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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file number 1-27
T e x a c o I n c .
(Exact name of registrant as specified in its charter)
Delaware 74-1383447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 Westchester Avenue
White Plains, New York 10650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 253-4000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
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<S> <C>
Common Stock, par value $3.125 New York Stock Exchange
Chicago Stock Exchange
The Stock Exchange, London
Antwerp and Brussels Exchanges
Swiss Stock Exchange
Rights to Purchase Series D Junior Participating Preferred Stock New York Stock Exchange
Cumulative Adjustable Rate Monthly Income Preferred Shares, Series B* New York Stock Exchange
6 7/8% Cumulative Guaranteed Monthly Income Preferred Shares, Series A* New York Stock Exchange
81/2% Notes, due February 15, 2003** New York Stock Exchange
8 5/8% Debentures, due June 30, 2010** New York Stock Exchange
9% Notes, due December 15, 1999** New York Stock Exchange
9 3/4% Debentures, due March 15, 2020** New York Stock Exchange
Extendible Notes, due June 1, 1999 (5 1/2% to June 1, 1999)** New York Stock Exchange
Extendible Notes, due March 1, 2000 (9.45% to March 1, 2000)** New York Stock Exchange
<FN>
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* Issued by Texaco Capital LLC and the payments of dividends and payments on
liquidation or redemption are guaranteed by Texaco Inc.
** Issued by Texaco Capital Inc. and unconditionally guaranteed by Texaco Inc.
</FN>
</TABLE>
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The Registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past 90 days.
No disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is contained herein, and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting common stock of Texaco Inc. held
by non-affiliates at the close of business on February 26, 1999 based on the New
York Stock Exchange composite sales price, was approximately $24,946,000,000.
The market value of the voting stock of Series B ESOP Convertible Preferred
Stock held in the Employees Thrift Plan of Texaco Inc. at the close of business
on February 26, 1999, was approximately $762,849,000.
As of February 26, 1999, there were 536,018,730 outstanding shares of
Texaco Inc. Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
(to the extent indicated herein)
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<CAPTION>
Part of
Form 10-K
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<S> <C>
Texaco Inc. Annual Report to Stockholders for the year 1998................................. I, II
Proxy Statement of Texaco Inc. relating to the 1999 Annual Meeting of Stockholders.......... III
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TABLE OF CONTENTS
<TABLE>
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Page
Texaco Inc.
Texaco Inc. 1998 Texaco Inc.
1998 Annual Report March 16, 1999
Form 10-K Item Form 10-K to Stockholders Proxy Statement
- -------------- --------- --------------- ---------------
PART I
<S> <C> <C> <C>
1. and 2. Business and Properties
Development and Description of Business................... 1 -- --
Industry Review of 1998................................... 1-2 -- --
Worldwide Operations...................................... 3-20 -- --
Additional Information Concerning Our Business............ 21 38-39 and 49-50 --
Forward-Looking Statements and
Factors That May Affect Our Business.................... 22-23 -- --
3. Legal Proceedings......................................... 24 68 --
4. Submission of Matters to a Vote of Security Holders....... 24 -- --
Executive Officers of Texaco Inc............................. 25 -- --
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PART II
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5. Market for the Registrant's Common Equity
and Related Stockholder Matters.......................... 26 81 --
6. Selected Financial Data.................................... 26 78 --
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 26 24-40 --
7A. Quantitative and Qualitative Disclosures about Market Risk. 26 76 --
8. Financial Statements and Supplementary Data
-- Financial Statements....................... 26 41-68 --
-- Report of Independent Public Accountants... 26 69 --
-- Supplemental Oil and Gas Information....... 26 70-75 --
--Selected Quarterly Financial Data........... 26 77 --
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 26 -- --
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<CAPTION>
PART III
<S> <C> <C> <C>
10. Directors and Executive Officers of the Registrant......... 27 -- 3-7 and 9-13
11. Executive Compensation..................................... 27 -- 7 and 22-27
12. Security Ownership of Certain Beneficial Owners
and Management........................................... 27 -- 2 and 9
13. Certain Relationships and Related Transactions............. 27 -- 7-8
</TABLE>
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<CAPTION>
PART IV
<S> <C> <C> <C>
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28-29 -- --
Report of Independent Public Accountants....................... 30 -- --
Schedule II - Valuation and Qualifying Accounts................ 31 -- --
</TABLE>
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PART I
TEXACO INC.
