<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
LYONDELL PETROCHEMICAL 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:
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(2) Aggregate number of securities to which transaction applies:
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(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:
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(5) Total fee paid:
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[_] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
LYONDELL
PETROCHEMICAL
COMPANY
NOTICE OF
ANNUAL MEETING
OF STOCKHOLDERS LOGO
TO BE HELD [LOGO OF LYONDELL APPEARS HERE]
ON MAY 9, 1997
AND PROXY STATEMENT
PLEASE COMPLETE, SIGN, DATE AND RETURN
YOUR PROXY PROMPTLY
<PAGE>
LOGO
[LOGO OF LYONDELL APPEARS HERE]
LYONDELL PETROCHEMICAL COMPANY
1221 MCKINNEY STREET, SUITE 1600
HOUSTON, TEXAS 77010
March 14, 1997
Dear Stockholder:
The 1997 Annual Meeting of Stockholders will be held on Friday, May 9, 1997,
beginning at 9:00 a.m. in the Two Houston Center Auditorium, 909 Fannin, Suite
P-200, in Houston, Texas. 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. Please be advised that we have not
scheduled a report on the Company or any multimedia presentations for the 1997
Annual Meeting and we do not anticipate any other business except for the two
regularly scheduled items. The official results of the voting at the meeting
will be sent to all stockholders as part of a subsequent stockholder report.
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 do plan to attend, we would appreciate your
checking the appropriate box on the enclosed proxy card.
Sincerely yours,
[SIG APPEARS HERE]
Chairman of the Board
[SIG APPEARS HERE]
President and Chief Executive Officer
<PAGE>
LOGO
[LOGO OF LYONDELL APPEARS HERE]
LYONDELL PETROCHEMICAL COMPANY
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 9, 1997
TO THE STOCKHOLDERS:
The Annual Meeting of Stockholders of Lyondell Petrochemical Company will be
held in the Two Houston Center Auditorium, 909 Fannin, Suite P-200, in
Houston, Texas, at 9:00 a.m., Houston time, on Friday, May 9, 1997, for the
following purposes, as more fully described in the attached Proxy Statement.
(1) To elect eight directors to serve until the 1998 Annual Meeting of
Stockholders or until their earlier resignation or removal;
(2) To ratify the appointment of Coopers & Lybrand L.L.P. as independent
auditors for Lyondell for the year 1997; and
(3) To transact such other business as may properly come before the meeting
or any adjournment thereof.
Stockholders of record at the close of business on March 12, 1997 will be
entitled to notice of and to vote at the meeting and any adjournment thereof.
PLEASE READ THE PROXY STATEMENT, THEN COMPLETE, SIGN AND DATE THE FORM OF
PROXY AND RETURN IT IN THE ENCLOSED SELF-ADDRESSED POSTPAID ENVELOPE.
EACH STOCKHOLDER OF RECORD WILL RECEIVE A SINGLE FORM OF PROXY PERTAINING TO
ALL CLASSES OF VOTING STOCK REGISTERED IN HIS OR HER NAME. EACH PARTICIPANT IN
ANY OF THE VARIOUS EMPLOYEE BENEFIT PLANS WILL ALSO RECEIVE A FORM OF PROXY
PERTAINING TO SHARES CREDITED TO HIS OR HER ACCOUNTS IN ALL PLANS.
BY ORDER OF THE BOARD OF DIRECTORS,
[SIG APPEARS HERE]
Jeffrey R. Pendergraft Houston, Texas
Secretary March 14, 1997
<PAGE>
LOGO
[LOGO OF LYONDELL APPEARS HERE]
LYONDELL PETROCHEMICAL COMPANY
1221 MCKINNEY STREET
SUITE 1600
HOUSTON, TEXAS 77010
----------------
PROXY STATEMENT
MARCH 14, 1997
----------------
INTRODUCTION
The accompanying proxy is solicited by the Board of Directors of Lyondell
Petrochemical Company ("Lyondell" 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
Lyondell. When a proxy is returned properly dated and signed, the shares
represented thereby will be voted by the persons named as proxies in
accordance with each stockholder's directions. If a proxy is dated, signed and
returned without specifying choices, the shares will be voted as recommended
by the directors of the Company. As to other items of business that may come
before the meeting or any adjournment thereof, the persons named in the
accompanying form of proxy will vote in accordance with their best judgment.
It is expected that proxy materials will be mailed to stockholders beginning
on or about March 31, 1997. Atlantic Richfield Company, a Delaware corporation
("ARCO"), has advised the Company that it owned approximately 49.9 percent of
the outstanding shares of Common Stock of the Company ("Common Stock") on
March 12, 1997 and that it intends to vote such shares in proportion to the
votes of the non-ARCO stockholders. See "PRINCIPAL STOCKHOLDERS".
VOTING PROCEDURES
Holders of record of Common Stock at the close of business on March 12, 1997
will be entitled to one vote per share. The Company had 80,000,000 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
will constitute a quorum. Abstentions and broker non-votes are counted as
present in determining whether the quorum requirement is satisfied.
The directors will be elected by a plurality of the shares of Common Stock
cast in person or represented by proxy at the meeting. Adoption of the
proposal to ratify the appointment of the independent auditors will require
the affirmative vote of a majority of the shares present in person or
represented by proxy at the meeting.
Abstentions from voting on any matter will be included in the voting tally
and will have the same effect as a vote withheld on the election of directors
or against the ratification of the appointment of the independent auditors, as
the case may be. Because broker non-votes (instances where brokers are
prohibited from exercising discretionary authority for beneficial owners who
have not returned a proxy) are not considered "shares present" with respect to
a matter requiring the affirmative vote of a majority of shares present in
person or by proxy at the meeting, broker non-votes will not affect the
outcome with respect to the ratification of the appointment of the independent
auditors.
The Company's 401(k) and Savings Plan, in which executive officers have
account balances, permits plan participants to direct the plan trustees how to
vote the Common Stock allocated to their accounts. The trustee
<PAGE>
will vote all shares of Common Stock for which no participant directions are
received as directed by the Plan's Benefits Administrative Committee which is
comprised of executive officers and senior managers of the Company.
PRINCIPAL STOCKHOLDERS
The Company's principal stockholder, ARCO, is one of the nation's leading
integrated oil companies and maintains its headquarters at 515 South Flower
Street, Los Angeles, California 90039. At March 12, 1997 ARCO owned 39,921,400
shares of Lyondell's Common Stock, which represent 49.9 percent of the
outstanding Common Stock.
In August 1994, ARCO completed an offering (the "ARCO Note Offering") of
three-year debt securities (the "ARCO Notes") exchangeable into Lyondell
Common Stock or cash. Upon maturity at September 15, 1997, the principal
amount of the ARCO Notes will be payable, at ARCO's option, in shares of
Lyondell Common Stock or cash. The number of shares or the amounts of such
cash will be determined using a formula based on the price of Lyondell Common
Stock at the maturity of the ARCO Notes. If ARCO elects to exchange the ARCO
Notes for the Lyondell Common Stock it holds, then its equity interest in
Lyondell will be substantially reduced or eliminated, depending on the price
of Lyondell's Common Stock at such time. ARCO has stated its current intent to
vote its shares of Lyondell Common Stock proportionately to the votes of the
non-ARCO stockholders, including with respect to the election of directors;
provided, however, that in the event a person other than ARCO is deemed to own
more than 10 percent of the Common Stock within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
there occurs a contested proxy solicitation within the meaning of Rule 14a-
11(a) of the Exchange Act, ARCO intends to vote its shares as it deems proper.
The Company is not included as a consolidated subsidiary in ARCO's financial
statements; however, for certain securities laws purposes, ARCO could be
deemed to be a "control" person or an "affiliate" of Lyondell.
The table below sets forth certain information as of December 31, 1996 (the
most recent date as of which the Company has information except as otherwise
noted below) regarding the beneficial ownership of the Common Stock by persons
other than ARCO known by the Company of more than five percent of its
outstanding shares of Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF SHARES
NAME AND ADDRESS SHARES OUTSTANDING
---------------- --------- -----------
<S> <C> <C>
Wellington Management Company, LLP(a)................. 7,524,900 9.26%
75 State Street, Boston, Massachusetts 02109
Brinson Partners, Inc.(b)............................. 6,145,826 7.7%
209 South LaSalle, Chicago, Illinois 60604-1295
FMR Corporation(c).................................... 4,666,096 5.61%
82 Devonshire Street, Boston, Massachusetts 02109
State Street Bank and Trust Company(d)................ 4,199,096 5.3%
225 Franklin Street, Boston, Massachusetts 02110
</TABLE>
- --------
(a) Wellington Management Company, LLP ("WMC") (together with its wholly-owned
subsidiary, Wellington Trust Management Company, N.A.) may be deemed a
beneficial owner of the 7,524,900 shares by virtue of the direct or
indirect investment and/or voting discretion they possess pursuant to the
provisions of investment advisory agreements with clients, including the
Vanguard/Windsor Fund, Inc. ("Vanguard"). WMC has shared dispositive power
over the 7,524,900 shares and shared voting power over 114,300 shares.
Vanguard has shared dispositive power over 7,410,600 shares and sole
voting power over 7,410,600 shares.
2
<PAGE>
(b) Brinson Partners, Inc. ("BPI") (together with its wholly-owned subsidiary,
Brinson Trust Company ("BTC")), and its parent holding companies, Brinson
Holdings, Inc. ("BHI"), SBC Holding (USA), Inc. ("SBCUSA") and Swiss Bank
Corporation ("SBC") may be deemed a beneficial owner of the 6,145,826
shares by virtue of the direct or indirect investment and/or voting
discretion they possess pursuant to the provisions of investment advisory
agreements with clients. BPI, SBCUSA, SBC and BHI have shared voting and
shared dispositive power over all 6,145,826 shares. BTC has shared voting
and dispositive power with respect to 1,157,500 shares.
