
If you plan to attend the meeting please put an "X"
in the box. [_]
SIGNATURE(S) _______________________________ DATE_______________________
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee,
guardian, or corporate officer, please give full title as such.
<PAGE>
ARCO CHEMICAL COMPANY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE COMPANY FOR THE ANNUAL MEETING ON MAY 14, 1998
The undersigned hereby constitutes and appoints Robert J. Millstone,
Marvin O. Schlanger and Walter J. Tusinski, and each of them, true and
lawful agents and proxies with full power of substitution in each, to
represent the undersigned at the Annual Meeting of Stockholders of ARCO
CHEMICAL COMPANY to be held at the Conference Center at the Company's
Headquarters, 3801 West Chester Pike, Newtown Square, Pennsylvania, on
Thursday, May 14, 1998, and at any adjournments thereof, on all matters
coming before said meeting, including (1) the election of 12 directors,
(2) approval of the ARCO Chemical Company 1998 Long-Term Incentive Plan,
and (3) approval of the appointment of Coopers & Lybrand L.L.P. as
independent auditors for the year 1998.
Nominees for election as director:
Walter F. Beran Stephen R. Mut COMMENTS OR CHANGE OF ADDRESS
Anthony G. Fernandes Frank Savage -----------------------------
Mark L. Hazelwood Marvin O. Schlanger -----------------------------
Alan R. Hirsig Walter J. Tusinski -----------------------------
John H. Kelly Donald R. Voelte, Jr. -----------------------------
Marie L. Knowles
James A. Middleton
(If you have written in the above space, please
mark the corresponding box on the reverse
side of this card.)
YOU ARE ENCOURAGED TO SPECIFY YOUR SEE
CHOICES BY MARKING THE APPROPRIATE REVERSE
BOXES, SEE REVERSE SIDE, BUT YOU NEED SIDE
NOT MARK ANY BOXES IF YOU WISH TO VOTE
IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THIS PROXY CANNOT
BE VOTED UNLESS YOU SIGN AND RETURN IT.
P R O X Y
<PAGE>
X PLEASE MARK YOUR
VOTES LIKE THIS. 1018
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF
DIRECTORS, FOR PROPOSAL 2, AND FOR PROPOSAL 3, IN ACCORDANCE WITH THE
RECOMMENDATIONS OF THE BOARD OF DIRECTORS.
- --------------------------------------------------------------------------------
FOR WITHHELD
1. Election of Directors [_] [_]
For, except vote withheld for the following nominee(s):
- ------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of the ARCO Chemical [_] [_] [_]
Company 1998 Long-Term
Incentive Plan
FOR AGAINST ABSTAIN
3. Approval of appointment of [_] [_] [_]
Coopers & Lybrand L.L.P. as
independent auditors
Comments or change of address on reverse side. [_]
If you plan to attend the meeting please put an "X"
in the box. [_]
SIGNATURE(S) _________________________________ DATE ____________________
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee,
guardian, or corporate officer, please give full title as such.