Items 1 and 2. Business and Properties
DEVELOPMENT AND DESCRIPTION OF BUSINESS
Texaco Inc. was incorporated in Delaware on August 26, 1926, as The Texas
Corporation. Its name was changed in 1941 to The Texas Company and in 1959 to
Texaco Inc. It is the successor to a corporation incorporated in Texas in 1902.
When we use the term "Texaco Inc." in this Form 10-K and in the documents we
have incorporated by reference into this Form 10-K, we mean Texaco Inc., a
Delaware corporation. We use terms such as "Texaco," "company," "organization,"
"unit," "we," "us," "our," and "its" for convenience only. These terms may mean
either Texaco Inc. and its consolidated subsidiaries or Texaco Inc.'s
subsidiaries and affiliates, either individually or collectively.
Texaco Inc. and its subsidiary companies, together with affiliates owned
50% or less, represent a vertically integrated enterprise principally engaged in
the worldwide exploration for and production, transportation, refining and
marketing of crude oil, natural gas liquids, natural gas and petroleum products.
INDUSTRY REVIEW OF 1998
Introduction
Crude oil prices have a major effect on our financial performance. The
price of crude oil is determined in the international market by the often
complex interaction of worldwide petroleum demand and supply. In 1998, crude oil
prices were driven down by several factors which influenced demand and supply.
These included economic activity, weather patterns and actions of the
Organization of Petroleum Exporting Countries (OPEC). For 1998, West Texas
Intermediate (WTI) crude oil prices averaged $14.39 per barrel, or about 30%
below the 1997 average.
Review of 1998
In 1998, the world experienced a severe economic crisis. Global economic
growth averaged a meager 1.6%, significantly below the 4% growth recorded in
1997 and 1996.
Economic activity varied widely among regions, with many Asian countries
hit the hardest. Japan, the world's second-largest economy, experienced its
worst downturn in the post-war period, caused by a collapse in consumer and
investor confidence and severe banking problems. Several of developing Asia's
key economies, including Indonesia, Hong Kong, Korea, Malaysia, Singapore and
Thailand also plunged into recession, crippled by a regional financial crisis
which began in July 1997.
The financial turbulence eventually spread to Russia and Latin America.
Russia's economy registered a steep decline. In Latin America, the heightened
financial uncertainty ultimately pushed the large Brazilian economy into
recession, and slowed growth in other Latin American countries. Moreover, weak
commodity prices--attributable in part to the slowdown in Asia--curtailed
economic growth in other areas, particularly the oil producing countries of the
Middle East and Africa.
In sharp contrast to the areas experiencing economic recession or
stagnation, the U.S. and Western Europe enjoyed favorable economic conditions.
U.S. growth remained robust as the economy benefited from lower interest rates,
and Western Europe showed an improvement because of higher consumer spending.
1
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Economic activity has a major effect on petroleum consumption. The
deterioration in major portions of the global economy resulted in a substantial
reduction in oil demand growth, which increased by only about 400,000 barrels
per day (BPD) or 0.5% during 1998. This represents a dramatic slowing from the
roughly 2 million BPD growth which occurred in both 1997 and 1996. Demand in
Asia suffered the largest decline, about 500,000 BPD. This was a significant
development, since growth in Asia had accounted for about half of the total
worldwide increase in recent years. Moreover, warm weather at both the beginning
and end of 1998 constrained oil consumption in the U.S. and Western Europe.
Crude oil prices were further weakened by significant increases in
petroleum supplies early in 1998. Specifically:
o OPEC countries set new, higher production quotas in late 1997 and proceeded
to exceed them
o U.N.-sanctioned crude oil exports from Iraq increased sharply
o Production from non-OPEC countries also increased.