(c) FMR Corporation ("FMR") (together with its affiliated entities) may be
deemed a beneficial owner of the 4,666,096 shares by virtue of the direct
or indirect investment and/or voting discretion they possess pursuant to
the provisions of investment advisory agreements with clients. The number
of shares owned by FMR and its affiliates as of December 31, 1996 included
3,064,732 shares resulting from the assumed conversion of the ARCO Notes
held by such affiliates as of such date (assuming a prescribed exchange
rate of 0.892857 shares of Common Stock per ARCO Note). FMR has the sole
dispositive power over 4,426,932 shares owned or deemed to be owned by the
Funds that its wholly-owned subsidiary, Fidelity Management & Research
Company ("Fidelity") acts as an advisor to. The power to vote or direct
the voting of such shares resides with the Funds' Boards of Directors and
Fidelity carries out the voting of the shares under written guidelines
established by the Funds' Boards of Directors. FMR has the sole
dispositive power over 239,164 shares owned or deemed to be owned by
Fidelity Management & Trust Company ("FMTC"), its wholly-owned subsidiary
serving as investment manager of institutional accounts. FMR has sole
voting power with respect to 163,271 of those shares and no voting power
with respect to 75,893 of those shares. The 239,164 shares FMTC owned
included 121,964 shares resulting from the assumed conversion of the ARCO
Notes held by FMTC as of such date (assuming a prescribed exchange rate of
0.892857 shares of Common Stock per ARCO Note).
(d) State Street Bank and Trust Company ("State Street"), Trustee for (i) the
Lyondell Petrochemical Company 401(k) and Savings Plan; (ii) the LYONDELL-
CITGO Refining Company Ltd. 401(k) and Savings Plans; (iii) various
collective investment funds for employee benefit plans and other index
accounts; and (iv) various trust accounts as Co-Trustee with the Barnes
Group may be deemed a beneficial owner of the 4,199,096 shares by virtue
of the direct or indirect investment and/or voting discretion it possesses
pursuant to the provisions of investment advisory agreements with clients.
State Street has sole voting power over 543,700 shares and shared voting
power over 3,244,396 shares, sole dispositive power over 952,400 shares
and shared dispositive power over 3,246,696 shares.
3
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Common Stock owned
beneficially as of February 1, 1997 by each director or nominee, each of the
current executive officers named in the Summary Compensation Table and by all
current directors and executive officers as a group. As of February 1, 1997,
the percentage of shares of Common Stock beneficially owned by any director or
nominee, named executive officer or by all directors and executive officers as
a group, did not exceed one percent of the issued and outstanding Common
Stock. Unless otherwise noted, each individual has sole voting and investment
power.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
OWNED BENEFICIALLY AS
OF
FEBRUARY 1, 1997(A)(B)
----------------------
<S> <C>
William T. Butler....... 4,624
Curtis J. Crawford...... 1,873
Travis Engen............ 2,873
Bob G. Gower............ 300,629(c)
Stephen F. Hinchliffe,
Jr..................... 4,873(d)
Dudley C. Mecum II...... 2,573
Richard W. Park......... 49,713
Jeffrey R. Pendergraft.. 67,887
Dan F. Smith............ 70,031
Paul R. Staley.......... 2,123
Debra L. Starnes........ 61,832(e)
Russell S. Young........ 65,142(f)
All directors and
executive officers as a
group (17)............. 758,422(g)
</TABLE>
- --------
(a) Includes shares held by the trustee under the Lyondell 401(k) and Savings
Plan for the accounts of participants as of December 31, 1996.
(b) The amounts shown include shares that may be acquired within 60 days
following February 1, 1997 through the exercise of stock options, as
follows: Mr. Gower, 156,000; Mr. Smith, 25,950; Mr. Pendergraft, 47,225;
Mr. Young, 36,025; Ms. Starnes, 30,350; Mr. Park, 29,775 and all directors
and executive officers as a group, including those just named, 380,744.
(c) Includes 5,000 ARCO Notes held by Mr. Gower. The ARCO Notes are
convertible at maturity into Lyondell Common Stock or, at ARCO's option,
cash.
(d) Does not include 1,000 shares held by a trust of which Mr. Hinchliffe is a
trustee, as to which shares he disclaims beneficial ownership.
(e) Does not include approximately 6,500 shares owned by Ms. Starnes' spouse,
as to which shares she disclaims beneficial ownership.
(f) Does not include 1,100 shares owned by Mr. Young's spouse, as to which
shares he disclaims beneficial ownership.
(g) Does not include the approximate 8,600 shares owned by spouses and a
trust, as to which shares beneficial ownership is disclaimed.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the Securities and
Exchange Commission ("SEC") and the New York Stock Exchange initial reports of
ownership and reports of changes in ownership of Common Stock of the Company.
Officers, directors and greater than ten-percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
4
<PAGE>
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that such reports
accurately reflect all reportable transactions and holdings, during the fiscal
year ended December 31, 1996 all Section 16(a) filing requirements applicable
to its officers, directors and greater than ten-percent beneficial owners were
complied with.
BOARD OF DIRECTORS
DIRECTORS' MEETINGS
An annual meeting of the Board of Directors is held each year in conjunction
with the annual meeting of stockholders for the purposes of the organization
of committees, election or appointment of officers and the transaction of
other business. Regular meetings of the Board of Directors may be held without
notice at such times as the Board of Directors may determine. The Board of
Directors currently expects to hold regular meetings in Houston, Texas.
Special meetings may be called by the Chairman of the Board of Directors, 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 of Directors consent
to such action in writing. During 1996, the Board of Directors held eight
meetings. All of the Company's incumbent directors attended 75 percent or more
of the aggregate of all meetings of the Board and committees on which they
served during 1996.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors was established for the
general purpose of reviewing the integrity of the Company's accounting and
financial reporting, maintaining communications between the Board of Directors
and external and internal auditors, dealing with conflicts between ARCO and
the Company and initiating special investigations as deemed necessary. The
Audit Committee has adopted specific guidelines for review of agreements
between the Company and ARCO or its affiliates to assure that such agreements
are fair to the Company and its stockholders. 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 Committee is an officer or employee of
the Company. The Audit Committee held seven meetings during 1996. The Audit
Committee currently consists of Mssrs. Engen, Staley and Mecum, who serves as
Chairman.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors adopts, amends,
administers and terminates compensation and benefit plans, makes
recommendations to the Board of Directors as to management succession plans
and administers the Company's pay performance and long-term incentive plans
for executive officers. No member of the Committee is an officer or employee
of the Company and no member is eligible to participate in any benefit plan of
the Company that is administered by the Committee. The Compensation Committee
held nine meetings during 1996. The Compensation Committee currently consists
of Messrs. Butler, Crawford and Hinchliffe, who serves as Chairman.
CORPORATE GOVERNANCE COMMITTEE (FORMERLY THE NOMINATING COMMITTEE)
The role of the former Nominating Committee has expanded to more broadly
encompass Board governance matters and the name of the committee has been
changed to the Corporate Governance Committee to reflect this broader
character. The Corporate Governance Committee considers and makes
recommendations to the Board of Directors as to the number of Directors to
constitute the whole Board, the selection criteria for membership and the
names of persons whom it concludes should be considered for membership on the
Board of Directors. The Corporate Governance Committee also recommends matters
relating to committee assignments and the roles and responsibilities of the
Board and of the Directors. The Corporate Governance Committee makes
determinations on compensation for Non-Employee Directors and is responsible
for evaluating the Board's performance and assessing the effectiveness of its
structure and governance. The Corporate Governance Committee held one meeting
during 1996. The Corporate Governance Committee currently consists of Messrs.
Butler, Crawford,
5
<PAGE>
Gower and Staley, who serves as Chairman. Stockholders of the Company who wish
to nominate persons for election to the Board of Directors must comply with
the provisions of the By-Laws that are described more fully at page 25 of this
Proxy Statement.
EXECUTIVE COMMITTEE
The Executive Committee 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 of Directors and formerly was responsible for determining
compensation of the Non-Employee Directors. The Executive Committee met five
times during 1996. The Executive Committee currently consists of Messrs.
Butler, Smith and Gower, who serves as Chairman.
6
<PAGE>
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, and until their
successors are elected and qualified. The Board of Directors has selected the
nominees listed below for election to the Board.
Unless authority to vote for directors is withheld in the proxy, the persons
named in the accompanying proxy intend to vote for the election of the eight
nominees listed below. The directors will be elected by a plurality of the
shares of Common Stock cast in person or by proxy at the meeting.
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 another person or persons as the Board
of Directors recommends. Bob Gower, the Company's current Chairman of the
Board, has announced his intention to retire from the Board during 1997. Mr.
Gower retired as an employee of the Company effective February 1, 1997.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ELECTION OF EACH NOMINEE
LISTED BELOW. PROPERLY DATED AND SIGNED PROXIES WILL BE SO VOTED UNLESS
STOCKHOLDERS SPECIFY OTHERWISE.
The following biographical information is furnished with respect to each of
the nominees for election at the annual meeting. The information includes age
as of March 1, 1997, present position, if any, with Lyondell, period served as
director, and other business experience during the past five years. The
positions referred to beneath a director's name refer to positions with
Lyondell unless stated otherwise.
William T. Butler, 64 ....... Dr. Butler was elected a Director of the
Company on December 21, 1988, effective as of
January 25, 1989. Dr. Butler became Chancellor
of Baylor College of Medicine on January 5,
1996. From 1979 until January 1996, he served
as President and Chief Executive Officer of
Baylor College of Medicine (education and
research). He is also a director of C. R.
Bard, Inc. and Browning-Ferris Industries Inc.
Dr. Butler is a member of the Compensation
Committee, the Executive Committee and the
Corporate Governance Committee.
Curtis J. Crawford, 49 ...... Mr. Crawford was elected a Director of the
Company on July 21, 1995. He has held his
current position as President of
Microelectronics, a business unit of Lucent
Technologies, Inc. (a successor to certain
AT&T businesses) since February 1, 1996. From
1993 to February 1996, Mr. Crawford was
President of AT&T Microelectronics, a business
unit of AT&T Corporation. From 1991 to 1993,
he held the position of Vice President and Co-
Chief Executive Officer of AT&T
Microelectronics. From 1988 to 1991, he held
the position of Vice President, Sales, Service
and Support for AT&T Computer Systems. From
1973 to 1988, he served in various sales,
marketing and executive management positions
at various divisions of International Business
Machines Corporation ("IBM"), including Vice
President, Marketing for the National
Distribution Division. He is a member of the
Board of Directors of the i-STAT Corporation,
ITT Industries, Inc., and the Semiconductor
Industry Association.
Mr. Crawford is a member of the Compensation
Committee and the Corporate Governance
Committee.
7
<PAGE>
Travis Engen, 52 ............ Mr. Engen was elected a Director of the Company
effective as of April 1, 1995. He has held his
current position as Chairman, President and
Chief Executive of ITT Industries, Inc. since
December 20, 1995. From 1991 until December
19, 1995, he served as Executive Vice
President and a member of the Management
Policy Committee of ITT Corporation. He held
the position of Senior Vice President of ITT
Corporation and President and Chief Executive
Officer of ITT Defense, Inc. from 1987 to
1991. Mr. Engen is also a director of Alcan
Aluminium Limited.
Mr. Engen is a member of the Audit Committee.
Bob G. Gower, 59 ... Mr. Gower was elected Chairman of the Board of
Chairman of the Board Directors of the Company on August 31, 1994.
Mr. Gower has been a Director of the Company
since June 27, 1988. Mr. Gower served as Chief
Executive Officer of the Company from October
24, 1988 until December 1996. He was President
of Lyondell and its predecessor, the Lyondell
Division, from the formation of the Lyondell
Division in April 1985 until August, 31, 1994.
Prior to 1989, Mr. Gower served in various
positions with ARCO, including as Senior Vice
President of ARCO. He is also a director of
Keystone International, Inc.
Mr. Gower is Chairman of the Executive
Committee and is a member of the Corporate
Governance Committee.
Stephen F. Hinchliffe, Jr., Mr. Hinchliffe was elected a Director of the
63 .......................... Company on March 1, 1991. Since 1988, he has
held his current position of Chairman of the
Board and Chief Executive Officer of BHH
Management, Inc., the managing partner of
Leisure Group, Inc. Previously, he served as
Chairman of the Board of Leisure Group, Inc.
(a manufacturer of consumer products), which
he founded in 1964.
Mr. Hinchliffe is Chairman of the
Compensation Committee.
Dudley C. Mecum II, 62....... Mr. Mecum was elected a Director of the Company
on November 28, 1988, effective as of January
25, 1989. Mr. Mecum is currently Chairman of
Mecum Associates, Inc., a firm specializing in
leveraged buy-outs. From August 1989 until
December 1996, Mr. Mecum was a partner with
the merchant banking firm of G. L. Ohrstrom &
Company. He served as Group Vice President and
director of Combustion Engineering Inc. from
1985 to December 1987, and as a managing
partner of the New York region of Peat,
Marwick, Mitchell & Co. from 1979 to 1985. He
is also a director of The Travelers Group,
Dyncorp, VICORP Restaurants, Inc., Fingerhut
Companies, Inc., Travelers/Aetna Property
Casualty Corporation, Metris Companies, Inc.
and Suburban Propane Partners, L.P.
Mr. Mecum is Chairman of the Audit Committee.
8
<PAGE>
Dan F. Smith, 50... Mr. Smith was named Chief Executive Officer of
President and Chief Executive the Company on December 6, 1996 and has served
Officer as President of the Company since August 31,
1994. He has served as a Director of the
Company since October 24, 1988. Mr. Smith
served as Chief Operating Officer from May
1993 to December 1996. He served as Vice
President Corporate Planning of ARCO from
October 1991 until May 1993. He previously
served as Executive Vice President and Chief
Financial Officer of the Company from October
1988 to October 1991 and as Senior Vice
President of Manufacturing of Lyondell, and
its predecessor, the Lyondell Division, from
June 1986 to October 1988. From April 1985 to
June 1986 Mr. Smith held executive positions
in manufacturing, control and administration.
Prior to 1985, he served in various financial,
planning and manufacturing positions with
ARCO. Mr. Smith is also a director of ABS
Group of Companies, Inc., a subsidiary of
American Bureau of Shipping, and ChemFirst,
Inc.
Mr. Smith is a member of the Executive
Committee.
Paul R. Staley, 67........... Mr. Staley was elected a Director of the
Company on November 28, 1988, effective as of
January 25, 1989. He has held his current
position as Chairman of the National Vision
Foundation since August 1994. He held the
position of Chairman of the Executive
Committee of the Board of Directors of P. Q.
Corporation (an industry supplier of
silicates) from January 1991 until August
1994. He also held the positions of President
and Chief Executive Officer of P.Q.
Corporation from 1973 and 1981, respectively,
until January 1991.
Mr. Staley is Chairman of the Corporate
Governance Committee and a member of the
Audit Committee.
PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS
Item 2 on Proxy Card
The Board of Directors has recommended the appointment of Coopers & Lybrand
L.L.P., Certified Public Accountants, to audit the financial statements of
Lyondell for the year 1997. Coopers & Lybrand L.L.P. has acted in this
capacity since July 1988 and has acted as the independent auditor for ARCO for
many years. Since June 1987, Coopers & Lybrand L.L.P. has also acted as the
independent auditor for ARCO Chemical, an 83.3 percent-owned (as of March
1996) subsidiary of ARCO that became publicly held in October 1987. Since
1993, Coopers & Lybrand, L.L.P. has also acted as the independent auditor for
the Company's refining affiliate, LYONDELL-CITGO Refining Company Ltd.
("LCR"). In addition, from time to time, the firm performs consulting work for
the Company, LCR, ARCO Chemical and ARCO. 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.
The 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.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF THE
APPOINTMENT OF COOPERS & LYBRAND L.L.P. PROPERLY DATED AND SIGNED PROXIES WILL
BE SO VOTED UNLESS STOCKHOLDERS SPECIFY OTHERWISE.
9
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information as to all individuals who served
as Chief Executive Officer during 1996 and the next four most highly
compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------------------------------
RESTRICTED SECURITIES LONG-TERM
OTHER ANNUAL STOCK UNDERLYING INCENTIVE ALL OTHER
NAME AND PRINCIPAL SALARY COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITION YEAR ($) BONUS ($) ($)(B) ($)(C) (#)(D) ($)(E) ($)(F)
------------------ ---- ------- --------- ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bob G. Gower(a)......... 1996 714,000 1,270,142 134,736 648,922 -0- 387,866 3,201,446(g)
Chairman of the Board & 1995 698,078 648,922 39,177 670,557 -0- 596,554 91,746
Former Chief Executive
Officer 1994 587,646 670,557 70,418 -0- 57,300 1,146,152 77,284
Dan F. Smith............ 1996 490,886 241,932 11,026 370,813 -0- 221,613 61,556
President & 1995 473,905 370,813 7,945 383,175 -0- 115,382 56,519
Chief Executive Officer 1994 409,000 383,175 11,722 -0- 25,000 86,396(h) 55,549
Russell S. Young........ 1996 275,400 90,725 24,297 139,055 -0- 83,127 43,844
Senior Vice President, 1995 269,385 139,055 16,990 143,691 -0- 120,269 41,199
Chief Financial Officer 1994 230,765 143,691 19,648 -0- 13,500 196,916 36,900
& Treasurer
Jeffrey R. Pendergraft.. 1996 255,000 54,535 14,707 139,055 -0- 83,127 40,845
Senior Vice President, 1995 249,885 139,055 8,868 143,691 -0- 149,277 38,854
General Counsel &
Secretary 1994 238,139 143,691 8,736 -0- 13,500 252,457 34,006
Debra L. Starnes........ 1996 214,200 54,535 15,444 139,055 -0- 83,127 39,109
Senior Vice President, 1995 209,904 139,055 10,387 143,691 -0- 110,174 34,108
Petrochemicals 1994 184,943 143,691 9,064 -0- 8,600 141,376 29,571
Richard W. Park......... 1996 207,060 54,535 29,824 83,433 -0- 49,867 38,209
Vice President, 1995 203,000 83,433 12,102 86,214 -0- 107,488 35,540
Human Resources 1994 199,900 86,214 16,019 -0- 5,300 201,965 32,057
</TABLE>
- --------
(a) Mr. Gower resigned as Chief Executive Officer effective December 6, 1996.
(b) Includes imputed income in respect of the Long-Term Disability Plan, tax
gross-ups in respect of financial counseling reimbursements and in respect
of other miscellaneous items, and the amount of incremental interest
accrued under the Executive Deferral Plan that exceeds 120 percent of a
specified IRS rate. "Tax gross-ups" refers to the additional reimbursement
paid to a recipient to cover the federal income tax obligations associated
with the underlying benefit, including an additional amount based on
maximum applicable income tax rates.
(c) The restricted stock is awarded as part of the award under the Company's
Value Share Plan. The dollar value included in the table reflects the
valuation at the time of the award. The restricted stock vests annually in
three equal installments. The number and value (based on the December 31,
1996 closing price of the Company's Common Stock) of all unvested
restricted stock holdings by each of the named executive officers as of
December 31, 1996 was as follows: Mr. Gower: 27,042 shares ($594,924); Mr.
Smith: 15,454 shares ($339,988); Mr. Young: 5,794 shares ($127,468); Mr.
Pendergraft: 5,794 shares ($127,468); Ms. Starnes: 5,794 shares
($127,468); and Park 3,477 shares ($76,494). The named executive officers
will receive dividends on the restricted stock reported in this column.
(d) No grants of stock options were made to executive officers in 1995 or
1996.
(e) Amounts shown in the Long-Term Incentive Payouts column for 1996 and 1995
represent payment of the associated cash portion under the Value Share
Plan that was paid in December 1996 and December 1995, respectively, in
connection with the vesting of such executive officers' restricted stock.
The amounts for 1995 also include the payout of performance units
(including associated dividend share credits) previously awarded under the
Company's Executive Long-Term Incentive Plan (the "LTIP") (except with
respect to
10
<PAGE>
Mr. Smith, who was not an executive officer of the Company at the time the
performance units were granted). Amounts shown in the Long-Term Incentive
Payouts column for 1994 represent payout of performance units (including
associated dividend share credits) previously awarded under the LTIP.
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 record date to an optionee's account
is computed by multiplying the dividend rate per share of Common Stock by
the sum of (i) the number of shares subject to outstanding options, (ii) 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. As future dividends are
declared, the participant will receive dividend share credits not only on
the number of shares covered by unexercised options and the number of
performance units but also on the number of dividend share credits in the
participant's account. The dividend crediting mechanism will continue to
operate in this manner with respect to options, until the participant
exercises such options or the options expire. Dividend share credits do not
represent earned compensation and have no definite value, if any, until the
date on which the options in respect of which such credits have been
allocated are exercised. See footnote (c) to the Aggregated Option Exercises
and Fiscal Year-End Option Values Table. Dividend share credits are canceled
upon an optionee's termination of employment under certain specified
circumstances. The number of dividend share credits accrued to the accounts
of the named executives during 1996, 1995 and 1994, respectively, is as
follows: Mr. Gower: 5,840, 10,680 and 10,273; Mr. Smith: 1,233, 2,149 and
1,867; Mr. Young: 1,589, 2,182 and 2,077; Mr. Pendergraft: 2,125, 2,567 and
2,483; Ms. Starnes: 1,358, 1,523 and 1,470; Mr. Park 1,322, 1,759 and 1,688.