These actions led to a large increase in worldwide petroleum inventories.
By mid-1998, OPEC, Mexico and a few other non-OPEC producers agreed to reduce
their combined oil production by about 3 million BPD. Yet, in the face of lower
demand, this attempt to improve the growing market imbalance did not prevent a
further slide in world oil prices. The market price of WTI crude oil slipped
from an average of about $16.70 per barrel in January to $11.30 per barrel
during December. In addition to lower worldwide crude oil prices, warmer than
normal weather and excess capacity caused natural gas prices in the U.S. to
decline almost 20%.
Near-Term Outlook
We are beginning to see signs of strengthening in the international
petroleum market. On March 23, 1999, OPEC announced that it would enact further
significant cuts in crude oil production in order to support higher prices.
Together with some non-OPEC producers, the intent is to remove about two million
BPD from the market. While world oil inventories are currently high by
historical standards, a supply curtailment of this magnitude could tighten the
supply/demand balance.
At the same time, there are indications that the world economy may well be
stabilizing, and growth is likely to pick up in the latter part of the year.
Several economic developments seem to support this:
o The U.S. economy remains robust, with few signs of slowing
o Japan continues to spur its economy with massive fiscal stimulus and a
dramatic easing in monetary policy
o Benefiting from an inflow of foreign capital and a trade surplus, Korea
expects to enjoy positive growth in real Gross Domestic Product this year
o Brazil is continuing to enact fiscal reforms required for International
Monetary Fund support.
As the world economy picks up, so too will growth in oil demand.
Consumption during 1999 is expected to rise by 800,000 BPD -about double the
increase of last year. This higher demand, balanced against lower supplies
resulting from the OPEC and non-OPEC production accord, suggests a firmer market
in 1999.
2
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WORLDWIDE OPERATIONS
Our worldwide operations encompass three main businesses:
o Upstream (exploration and production)
o Downstream (manufacturing, marketing and distribution)
o Global Gas Marketing.
In the following pages, we discuss each of these businesses, along with our
Global Gas and Power and Technology units.
UPSTREAM
Our upstream results were significantly reduced by the lowest crude oil
prices in over 20 years. Despite low prices, we achieved our key operational
goals. In 1998:
o Production was up some 9% over 1997
o Exploration success was highlighted by finds in Nigeria, Trinidad, and the
Partitioned Neutral Zone (PNZ) between Saudi Arabia and Kuwait
o Our worldwide reserve replacement of 166% enabled us to achieve our
highest year-end reserve total since 1985
o Our finding and development cost was an extremely competitive $3.45 per
barrel of oil equivalent (BOE).
Exploration
The year 1998 was a very successful year in exploration, highlighted by key
discoveries in Nigeria, Trinidad and the PNZ. In addition, we continued to add
to our deepwater Gulf of Mexico position and added new blocks in Angola and
Colombia. During the year, we continued to focus our exploration efforts on West
Africa, the deepwater Gulf of Mexico, Trinidad and Colombia, while withdrawing
from several less productive areas such as Italy, Vietnam and Thailand.
West Africa
Our significant oil discovery in Nigeria Block OPL-216, named Agbami, could
potentially contain several hundred million barrels. Located in the central
Niger Delta approximately 70 miles offshore, the discovery well was drilled in
4,700 feet of water -- a current industry record for Nigeria -- and it
encountered 420 net feet of oil pay in multiple zones.
In March 1999, we and our partner Statoil announced a discovery on the
nearby block OPL-218. Preliminary data indicates the reservoirs of Block 218
(46.15% Texaco share) could contain up to several hundred million barrels of
recoverable oil.
Our acreage holdings in the deepwater off Nigeria are approximately 1.2
million acres. We are well positioned to expand reserve finds in this developing
"hot spot" for exploration.
In Angola, we acquired a 50% interest in Block 1, which is located west of
Texaco's producing Block 2/85. Block 1, covering almost one million acres, is
the third Texaco-operated exploration block that we acquired in Angola over the
past two years. During 1998, we signed a Production Sharing Agreement with
Sonangol, Angola's state-owned oil company, for Blocks 9 and 22, in which we
acquired 40% interests in 1997.