(f) Includes contributions to the Executive Supplementary Savings Plan,
incremental executive medical plan premiums, financial counseling
reimbursements and certain amounts in respect to the Executive Life
Insurance Plan, as follows:
<TABLE>
<CAPTION>
YEAR MR. GOWER MR. SMITH MR. YOUNG MR. PENDERGRAFT MS. STARNES MR. PARK
---- --------- --------- --------- --------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Executive Supplementary
Savings Plan........... 1996 $57,120 $39,271 $22,032 $20,400 $17,136 $16,565
Incremental Medical Plan
Premiums............... 1996 $ 8,693 $ 8,693 $ 8,693 $ 8,693 $ 8,693 $ 8,693
Financial Counseling
Reimbursement.......... 1996 $ 7,650 $ 6,250 $ 6,730 $ 7,150 $ 6,730 $ 6,430
Executive Life Insurance
Plan................... 1996 $24,889 $ 7,342 $ 6,386 $ 4,602 $ 6,550 $ 6,521
</TABLE>
(g) Includes certain benefits payable or paid to Mr. Gower pursuant to the
terms of his separation agreement with the Company as follows: (i)
$1,456,000 severance payment; and (ii) $1,647,094 enhanced SERP benefit
payment. The terms of this agreement and the calculation of the related
benefits are more fully described beginning at page 15 of this Proxy
Statement.
(h) Represents an amount prorated for the number of months during the three-
year period that Mr. Smith was an executive officer of the Company.
11
<PAGE>
PAY AND PERFORMANCE PLANS AND LONG-TERM INCENTIVE PLANS
VALUE SHARE PLAN
In 1995 the Company adopted a performance driven pay plan for executive
officers (the "Value Share Plan"), replacing the Executive Long-Term Incentive
Plan ("LTIP"). The Value Share Plan is designed to provide participants with
an incentive to maximize long-term stockholder value and to encourage
significant ownership of Company stock. The Value Share Plan establishes
Performance Cycles and at the beginning of each Cycle, participants are
assigned an allocation percentage that will indicate the extent to which each
participant will share in the amounts generated by the Value Share Plan. At
the end of the Performance Cycle two award pools are created: (i) a Value
Award Pool and (ii) an Operating Award Pool.
The Value Award Pool equals the sum of 4.0% of Average EVA ("economic value
added") and 1.25% of MVA ("market value added"). EVA measures the Company's
cash flow performance in excess of a capital charge, which is calculated by
multiplying the capital invested in the Company times the Company's weighted
average cost of capital. MVA measures changes in the market value of the
Company's equity, plus the value of dividends as if they had been reinvested
in the Company's Common Stock.
An Operating Award Pool is created if certain minimum criteria are
satisfied. The size of the pool is based on the Compensation Committee's
evaluation of Lyondell's operating performance in the final year of any Cycle
in the areas of customer satisfaction, corporate responsibility (including
safety and environmental performance), employee productivity and financial
performance. The Operating Award Pool maximum is $1,000,000 for any
Performance Cycle and may be adjusted downward by the Compensation Committee
based on its assessment of the Company's performance in the final year of the
Cycle.
Following the completion of a Performance Cycle, the sum of the Pools will
be awarded to Participants in accordance with their allocation percentages.
Awards are paid out in three parts as follows:
(a) One-third in cash, to be paid within 90 days following the end of a
Performance Cycle;
(b) One-third in restricted stock, issued within 90 days following the end
of a Performance Cycle; and
(c) One-third in cash, to be paid at the time that the related award of
restricted stock vests.
The restricted stock awards made in 1996 which represent the "long-term"
portion of the Value Share Plan, are reported in the Summary Compensation
Table as well as in the following table.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERIOD UNTIL
MATURATION
NAME NUMBER OF SHARES OR PAYOUT
---- ---------------- ------------
<S> <C> <C>
Mr. Gower...................................... 27,323 *
Mr. Smith...................................... 15,613 *
Mr. Young...................................... 5,855 *
Mr. Pendergraft................................ 5,855 *
Ms. Starnes.................................... 5,855 *
Mr. Park....................................... 3,513 *
</TABLE>
- --------
* The shares vest in annual one-third increments, beginning on December 15,
1996.
12
<PAGE>
EXECUTIVE LONG-TERM INCENTIVE PLAN
Prior to its replacement by the Value Share Plan, the LTIP provided for the
granting of stock options, the right to receive performance units under
certain circumstances and a cash payment in respect of dividend share credits.
Additional information with respect to the payout of performance units
previously granted under the LTIP is contained in the Summary Compensation
Table. No performance units are currently outstanding. Commencing in 1995, no
additional grants of stock options or performance units have been made to
executive officers pursuant to the LTIP, although dividend share credits will
continue to accrue on outstanding stock options.
The following table shows the number and value of stock option exercises
during 1996 and the number of shares of Common Stock represented by
outstanding stock options held by each of the named executive officers as of
December 31, 1996. Also reported are the values for "in-the-money" options
which represent the positive spread between the exercise price of any such
existing stock options and the year end price of the Common Stock.
AGGREGATED OPTION EXERCISES IN 1996
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
NUMBER OF SECURITIES OPTIONS AT FISCAL FISCAL YEAR-END ($) (B)
UNDERLYING OPTIONS YEAR-END (#) (C)
--------------------------------- ------------------------- -------------------------
NAME EXERCISED(#) VALUE REALIZED($)(A) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Gower............... 86,162 $2,328,626 113,225 42,775 -0- -0-
Mr. Smith............... 16,766 $ 422,762 19,700 12,500 $ 7,202 -0-
Mr. Young............... 11,379 $ 325,806 29,025 10,375 $ 5,600 -0-
Mr. Pendergraft......... 9,085 $ 290,360 39,550 11,050 $14,350 -0-
Ms. Starnes............. 3,824 $ 126,074 2,553 1,400 $ 7,875 -0-
Mr. Park................ 8,332 $ 265,660 25,775 5,325 $11,550 -0-
</TABLE>
- --------
(a) Includes value of accrued dividend share credits, which were paid in cash.
See footnote (e) to the Summary Compensation Table.
(b) The last reported closing sales price, as reported on the NYSE, of
Lyondell Common Stock on December 31, 1996 was $22 per share.
(c) Each option carries with it the right to dividend share credits, as
described in footnote (e) to the Summary Compensation Table. Set forth
below is a calculation of the value of accrued dividend share credits,
assuming exercise at December 31, 1996, of the in-the-money options. These
hypothetical values have been calculated for illustration purposes only.
<TABLE>
<CAPTION>
EXERCISABLE UNEXERCISABLE
----------- -------------
<S> <C> <C>
Mr. Gower....................................... -0- $-0-
Mr. Smith....................................... $54,494 $-0-
Mr. Young....................................... $24,222 $-0-
Mr. Pendergraft................................. $62,062 $-0-
Ms. Starnes..................................... $34,056 $-0-
Mr. Park........................................ $49,962 $-0-
</TABLE>
13
<PAGE>
ANNUAL PENSION BENEFITS
The following table shows estimated annual pension benefits payable to the
Company's employees, including executive officers of the Company upon
retirement at age 65 based on credited service as of January 1, 1997 under the
provisions of the Lyondell Retirement Plan and the Supplementary Executive
Retirement Plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE FINAL EARNINGS
(BASE SALARY PLUS ANNUAL
INCENTIVE PLAN AWARDS)
HIGHEST THREE CONSECUTIVE
YEARS OUT OF LAST TEN YEARS APPROXIMATE ANNUAL BENEFIT FOR YEARS OF MEMBERSHIP SERVICE INDICATED(A)(B)(C)
--------------------------- -------------------------------------------------------------------------------
15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$1,400,000 322,239 429,652 537,065 644,478 751,891
1,300,000 299,139 398,852 498,565 598,278 698,991
1,200,000 276,039 368,052 460,065 552,078 644,091
1,100,000 252,939 337,252 421,565 505,878 590,191
1,000,000 229,839 306,452 383,065 459,678 536,291
900,000 206,739 275,652 344,565 413,478 482,391
800,000 183,639 244,852 306,065 367,278 428,491
700,000 160,539 214,052 267,565 321,078 374,591
600,000 137,439 183,252 229,065 274,878 320,691
500,000 114,339 152,452 650,565 228,678 266,791
400,000 91,239 121,652 152,065 182,478 212,891
300,000 68,139 90,852 113,565 136,278 159,991
200,000 45,039 60,052 75,065 90,078 105,091
</TABLE>
- --------
(a) The amounts shown in the above table are necessarily based upon certain
assumptions, including retirement of the employee at age 65, based on
credited services as of January 1, 1997 and payment of the benefit under
the basic form of allowance provided under the Lyondell Retirement Plan
(payment for the life of the employee only with a guaranteed minimum
payment period of 60 months). The amounts will change if the payment is
made under any other form of allowance permitted by the Lyondell
Retirement Plan, or if an employee's actual retirement occurred after
January 1, 1996, since the "annual covered compensation level" of such
employee (one of the factors used in computing the annual retirement
benefits) may change during the employee's subsequent years of membership
service. The benefits shown are not subject to deduction for Social
Security benefits or other offset amounts. The plans, however, provide a
higher level of benefits for the portion of compensation above the
compensation levels on which Social Security benefits are based.
(b) As of December 31, 1996, the credited years of service (rounded to the
nearest whole number) under the Lyondell Retirement Plan for the named
executive officers are: Mr. Gower, 33; Mr. Smith, 20; Mr. Young, 17; Mr.
Pendergraft, 24; Mr. Park, 31; and Ms. Starnes, 22.
(c) All employees' (including executive officers') years of service with ARCO
prior to the creation of Lyondell have been credited under the Company's
retirement plans.
14
<PAGE>
EXECUTIVE SEVERANCE ARRANGEMENTS
SEVERANCE AGREEMENTS
In 1994, the Company entered into severance agreements with each of its
executive officers. The severance agreements provide for the receipt by the
executive officers of certain payments and benefits in the event of a "Change
of Control" of the Company. A Change of Control occurs when (i) the Incumbent
Directors (as defined in the severance agreements) cease to constitute at
least a majority of the Board, (ii) the stockholders of the Company approve
any merger, consolidation, recapitalization or sale of substantially all of
the assets of the Company under circumstances where such stockholders would
own less than 80 percent of the outstanding voting securities of the surviving
entity, or where the Incumbent Directors would not constitute a majority of
the Board of Directors immediately after such transaction, or such
stockholders approve any plan or proposal for the liquidation or dissolution
of the Company (iii) any person or group, other than ARCO, holds or acquires,
directly or indirectly, more than 20 percent of the Company's then outstanding
voting securities, or (iv) ARCO acquires (other than in an inadvertent
transaction that is effectively reversed) ownership, directly or indirectly,
of more than 50 percent of the Company's then outstanding voting securities.
In the event of a Change of Control, the severance agreements provide for
the vesting of all of the executives' non-vested stock options granted to the
executive under the Company's Long-Term Incentive Plan. The Company will also
pay the executive a cash lump-sum payment of the value of dividend share
credits associated with those stock options. The Company's Restricted Stock
Plan provides for accelerated vesting of restricted stock in the event of a
Change of Control.
The severance agreements provide for additional payments and benefits in the
event the executive's employment with the Company is actually or
constructively terminated at any time within two years following a Change in
Control, including lump-sum payments based on three times the executive's base
salary and pro rata Value Share Plan awards, certain tax gross-up payments,
additional pension benefits and cash payment of benefits upon termination of
the executive's deferral plan. The Company expects that a material portion of
any payments required to be made under the severance agreements would be
considered "parachute" payments under applicable Internal Revenue Code
provisions and would therefore not be deductible for Federal Income Tax
purposes by the Company. The original agreements were revised in August 1996
and are reviewed annually by the Compensation Committee.
PAYMENTS TO FORMER CHIEF EXECUTIVE OFFICER
In December 1996, Mr. Gower announced his retirement from his position as
Chief Executive Officer, and, in connection with his retirement, Mr. Gower
became eligible for benefits under the Company's executive benefit plans. In
accordance with the terms of the Company's Executive Long-Term-Incentive Plan,
unvested stock options for 14,325 shares of Lyondell Common Stock vested
effective with Mr. Gower's retirement. Also, in accordance with the terms of
the Company's Restricted Stock Plan, 27,042 shares of restricted stock vested
effective upon his retirement and Mr. Gower received the cash payment
associated with the vesting of the restricted stock at that time.
In addition, Mr. Gower also is eligible, pursuant to the terms of the Value
Share Plan, to receive payments equivalent to pro-rated Value Share Plan
awards for the years 1997 through 2001. Awards under the Value Share Plan are
calculated based on five year cycles and the pro-rata payments acknowledge Mr.
Gower's contributions to the Company during a portion of the cycles ending in
each of the years 1998 through 2001. Pursuant to an agreement with the Company
and in consideration of his agreement to continue as Chairman of the Board, in
1998 Mr. Gower will receive an amount equal to the total amount he would have
received had he continued as an executive through 1997. The remaining awards
are payable as follows: in each of the years 1999 through 2002 he will receive
a pro-rated award in the amount of 80% of the award payable in 1999 for 1998;
60% of the award payable in 2000 for 1999; 40% of the award payable in 2001
for 2000; and 20% of the award payable in 2002 for 2001. The calculations of
the amounts payable in each of those years will be based solely on the EVA and
MVA components used to calculate the awards payable under the Value Share
Plan.
15
<PAGE>
As a retiree, Mr. Gower is eligible to participate in the Company's
Executive Medical Insurance Plan. In addition, Mr. Gower will continue to be
covered under terms of the Company's Executive Life Insurance Plan. In
accordance with terms of the Company's Long-Term Disability Plan, Mr. Gower is
eligible to convert to an individual policy following retirement and is
eligible for full benefits under the Company's Financial Counseling Policy for
1997. At the time of Mr. Gower's retirement, he received his accrued benefits
under the Company's Supplementary Executive Retirement Plan (the "SERP") and
the Lyondell Retirement Plan.
Pursuant to the terms of his agreement with the Company, Mr. Gower received
a severance payment of $1,456,000, an amount equal to two times his annual
base salary. Mr. Gower's agreement allows that if a "Change of Control" occurs
in 1997, Mr. Gower will be eligible to receive an additional payment
equivalent to his 1996 base salary. Also, Mr. Gower was eligible to receive a
special supplementary benefit payment in addition to the normal SERP benefits
and accordingly, the amount paid pursuant to the SERP was enhanced by adding
an additional five years of age and service to the calculation and including a
bonus in the calculation of his annual salary.
16
<PAGE>
PERFORMANCE GRAPH
The graph below compares the cumulative total return to stockholders of the
Company with the cumulative total return to stockholders of the S&P 500 Stock
Index and a group of 14 peer companies ("Peer Group").
The Peer Group is a composite index composed of commodity chemical
manufacturers and independent refiners. The Peer Group consists of Ashland
Oil, Inc.; Crown Central Petroleum Corporation; Diamond Shamrock, Inc.;
Eastman Chemical; FINA, Inc; The Geon Company; Georgia Gulf Corporation;
Methanex Corporation; Nova Corporation of Alberta; Rexene Corporation; Sun
Company, Inc.; Tosco Corporation; Union Carbide Corporation and Valero Energy
Corporation. During 1996, Sterling Chemicals, Inc., formerly a member of the
Peer Group, ceased to be a publicly-traded company and was therefore
eliminated from the Peer Group. All companies in the Peer Group are included
in the comparison group used for determinations of the competitiveness of
executive salaries.
[paste up graph]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
LYONDELL........................ $100.00 $117.39 $107.33 $135.33 $123.98 $124.40
S&P 500......................... $100.00 $107.62 $118.46 $120.03 $165.13 $203.05
PEER GROUP(a)................... $100.00 $ 92.89 $106.32 $127.78 $136.60 $153.03
</TABLE>
(a) Group total returns are weighted by average annual market capitalization
for Peer Group companies as of the beginning of each year and assume
reinvestment of dividends. None of the Peer Companies constituted more
than 20 percent of the market capitalization of the entire Peer Group in
1996.
PURSUANT TO SEC RULES, THIS SECTION OF THE PROXY STATEMENT (INCLUDING THE
COMPENSATION COMMITTEE REPORT THAT FOLLOWS) IS NOT DEEMED "FILED" WITH THE
SEC AND IS NOT INCORPORATED BY REFERENCE WITH THE COMPANY'S REPORT ON FORM
10-K.
17
<PAGE>
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors (the "Committee") has
responsibility for establishing and administering the pay philosophy,
policies, and plans for the executive officers of the Company. The Committee
conducts an annual review of executive pay and approves all salary changes,
grants and awards to executive officers of Lyondell. The Committee is
comprised of three non-employee directors: Mr. Stephen F. Hinchliffe, Jr.,
Chairman, Dr. William T. Butler and Mr. Curtis J. Crawford.
The Company's performance-driven incentive plan was implemented in 1995
following a comprehensive review of the Company's executive pay programs by
the Compensation Committee.
EXECUTIVE PAY PHILOSOPHY
The overriding principle behind the Company's pay philosophy is that pay
must support the Company's primary objective of creating shareholder value and
that premium pay will be provided for premium performance. Specific elements
of this philosophy are:
. Performance should be defined in terms of measures that directly link to
or strongly influence Lyondell's shareholder value and achievement of
strategic business and other performance objectives
. Executive base salaries should be comparable to salaries for similar
positions in a broad group of industrial and chemical companies that are
similar to Lyondell, with incentives varying substantially commensurate
with the Company's performance and designed to account for the cyclical
nature of the Company's businesses
. The pay programs should foster a team orientation and a high degree of
cooperation and coordination among top management
. Substantial ownership in the Company's stock among executives should be
highly encouraged so that management interests are closely aligned with
shareholders in terms of both risk and reward
Driven by this philosophy, the Company's executive pay program has been
designed to encourage a long-term performance orientation, with performance
measures strongly related to shareholder value creation. Further, the program
is designed to facilitate ownership of Company stock. As a result, the
Company's total pay package is designed to be highly sensitive to the
Company's performance, defined in terms of shareholder value creation.
Base Salary
Pursuant to the pay philosophy, Lyondell's executive base salaries generally
are positioned at the 50th percentile of the market according to nationally
recognized surveys for industrial and chemical companies. Salaries for
executives who are new to their positions may initially be set at below market
levels.
In 1995, the Compensation Committee assessed market pay by position by
relying on both published surveys and proxy data. Published surveys covered a
group of industrial and chemical companies. Proxy data covered specific
companies considered to be comparable to Lyondell because of the business in
which they operate (and are the same companies reflected in the Peer
Performance Graph). Using this data, salary adjustments were made in 1995 such
that salaries for most executives were set at the median of the market.
Salaries for those new in their positions, however, were set below the median
of the market.
In the years in which external salary assessments are not conducted, the
Compensation Committee intends to increase executive salaries commensurate
with the increases reported by at least two nationally recognized surveys.
This was done in both 1996 and 1997.
Incentives
Value Share Plan.
Lyondell executives participate in the Value Share Plan which was approved
by the shareholders in 1995. The Value Share Plan is designed to provide
participants with an incentive to maximize the long-term creation of
shareholder value and encourage significant ownership of Company stock.
18
<PAGE>
Pursuant to the Value Share Plan, each year an award pool is created,
comprised of 4.0% of Lyondell's Economic Value Added (EVA), averaged over the
last five years, and 1.25% of Lyondell's 5-year Market Value Added (MVA). EVA
measures the Company's cash flow performance (which exceeds the cost of
capital) and is calculated by multiplying the capital invested in the Company
by the Company's weighted average cost of capital. MVA measures changes in the
market value of the Company's equity, plus dividends as if they had been
reinvested in the Company's stock. Based on this formula, an award pool of
$2,628,980 was created for 1996. This award pool represents 4.0% of 5-year
average EVA, which was $760,000 and 1.25% of 5-year MVA, which was $1,868,980.
In addition, an annual award pool of $1,000,000 was created for 1996, based
on the Committee's assessment of Lyondell's accomplishments over the course of
the year. The Company must satisfy certain minimum criteria relating to these
areas to be eligible for this pool, which in any event may not exceed
$1,000,000. In determining the size of this pool, the Committee took into
account accomplishments relating to customer satisfaction, corporate
responsibility, including safety and environmental performance, employee
productivity and overall performance.