3
<PAGE>
Gulf of Mexico
We were an active participant in both the Western and Central Gulf of
Mexico lease sales in 1998, adding 92 new blocks to our already strong inventory
of deepwater prospects. These blocks added slightly over 500,000 gross acres to
our total Gulf acreage. With 2.4 million gross acres, we have the third largest
holdings in the deepwater Gulf of Mexico.
South America/Caribbean
Texaco Trinidad Inc. and our partner, British Gas, announced two
discoveries in Trinidad during 1998. The Dolphin Deep discovery, located in 650
feet of water, approximately 60 miles off Galeota Point, southeast of Trinidad,
encountered 430 feet of gas pay in three zones and tested at a rate of 36
million cubic feet of gas per day and 370 barrels of condensate per day.
Following on from the Dolphin Deep discovery, the partnership (Texaco share
50%) announced the Starfish discovery late in the year. The Starfish discovery
was drilled in 427 feet of water on the border between Blocks E and 5a. The well
encountered 501 feet of natural gas pay in four zones and tested at a
constrained rate of 16.2 million cubic feet of natural gas per day.
In Colombia, Texas Petroleum Company, together with Shell, signed two new
exploration contracts with Ecopetrol, Colombia's state-owned oil company, to
explore two large offshore blocks. Texaco and Shell each hold a 25% share in the
two blocks in which we will be the operator. The blocks encompass more than 12
million acres.
Partitioned Neutral Zone
Saudi Arabian Texaco Inc., together with Kuwait Oil Company, announced the
Humma discovery during 1998 (50% Texaco share). The discovery well is located
approximately 16 miles southwest of Wafra Field in the PNZ. The well encountered
726 feet of gross crude oil pay and tested at a combined rate of 3,400 barrels
of oil per day.
Production
Strong production growth was the highlight for 1998 as we increased our
worldwide production by 9% to 1.3 million barrels of oil equivalent per day.
U.S. production accounted for some 55% of worldwide production or 713,000 BOE
per day and was up by 5% over 1997. International production was up by 14% over
1997 to 588,000 BOE per day.
The worldwide production increase came primarily from the North Sea and
California. However, there were also success stories in the PNZ, Kazakhstan and
the Gulf of Mexico.
Gulf of Mexico
Three new fields began producing in 1998: Barite South, Arnold and Oyster.
The Barite South field (60% Texaco share) began producing in April from a
12-slot conventional platform with two wells. Several new wells were added
during the course of the year. Barite South was followed in May by the Arnold
field (37.5% Texaco share) and the Oyster field (33.3% Texaco share). Both of
these developments have Marathon as a partner. These three new developments
helped offset production declines in other Gulf fields, allowing total Gulf of
Mexico production to remain as one of our strongest upstream assets.
4
<PAGE>
California
In 1998, we had our first full year of production from the properties
acquired from Monterey Resources in November of 1997. Production in California
was up by some 42,000 barrels of oil equivalent per day due primarily to the
increased production associated with the 1997 acquisition. Since the
acquisition, we have been successful at reducing field operating costs by over
$1 per barrel for the acquired Monterey fields, while increasing production by
applying our experience in heavy-oil technology.
United Kingdom
The U.K. sector of the North Sea provided the most significant increase in
our production profile, accounting for some 44,000 barrels of oil equivalent per
day of increased production. Galley field, located in Block 15/23a, achieved
first production in March 1998. Our 67.4% share of the field's production
amounted to just under 17,000 barrels of oil equivalent per day for the full
year. In addition, 1998 saw the first full year of production from both the
Captain and Erskine fields.
Middle East and Caspian Area
In 1998, Saudi Arabian Texaco (SAT) achieved a production increase for the
sixth consecutive year in the PNZ. Continued development of the three key fields
operated by SAT, and partner Kuwait Oil Company, drove our share of production
to a record 108,000 barrels of oil per day.