The award pools were allocated to a total of 10 executives, including the
former Chief Executive Officer, who in the opinion of the Committee, had the
opportunity to significantly impact the long-range success and value of the
Company in accordance with pre-established allocation percentages. One-third
of the calculated value of each individual's award was paid out in cash and
two-thirds was paid in equal amounts of deferred cash and restricted stock.
The deferred cash and restricted stock vest over a three year period.
Stock Ownership Guidelines
In 1995, the Committee adopted stock ownership guidelines for participants
in the Value Share Plan. These guidelines were modified in 1997 to reflect the
reorganization of the Company, including the elimination of the Chief
Operating Officer position. The ownership targets are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
REQUESTED TO BE
POSITION OWNED
-------- ----------------
<S> <C>
Chief Executive Officer.................................. 110,000
Senior Vice President.................................... 25,000
Vice President........................................... 15,000
</TABLE>
All shares which are beneficially owned, including shares of unvested
restricted stock, but excluding unexercised stock options, count toward
fulfillment of the ownership guidelines.
CHIEF EXECUTIVE OFFICERS' 1996 PAY
Mr. Gower served as Chief Executive Officer until December 6, 1996. At that
time he was succeeded by Dan Smith, who also holds the position of President.
Compensation and Separation Payments for Bob Gower. In 1996, the
Compensation Committee determined the pay of Mr. Gower in substantially the
same manner as the pay for all other executive officers. Consistent with the
Company's pay philosophy, Mr. Gower's total pay package is highly sensitive to
the Company's performance, defined in terms of shareholder value creation as
measured by EVA and MVA.
In 1996, Mr. Gower's salary was raised from $700,000 to $728,000. This base
salary increase was consistent with Lyondell's executive pay philosophy.
In March 1997, Mr. Gower received an award under the Company's Value Share
Plan for 1996. In accordance with the Company's Value Share Plan, Mr. Gower
was entitled to a full award under the plan. However, because Mr. Gower
retired as an employee of Lyondell the entire amount of Mr. Gower's award,
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$1,270,142, was payable in cash. The Committee believes that this award is
appropriate given the Company's achievements in creating shareholder value, as
measured by EVA and MVA, as well as its financial and strategic success.
In December 1996, Mr. Gower announced his retirement as Chief Executive
Officer after twelve years with Lyondell. Payments that he received and will
receive are described on pages 10-11 and 15-16. The Committee's actions taken
in respect of Mr. Gower's retirement reflect a number of factors, including
rights that had accrued to Mr. Gower under the terms of certain Company plans
in which he was a participant, the Company's past practices in connection with
the retirement of senior executives, the additional restrictive covenants that
Mr. Gower entered into in connection with his retirement, Mr. Gower's
willingness to perform consulting services after retirement and to continue to
represent the Company in certain professional capacities, including as
Chairman of the Board, and the Committee's judgment as to what was appropriate
given Mr. Gower's position and his significant contributions to the Company
since its inception.
Compensation for Dan Smith. Upon his promotion to Chief Executive Officer in
December 1996, Mr. Smith's salary was raised from $475,000 to $600,000. This
base salary increase was consistent with the Company's executive pay
philosophy.
In March 1997, Mr. Smith received an incentive award for 1996 under the
Company's Value Share Plan. Mr. Smith's annual incentive cash award was
$241,932, a grant of restricted stock equal to 10,950 shares was made and Mr.
Smith will receive a deferred cash payment as the restricted stock grant
vests. The vesting of the restricted stock and the deferred cash payment occur
on the same terms as all other executive officers participating in the Value
Share Plan. The Committee believes that this award is appropriate given the
Company's achievements in creating value, as measured by EVA and MVA, as well
as its financial and strategic success.
Mr. Smith's pay package continues to include a large portion which is at
risk as to its ultimate value. The Compensation Committee believes that Mr.
Smith's pay mix, coupled with the design of his pay package, continues to
align his rewards and incentives with shareholder interests. Consistent with
the Company's pay philosophy, Mr. Smith's total pay package is highly
sensitive to the Company's performance, defined in terms of shareholder value
as measured by EVA and MVA.
OMNIBUS BUDGET RECONCILIATION ACT OF 1993
Section 162(m) of the Omnibus Budget Reconciliation Act of 1993 (the "1993
Act") limits the deductibility of pay in excess of $1 million paid to the
Company's chief executive officer and the next four highest paid officers
during any fiscal year, beginning with 1994, unless such pay meets certain
requirements.
In 1995, the shareholders approved the new Value Share Plan and the
Restricted Stock Plan which Plans replaced the Company's annual bonus plan and
the LTIP. The Company believes that the amounts awarded in 1996 pursuant to
the plan should be deductible. The Committee seeks to qualify for
deductibility where feasible, but retains the discretion to pay non-deductible
amounts if that would be in the best interests of the Company and shareholders
under the circumstances.
COMPENSATION COMMITTEE MEMBERS
The Compensation Committee strongly believes that shareholders are well
served by Lyondell's executive management team and that the executive pay
philosophy and programs that have been established support the long-term
success of the Company. This report is submitted by the Compensation Committee
of the Board of Directors of Lyondell.
Respectfully submitted,
Stephen F. Hinchliffe, Jr. (Chairman)
Dr. William T. Butler
Curtis J. Crawford
THE COMPENSATION COMMITTEE
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COMPENSATION OF DIRECTORS
DIRECTORS' FEES
Directors who are employees of the Company are not paid any fees or
additional compensation for service as members of the Board of Directors or
any committee thereof. During 1996, directors who were not employees of the
Company ("Non-Employee Directors") were paid an annual retainer of $40,000 (of
which $10,000 was paid in shares of restricted stock) and $1,250 for each
Board or committee meeting attended, and were reimbursed for travel and other
related expenses incurred in attending such meetings. In addition, the non-
employee directors who served as Chairman of the Audit, Compensation and
Nominating (now called Corporate Governance) Committees, respectively,
received $7,500, $7,500 and $5,000 per year.
RESTRICTED STOCK GRANTS
The Company believes paying a portion of the directors' compensation in
stock further aligns the directors' interests with the stockholder and
accordingly, has adopted stock ownership guidelines for its Non-Employee
Directors. Restricted Shares were granted as part of the annual retainer for
1997 and were valued at approximately $10,000 (which are subject to transfer
restrictions and risk of forfeiture for a period (the "restricted period") of
at least one year from the date of grant). During the restricted period, the
director has the right to receive dividends on and the right to vote the
Restricted Shares. The Restricted Shares will be forfeited if the director's
service terminates (other than for retirement, death or disability) prior to
the end of the restricted period. It is intended that the directors will
continue to hold the Restricted Shares beyond the termination of the
restricted period.
RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS
The Lyondell Petrochemical Company Retirement Plan for Non-Employee
Directors (the "Directors' Retirement Plan") is a non-qualified retirement
plan for directors who are not employees of the Company. The annual retirement
benefit is equal to the director's annual retainer fee immediately preceding
the director's retirement from the Board of Directors. A director vests in the
benefit upon serving three years as a member of the Board of Directors, or, in
the case of a retired Company officer, three years following retirement as an
officer of the Company. The benefit is payable for a period of time equal to a
director's service on the Board of Directors, or, in the case of retired
officers of the Company, to the director's service on the Board of Directors
following retirement as an officer. However, if a director has served for at
least 15 years as a member of the Board of Directors, excluding years of
service when the director was also an officer of the Company, the benefit
shall be paid for the greater of the period described in the preceding
sentence or until death. Benefits commence at age 65, or, if later, at the
time the director retires from the Board of Directors. A surviving spouse is
entitled to receive 50 percent of the benefits otherwise payable to a director
with payment up to a maximum of 15 years if the director dies prior to
retirement from the Board of Directors or if he dies after retirement from the
Board of Directors the benefits otherwise payable to the director up to a
maximum of 15 years. The benefits under the Directors' Retirement Plan are
secured through a grantor trust.
DEFERRAL PLAN FOR NON-EMPLOYEE DIRECTORS
The Lyondell Petrochemical Company Elective Deferral Plan for Non-Employee
Directors (the "Directors' Deferral Plan") provides directors who are not
employees of the Company with the opportunity to defer all or a portion of
their retainer and meeting fees. Under the Directors' Deferral Plan, the
minimum amount that may be elected to be deferred is $8,000 and the maximum is
100 percent of the director's retainer and meeting fees per year. Amounts may
be deferred until retirement from their regular employment or resignation from
the Board, unless the director has suffered a financial hardship or elected an
early distribution at the time the deferral commitment is made. Upon the
director's death, retirement or resignation, benefits are payable, in
accordance with the director's prior election, either in a lump sum or in
substantially equal monthly payments over five, ten or fifteen years. The
benefits under the Directors' Deferral Plan are secured through a grantor
trust. A
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participant's account under the Deferral Plan will accrue interest at a rate
established by the Company annually prior to the commencement of each year.
The guaranteed minimum rate of interest is not less than the Citibank base
rate. The interest rate for 1996 was 9.7 percent.
TRANSACTIONS BETWEEN THE COMPANY AND ARCO
Lyondell was a division of ARCO until July 1988 when ARCO transferred the
assets of its Lyondell division to a wholly-owned subsidiary, Lyondell
Petrochemical Company. In January 1989, ARCO completed an initial public
offering of Lyondell's Common Stock. In connection with the transfer of assets
and liabilities to Lyondell, the Company and ARCO entered into a number of
agreements for the purpose of defining their ongoing relationships. In
addition, in July 1987, the Lyondell Division and ARCO Chemical Company ("ARCO
Chemical"), then a wholly-owned (and now an 83.3 percent owned) subsidiary of
ARCO, entered into a number of agreements in connection with the organization
of ARCO Chemical. None of these agreements was the result of arm's-length
negotiations between independent parties. It was the intention of the Company,
ARCO and ARCO Chemical that such agreements and the transactions provided for
therein, taken as a whole, accommodate the parties' interests in a manner that
was fair to the parties, while continuing certain mutually beneficial joint
arrangements. The Audit Committee of the Board of Directors of the Company,
none of the members of which are affiliated with the Company (including
LYONDELL-CITGO Refining Company Ltd. ("LCR")), ARCO or ARCO Chemical, has
determined that such agreements, taken as a whole, were in its opinion fair to
the Company and its stockholders. Because of the complexity of the various
relationships between the Company, ARCO and its direct and indirect
subsidiaries, including ARCO Chemical (together, "ARCO Affiliates"), however,
there can be no assurance that each of such agreements, or the transactions
provided for therein, has been effected on terms at least as favorable to the
Company as could have been obtained from unaffiliated third parties. The terms
and provisions of many of those initial agreements have been modified
subsequently or supplemented.
Any future agreements, arrangements and transactions will be determined
through negotiation between the Company and ARCO Affiliates and it is possible
that conflicts of interest will be involved. Future contractual relations
among the Company and ARCO Affiliates will be subject to certain provisions of
the Company's Certificate of Incorporation. See "Certificate of Incorporation
Provisions Relating to Corporate Conflicts of Interest." In addition, the
Audit Committee of the Board of Directors has adopted a set of guidelines for
the review of all agreements entered into between the Company and ARCO
Affiliates for so long as ARCO remains a significant stockholder. These
guidelines include a provision that, at least annually, the Audit Committee
will review such agreements, or the transactions provided for therein, to
assure that such agreements are, in its opinion, fair to the Company and its
stockholders. See "BOARD OF DIRECTORS--Audit Committee."
For the year ended December 31, 1996, Lyondell (including LCR) paid ARCO
Affiliates an aggregate of approximately $23 million. For the year ended
December 31, 1996, Lyondell recorded revenues of approximately $318 million
from sales to ARCO Affiliates, of which $287 million represented sales to ARCO
Chemical. Sales to ARCO Chemical accounted for approximately 12 percent of
total revenues from sales of petrochemical products (including intersegment
sales) and approximately six percent of total revenues.
THE FOLLOWING IS A SUMMARY OF CERTAIN AGREEMENTS, ARRANGEMENTS AND
TRANSACTIONS AMONG THE COMPANY AND ARCO AFFILIATES EFFECTIVE DURING THE PAST
FISCAL YEAR, AS WELL AS CERTAIN AGREEMENTS, ARRANGEMENTS AND TRANSACTIONS THAT
ARE CURRENTLY PROPOSED.
REGISTRATION RIGHTS AGREEMENT
Subject to the terms and conditions of a registration rights agreement
("Registration Rights Agreement") entered into with Lyondell in connection
with the ARCO Note Offering, ARCO agreed that it will not, without the prior
approval of Lyondell's Board of Directors, prior to the maturity of the ARCO
Notes, (i) initiate or solicit
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proposals by a single entity or a group of affiliated entities to acquire all
or substantially all of ARCO's Lyondell Common Stock or otherwise to acquire
Lyondell, (ii) take action by written consent in lieu of a meeting of
Lyondell's stockholders or cause to be called any special meeting of
Lyondell's stockholders, (iii) initiate or propose, or solicit proxies in
respect of, stockholder proposals with respect to the Company, or (iv) solicit
proxies or written consents in respect of replacing or adding members of the
Lyondell Board of Directors.
Under the terms and conditions of the Registration Rights Agreement, ARCO
also agreed that it will not, without the prior approval of Lyondell's Board
of Directors or except upon exchange of the ARCO Notes as contemplated by the
prospectus for the ARCO Notes, prior to one year following the maturity date
of such ARCO Notes, dispose of (or enter into an agreement contemplating the
disposition of) all or any portion of its Lyondell Common Stock in a private
sale to a single entity or a group of affiliated entities, provided that this
agreement will not restrict ARCO from selling all or any portion of its
Lyondell Common Stock (i) in a public offering intended to result in
widespread distribution; (ii) in a Rule 144 transaction under the Securities
Act of 1933 (the "Securities Act") in accordance with the volume limitations
set forth therein; (iii) in a Rule 144A transaction intended to result in
widespread distribution to institutional buyers; or (iv) pursuant to a tender
offer or exchange offer by Lyondell or a third party or a merger or other
business combination including Lyondell that is not solicited by ARCO and in
which ARCO is treated on substantially comparable terms with other holders of
Lyondell Common Stock. Notwithstanding the foregoing, ARCO is not precluded
from (i) participating in any self tender offer or exchange offer or open
market purchase program conducted by Lyondell, (ii) voting its shares of
Lyondell Common Stock as it deems proper, or (iii) disclosing (including in
response to private inquiries) either its intentions concerning matters to be
brought before Lyondell's stockholders or making such disclosures as ARCO
determines appropriate in compliance with its obligation under the federal
securities laws.
Pursuant to the Registration Rights Agreement, ARCO has the right to require
the Company to use its best efforts to file up to three registration
statements under the Securities Act covering ARCO shares of Lyondell Common
Stock. ARCO also has the right, if the Company files a registration statement
for an equity offering, to require the Company to register ARCO's shares of
Common Stock for sale under the Securities Act on such registration statement.
If the exercise by ARCO of such "piggyback registration rights" would result
in the registration of a number of shares of Common Stock, that in the
judgment of the managing underwriter for such proposed offering exceeds the
number which can be sold in the offering, the number of shares that ARCO
initially intended to register shall be reduced. ARCO has agreed to pay all
costs and expenses relating to the exercise of its "demand" registration
rights. In the event of a "demand" registration, ARCO and the Company will
indemnify the underwriters of the offering for certain liabilities, including
liabilities under the Securities Act in connection with any such registration,
except that in the event that ARCO owns less than 20 percent of the Lyondell
Common Stock, the Company will indemnify both ARCO and the underwriters.
CROSS-INDEMNITY AGREEMENT
In connection with the transfer by ARCO of substantially all of the assets
and liabilities of its Lyondell Division to the Company, the Company and ARCO
executed a Cross-Indemnification Agreement (the "Cross-Indemnity Agreement").
In the Cross-Indemnity Agreement, the Company agreed generally to indemnify
ARCO against substantially all fixed and contingent liabilities relating to
the integrated petrochemical and petroleum processing business and certain
assets of the Lyondell Division. The liabilities assumed by the Company
include the following, to the extent not covered by ARCO's insurance: (1) all
liabilities and obligations of the Company and its combined subsidiaries, as
of July 1, 1988; (2) all liabilities and obligations under contracts and
commitments relating to the business of the Lyondell Division and certain
assets relating thereto; (3) employment and collective bargaining agreements
affecting the Company's employees; (4) specified pending litigation and other
proceedings; (5) federal, state, foreign and local income taxes to the extent
provided in the Cross-Indemnity Agreement; (6) liabilities for other taxes
associated with the Lyondell Division's business and certain assets relating
thereto; (7) liabilities for any past, present or future violations of
federal, state or other laws (including environmental laws), rules,
regulations or other requirements of any governmental authority in connection
with the business of the Lyondell Division and certain assets relating
thereto; (8) existing or future liabilities for
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claims based on breach of contract, breach of warranty, personal or other
injury or other torts relating to such integrated petrochemical and petroleum
processing businesses and certain assets relating thereto; and (9) any other
liabilities relating to the assets transferred to the Company or its
subsidiaries. ARCO has indemnified the Company with respect to other claims or
liabilities and other matters of litigation not related to the assets or
business transferred by ARCO to the Company.
The Cross-Indemnity Agreement includes procedures for notice and payment of
indemnification claims and provides that a party entitled to indemnification
for a claim or suit brought by a third party may require the other party to
assume the defense of such claim. The Cross-Indemnity Agreement also includes
a defense cost-sharing agreement, whereby the Company will bear its allocated
defense costs for certain lawsuits.
The Company has reached an agreement-in-principle with ARCO to update the
Cross-Indemnity Agreement ("Revised Cross-Indemnity Agreement"). For current
and future cases related to company products and company operations, ARCO and
the Company will bear a proportionate share of judgment and settlement costs
according to a formula which allocates responsibility based on years of
ownership during the relevant time period. Under the Revised Cross-Indemnity
Agreement, ARCO will waive any claim for reimbursement under the existing
Cross-Indemnity Agreement for any prior defense and settlement costs
associated with waste site matters, and the Company will assume responsibility
for its proportionate share of future costs for waste sites matters not
covered by ARCO insurance.
Effective January 1, 1991, the Company and ARCO entered into an agreement
(the "Insurance Termination Agreement") which terminated the insurance
coverage previously provided by ARCO and established procedures for the
resolution of pending and future claims that are or will be covered under
ARCO's policies in effect prior to January 1, 1991.
SERVICES AGREEMENTS
During 1996, ARCO provided various employee benefits administration and
payroll services pursuant to the "Employee Services Agreement" and investment
services with regard to the management of Lyondell's qualified employee
pension benefit plan funds pursuant to the "Investment Management Agreement".
Lyondell may elect to terminate some or all of the services being provided
upon thirty days prior notice, and the payroll services were terminated as of
December 1996. The remainder of services will be terminated as of July 1,
1997. Upon termination of any or all services, ARCO will provide Lyondell with
support and assistance to accomplish an orderly transition from ARCO's
provision of the services to Lyondell's acquisition of comparable services.
The Employee Services Agreement provides for substantially all services to be
provided at a fee based on ARCO's costs and for the other services to be
provided at mutually-agreed fees. The Investment Management Agreement provides
for a renegotiation of fees from time to time. Lyondell paid ARCO an aggregate
of $2 million in 1996 for services under these agreements.
TECHNOLOGY TRANSFERS AND LICENSES
Effective July 1, 1988, ARCO assigned to the Company numerous domestic and
foreign trademarks and certain U.S. and foreign patents and granted the
Company a nonexclusive license to use other trademarks containing the word
"ARCO," to use ARCO's spark symbol as a logo and to use ARCO's color striping
scheme. The Company subsequently assigned this license to LCR and LCR paid
ARCO approximately $60,000 under the terms of this license in 1996.
In connection with the transfer of assets and liabilities relating to the
Lyondell Division from ARCO to the Company, the Company and ARCO, effective
July 1, 1988, entered into (i) a License Agreement pursuant to which ARCO
licensed to the Company on a nonexclusive, royalty-free basis certain rights
(including Lyondell's right to sublicense to third parties, in some cases
without accounting to ARCO) to ARCO's technology and intellectual property
related to certain operations or assets of the Company, (ii) a technology
assignment
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agreement pursuant to which legal title to certain other technology and
intellectual property useful in the Company's business (including, without
limitation, technology relating to olefins, including product flexibility) was
transferred to the Company; provided, however, that except for technology
relating to the product flexibility unit, ARCO retained a nonexclusive license
to use the technology and property rights in ARCO's other operations, and
(iii) an immunity from suit agreement in respect of the Company's right to use
all remaining technology in the possession of the Company prior to July 1,
1988. During 1990, the Company and ARCO entered into a series of amendments to
these agreements designed to clarify the parties' rights under the original
technology transfer. In addition, Lyondell and ARCO executed a patent
maintenance agreement pursuant to which ARCO agreed to maintain certain
patents licensed to Lyondell. Lyondell and ARCO also entered into a letter
agreement granting Lyondell the right to obtain additional licensing rights.