In Kazakhstan, the Karachaganak field added new production for us in 1998
following the signing of the Production Sharing Agreement in November 1997.
Texaco (20% share), together with partners BG, Agip and Lukoil, saw production
limited from the field due to economic constraints. However, the potential
exists for significant production increases following completion of the Caspian
Pipeline Consortium pipeline or other equivalent outlets for crude oil from the
Karachaganak field.
Also in Kazakhstan, we acquired a 65% operating interest in the North
Buzachi oil field from Nimir Petroleum Company. The field is located 120 miles
north of the Caspian port city of Aktau. A pilot work program will determine the
viability of developing the field.
Indonesia
P.T. Caltex Indonesia (CPI), an exploration and production company, is
owned 50% each by Texaco and Chevron. CPI holds a Production Sharing Contract in
Central Sumatra through the year 2021. CPI also acts as operator in Sumatra for
seven other petroleum contract areas, with 33 fields. Exploration is pursued
through an area comprising approximately 16 million acres with production
established in the giant Minas and Duri fields, along with smaller fields. Gross
production from fields operated by CPI for 1998 was over 760,000 barrels of
crude oil per day.
China
During 1998, Texaco China B.V. and ARCO China Inc. signed a new petroleum
contract with the Chinese National Offshore Oil Corporation to develop QHD 32-6
field, China's second largest offshore oil field. Discovered in 1995, QHD 32-6
is located approximately 155 miles southeast of Beijing in Bohai Bay. The field
is located in 65 feet of water and we hold a 24.5% interest.
Also in 1998, we signed the first contract with the China United Coalbed
Methane Corporation. The contract will allow us to explore for coalbed methane
in two blocks covering 2,663 square kilometers in China's Anhui Province.
Successful exploration will allow us to apply the expertise we have gained in
our U.S. operations.
5
<PAGE>
Reserves
We increased our worldwide reserve base to nearly 4.7 billion BOE by
year-end 1998. Approximately 54% (2.5 billion BOE) of these reserves are located
in the United States. U.S. reserves are up by 3% over year-end 1997 with the
majority of the increase associated with additions in California. International
reserves (2.2 billion BOE) were up 15% over year-end 1997. The primary
contributors to this increase were Indonesia and the PNZ.
Excluding sales and purchases, our 1998 reserve replacement was 166%. Over
the past three years, worldwide reserve replacement averaged 150%. Over the past
five years, our worldwide reserve replacement averaged 138%.
Capital and Exploratory Expenditures
Our upstream capital and exploratory expenditures during 1998 of $2.7
billion were down slightly from 1997, excluding the $1.4 billion acquisition of
Monterey Resources in 1997. Texaco's expenditures in 1998 reflect the deferral
of certain projects due to the low-price environment. We spent approximately
$1.4 billion in the U.S. and $1.3 billion internationally. Our worldwide finding
and development costs in 1998 were a very competitive $3.45 per BOE, down from
$3.79 in 1997. Our finding and development costs in 1998 were $4.41 per BOE in
the U.S. and were $2.64 per BOE internationally.
Spending for 1999 on upstream projects is expected to be $2.3 billion. Even
in the current low-price environment, we feel it is important to continue to
prudently allocate capital resources to projects which often have long lead
times and which will generate attractive returns in the future. However, we
continue to carefully assess investment projects given the current and projected
industry environment.
Development spending will be directed towards projects in the U.S.
deepwater Gulf of Mexico, the U.K. North Sea and Denmark. Major exploration
projects will include Nigeria, Angola and Trinidad.
6
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SUPPLEMENTARY EXPLORATION AND PRODUCTION INFORMATION
The following tables provide supplementary information concerning the oil
and gas exploration, development and production activities of Texaco Inc. and
consolidated subsidiaries, as well as our equity in CPI, a 50%-owned affiliate
operating in Other Eastern Hemisphere. Supplemental oil and gas information
required by Statement of Financial Accounting Standards No. 69, Disclosures
About Oil and Gas Producing Activities, is incorporated herein by reference from
pages 70 through 75 of our 1998 Annual Report to Stockholders.