AGREEMENTS BETWEEN THE COMPANY AND ARCO PIPELINE COMPANY
The Company has entered into several contracts with ARCO PipeLine Company
("ARCO PipeLine") pursuant to which the Company: (i) leases certain pipelines
and pipeline segments from ARCO PipeLine at annual rental rates which include
recovery of operating costs, return on capital investment and inflation
escalators; (ii) obtains services from ARCO PipeLine to operate various groups
of pipelines owned by the Company; and (iii) throughputs volumes at tariff
rates for transportation of crude oil and other products. Certain of these
contracts that relate to the refining business were assigned to LCR as of July
1, 1993. ARCO PipeLine also owns various easements and licenses for its
pipelines and related equipment located on the property of the Company or LCR
and has performed services relating to the pipeline systems. The Company
(including LCR) also ships products over common carrier pipelines owned and
operated by ARCO PipeLine pursuant to filed tariffs on the same basis as other
non-affiliated customers. The Company and LCR paid ARCO PipeLine approximately
$29 million during 1996 for rental fees and services under these contracts.
In April 1994, the Company and ARCO Pipe Line agreed to a new lease that
extends the Company's lease of ARCO Pipe Line's pipeline system referenced in
clause (i) of the foregoing paragraph from January 1999 through December 31,
2023. Absent major regulatory changes, the terms and conditions of the new
lease will not be materially different from the current lease.
Beginning in January 1997, ARCO Pipe Line began providing terminalling and
delivery of crude oil to LCR under the terms of crude oil terminally agreement
that extends through 2010.
AGREEMENTS BETWEEN THE COMPANY AND ARCO CHEMICAL
Lyondell provides to ARCO Chemical large volumes of the feedstocks
(including benzene, ethylene, propylene and methanol) purchased by ARCO
Chemical for its manufacturing facilities located at Channelview, Texas.
Pricing arrangements under these contracts are generally representative of
prevailing market prices. Lyondell also provides certain nominal plant
services at the aforementioned plants. ARCO Chemical in turn provides to
Lyondell certain feedstocks and supplies at market-based prices.
The Company sells MTBE (produced at one of the Company's two MTBE units) to
ARCO Chemical at market-based prices. Production from the Company's second
MTBE unit is dedicated to LCR.
OTHER AGREEMENTS BETWEEN THE COMPANY AND ARCO
Lyondell has entered into a nine year supply agreement beginning April 1996
with ARCO Products Company ("ARCO Products") wherein Lyondell is committed to
sell and ARCO Products is committed to buy approximately 6,000 barrels of
alkylate per day at market-based prices.
LCR purchases certain of its crude oil requirements from ARCO Affiliates
under short-term arrangements at prices based on market values at the time of
delivery. LCR also purchases crude oil from ARCO Affiliates from time to time
on the spot market at then-current spot market prices. The Company and LCR
also purchased natural gas and natural gas liquids from ARCO Affiliates during
1996 on the spot market at then-current spot market prices.
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The Company (including LCR) also sold products to ARCO Affiliates, including
crude oil resales and sales of heating oil and lube oil at market-based
prices.
DISPUTE RESOLUTION AGREEMENT
In April 1993, the Company, ARCO and ARCO Chemical entered into a Dispute
Resolution Agreement that mandates a procedure for negotiation and binding
arbitration of significant commercial disputes among any two or more of the
parties.
CERTIFICATE OF INCORPORATION PROVISIONS RELATING TO CORPORATE CONFLICTS OF
INTEREST
In order to address certain potential conflicts of interest between the
Company and ARCO (for purposes of this section the term "ARCO" also includes
ARCO's successors and any corporation, partnership or other entity in which
ARCO owns fifty percent or more of the voting securities or other interest),
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
opportunities. The Certificate of Incorporation provides that ARCO has no duty
to refrain from (i) engaging in business activities or lines of business that
are the same as or similar to those of the Company, (ii) doing business with
any customer of the Company or (iii) employing any officer or employee of the
Company. The Certificate of Incorporation provides that ARCO is not under any
duty to present any corporate opportunity to the Company if it may be a
corporate opportunity for both ARCO and the Company, and that ARCO will not be
liable to the Company or its stockholders for breach of any fiduciary duty as
a stockholder of the Company by reason of the fact that 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. ARCO currently owns interests in certain chemical companies and
refiners (other than the Company) and has advised the Company that it may
continue to acquire additional interests in chemical companies and refiners.
The foregoing Certificate of Incorporation provisions describe the
obligations of officers and directors of the Company with respect to
presentation of corporate opportunities, but do not limit the ability of the
Company or of ARCO to consider and act upon such opportunities whether or not
such provisions have been followed.
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 will vote the proxies in accordance with
their best judgment.
PROXY SOLICITATION
The expense of soliciting proxies will be paid by the Company. The Company
has retained Georgeson & Company Inc. to solicit proxies at an estimated fee
of $8,000 plus expenses. Some of the executive officers and other employees of
the Company also may solicit proxies personally, by telephone and by mail, if
deemed appropriate.
PROXIES
The designated proxies are Joseph M. Putz, Debra L. Starnes and Russell S.
Young. Under the General Corporate Law of Delaware, a stockholder has the
right to designate other individuals to act as proxies. A stockholder may
designate other individuals by crossing out the printed names on the proxy
card, provided that no more than three individuals are so designated.
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STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
AND DIRECTOR NOMINATIONS
Stockholder proposals intended to be presented at the 1998 Annual Meeting
must be received by November 28, 1997. Such proposals should be addressed to
the Secretary. The 1998 Annual Meeting is scheduled to take place in May 1998.
Pursuant to the Bylaws of the Company, a stockholder wishing to nominate a
candidate for election to the Board is required to give written notice to the
Secretary of the Company of his or her intention to make such a nomination.
The notice of nomination must be received by the Company not less than 90 days
in advance of such meeting, or if the meeting was not publicly announced by a
mailing to the stockholders, in a press release reported by the Dow Jones New
Service, the Associated Press or a comparable national news service or a
filing with the Securities and Exchange Commission more than 90 days prior to
the meeting, must be delivered to the Board of Directors not later than the
close of business on the tenth day following the day on which the date of the
meeting was first so publicly announced. The notice of nomination is required
to contain certain information about both the nominee and the stockholder
making the nomination. A nomination that does not comply with the above
procedure will be disregarded.
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 AT 1221 MCKINNEY STREET, SUITE 1600, HOUSTON, TEXAS 77010.
27
<PAGE>
LOGO
[LOGO OF LYONDELL APPEARS HERE]
LOGO
<PAGE>
[LYONDELL LOGO APPEARS HERE]
LYONDELL PETROCHEMICAL COMPANY
1221 MCKINNEY STREET, SUITE 1600
HOUSTON, TEXAS 77010
March 14, 1997
Dear Stockholder:
You are cordially invited to join us at the 1997 Annual Meeting of
Stockholders on Friday, May 9, 1997, beginning at 9:00 a.m. in the Two Houston
Center Auditorium, 909 Fannin, Suite P-200, in Houston, Texas.
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 do plan to attend, we would appreciate your
checking the appropriate box on the enclosed proxy card.
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 official results of the voting at the meeting will be sent to
all stockholders as part of a subsequent stockholder report.
Sincerely,
/s/
- ------------------------------------
Chairman of the Board
/s/
- -------------------------------------
President and Chief Executive Officer
PLEASE DETACH PROXY CARD HERE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS FOR all nominees [X] WITHHOLD AUTHORITY to vote [X] *EXCEPTIONS [X]
listed below for all nominees listed below
Nominees: William T. Butler, Curtis J. Crawford, Travis Engen, Bob G. Gower, Stephen F. Hinchiffle, Jr., Dudley C. Mecum II,
Dan F. Smith, Paul R. Staley
(INSTRUCTIONS: To withhold authority to vote for any individual nominee mark the "Exceptions" box and write that nominee's name
in space provided below).
*Exceptions_____________________________________________________________________________________________________________________
2. Proposal to ratify the appointment of Coopers & Lybrand, independent 3. In their discretion, the Proxies are authorized
accountants, as the Company's auditors for the fiscal year ending to vote upon such other business as may properly
December 31, 1997. come before the meeting.
FOR [X] AGAINST [X] ABSTAIN [X]
I/we will Address Change
attend meeting. [X] [X]
Please sign exactly as name appears. When shares
are held by joint tenants, both should sign. When
signing as attorney, executor, administrator,
trustee or guardian, please give full title as
such.
Dated_______________________________________1997
_______________________________________________
Signature
_______________________________________________
Signature of third party
Vote MUST be indicated
Please Sign, Date and Return the Proxy Promptly Using the Enclosed Envelope. (x) in Black or Blue Ink. [X]
</TABLE>
<PAGE>
[LYONDELL LOGO APPEARS HERE]
One Houston Center
1221 McKinney, Suite 1600
Houston, Texas 77010
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby makes, constitutes and appoints Joseph M. Putz,
Debra L. Starnes and Russell S. Young and each of them, lawful attorney and
proxies of the undersigned, with full power of substitution, for and in the
name, place and stead of the undersigned to attend the Annual Meeting of
Stockholders of Lyondell Petrochemical Company (herein the "Company") in the Two
Houston Center Auditorium, 909 Fannin, Suite P-200, Houston, Texas, on Friday,
May 9, 1997 at 9:00 a.m., local time, and at any adjournment(s) thereof, with
all powers the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR ITEMS 1 AND 2.
This card also constitutes your voting
instructions for shares held in the Lyondell
Petrochemical Company 401(k) and Savings Plan, LYONDELL PETROCHEMICAL COMPANY
the LYONDELL-CITCO Refining Company Ltd. 401(k) P.O. BOX 11244
and Savings Plan for Non-Represented Employees NEW YORK, N.Y. 10203-0244
and the LYONDELL-CITGO Refining Company Ltd.
401(k) and Savings Plan for Represented
Employees, and the undersigned hereby
authorizes State Street Bank, as Trustee of
such plans to vote the shares held in the
undersigned's accounts.
(Continued, and to be signed and dated, on reverse side.)