Reserves Reported to Other Agencies
We provide information concerning recoverable, proved oil and gas reserve
quantities to the U.S. Department of Energy and to other governmental bodies
annually. Such information is consistent with the reserve quantities presented
in Table I, Net Proved Reserves, beginning on page 70 of our 1998 Annual Report
to Stockholders.
Average Sales Prices and Production Costs--Per Unit
Information concerning average sales prices and production costs on a per
unit basis is incorporated herein by reference from page 74 of our 1998 Annual
Report to Stockholders.
Delivery Commitments
During 1999, we expect that our net production of natural gas will
approximate 2.3 billion cubic feet per day. This estimate is based upon our past
performance and on our assumption that such gas quantities can be produced under
operating and economic conditions existing at December 31, 1998. We did not
factor possible future changes in prices or world economic conditions into this
estimate. These expected production volumes, together with the normal related
supply arrangements, are sufficient to meet our anticipated delivery
requirements under contractual arrangements. Approximately 34% of our proved
natural gas reserves in the U.S. as of December 31, 1998, 1997 and 1996 were
covered by long-term sales contracts. These agreements are primarily priced at
market.
7
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<TABLE>
<CAPTION>
Oil and Gas Acreage
As of December 31, 1998
---------------------------------
Thousands of acres Gross Net
------------------ ----- ---
<S> <C> <C>
Producing
Texaco Inc. and Consolidated Subsidiaries
United States................................................ 3,200 1,792
Other Western Hemisphere ................................... 110 53
Europe ..................................................... 146 53
Other Eastern Hemisphere ................................... 645 156
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Total ................................................... 4,101 2,054
Equity in Affiliate............................................... 210 105
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Total worldwide.............................. 4,311 2,159
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Undeveloped
Texaco Inc. and Consolidated Subsidiaries
United States................................................ 8,820 6,091
Other Western Hemisphere ................................... 13,948 3,597
Europe ..................................................... 6,690 2,784
Other Eastern Hemisphere..................................... 57,494 28,663
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Total ................................................... 86,952 41,135
Equity in Affiliate............................................... 1,745 873
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Total worldwide............................. 88,697 42,008
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Total oil and gas acreage....................... 93,008 44,167
====== ======
Number of Wells Capable of Producing*
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------------
Gross Net
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<S> <C> <C>
Oil wells
Texaco Inc. and Consolidated Subsidiaries
United States................................................ 33,876 18,033
Other Western Hemisphere ................................... 326 109
Europe ..................................................... 258 75
Other Eastern Hemisphere ................................... 1,775 652
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Total ................................................... 36,235 18,869
Equity in Affiliate............................................... 4,744 2,372
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Total worldwide**........................... 40,979 21,241
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Gas wells
Texaco Inc. and Consolidated Subsidiaries
United States................................................ 7,363 3,233
Other Western Hemisphere .................................. 33 17
Europe ..................................................... 36 10
Other Eastern Hemisphere ................................... 34 6
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Total ................................................... 7,466 3,266
Equity in Affiliate ............................................ 47 24
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Total worldwide**........................... 7,513 3,290
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<FN>
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* Producible well counts include active wells and wells temporarily shut-in.
Consistent with general industry practice, injection or service wells and
wells shut-in that have been identified for plugging and abandonment have
been excluded from the number of wells capable of producing.
** Includes 140 gross and 54 net multiple completion oil wells and 8 gross and
6 net multiple completion gas wells.
</FN>
</TABLE>
8
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<TABLE>
<CAPTION>
Oil, Gas and Dry Wells Completed For the years ended December 31,
------------------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
Oil Gas Dry Oil Gas Dry Oil Gas Dry
--- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net exploratory wells*
Texaco Inc. and Consolidated Subsidiaries
United States................................. 14 14 26 32 22 35 29 28 29
Other Western Hemisphere...................... -- 2 2 1 -- 1 -- 3 1
Europe........................................ -- -- 1 4 -- 1 3 -- 1
Other Eastern Hemisphere...................... 4 4 2 1 3 5 1 2 2
Total ..................................... 18 20 31 38 25 42 33 33 33
Equity in Affiliate............................. 3 -- -- 2 -- -- -- -- --
----- --- --- ----- --- --- --- --- ---
Total worldwide........................... 21 20 31 40 25 42 33 33 33
Net development wells
Texaco Inc. and Consolidated Subsidiaries
United States................................. 937 106 14 883 165 23 283 191 44
Other Western Hemisphere...................... 109 3 -- 107 1 3 33 8 --
Europe....................................... 21 2 -- 6 3 -- 1 -- 1
Other Eastern Hemisphere...................... 38 27 -- 45 1 -- 44 -- 1
----- --- --- ----- --- --- --- --- ---
Total ...................................... 1,105 138 14 1,041 170 26 361 199 46
Equity in Affiliate............................. 271 -- -- 143 1 -- 259 1 --
----- --- --- ----- --- --- --- --- ---
Total worldwide........................... 1,376 138 14 1,184 171 26 620 200 46
===== === === ===== === === === === ===
<FN>
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* Exploratory wells which identify oil and gas reserves, but have not resulted
in recording of proved reserves pending further evaluation, are not
considered completed wells. Reserves which are identified by such wells are
included in Texaco's proved reserves when sufficient information is available
to make that determination. This is particularly applicable to deep
water exploratory areas which may require extended time periods to assess,
such as the U.K. sector of the North Sea and in the deepwater U.S. Gulf of
Mexico.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Additional Well Data As of December 31, 1998
------------------------------------------------------------
Wells in the Pressure Maintenance
process of -------------------------------------
drilling Projects in
-------------- Installations the process of
Gross Net in operation being installed
----- --- ------------ ---------------
<S> <C> <C> <C> <C>
Texaco Inc. and Consolidated Subsidiaries
United States................................... 40 31 390 --
Other Western Hemisphere........................ 3 2 1 --
Europe.......................................... 6 1 13 --
Other Eastern Hemisphere........................ 17 6 13 1
--- --- --- ---
Total ........................................ 66 40 417 1
Equity in Affiliate................................ 6 3 7 --
--- --- --- ---
Total worldwide............................. 72 43 424 1
=== === === ===
</TABLE>
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DOWNSTREAM
Texaco International Marketing and Manufacturing
Our Texaco International Marketing and Manufacturing (TIMM) unit conducts
business in some 60 countries throughout Latin America, the Caribbean, Europe
and West Africa. The main lines of business for this unit are fuel and
lubricants sales, both retail and commercial, and petroleum refining.
We are a market leader in the Caribbean and Central and South America with
significant fuels market shares, as high as 25% in most Caribbean and Central
American countries. One-fourth of our worldwide lubricants sales are in Latin
America. Our largest business is in Brazil, where sales are over 50 million
barrels per year and our market share is 13.5% in retail fuels and 23% in
lubricants. In Brazil, the addition of over 200 branded retail stations in 1998
brings our total retail stations to more than 3,200.
In the Andean Region, comprising Colombia, Ecuador, Peru, Panama and
Venezuela, we have almost 1,000 service stations. In Venezuela, which is
expected to become a major retail market in this region, we are positioned to
match our growing lubricants market share with an expanded retail development
program. This should occur as soon as the timing and economics related to the
privatization of that sector are developed further.
In early 1999, our business in Brazil and the Andean countries has been
impacted by economic slowdown and currency devaluation. We are taking prompt
actions, such as significant reductions in capital expenditures and expenses, to
mitigate the effects of these problems. In addition, we are taking steps to
reduce our overall exposure.
In the Caribbean and Central America, we operate in 32 countries through a
network of 1,250 service stations. Petroleum demand growth is projected to be
about 3% a year. In this region, we have built on our excellent market share and
presence to continue growth by investing in areas with the greatest potential.
We will continue to grow by aligning ourselves with suppliers, major industrial
customers, and other oil companies where we can capture infrastructure
efficiencies.
We continue to maximize returns from our substantial retail properties by
increasing non-fuel retail income. One of our most successful non-fuel retail
initiatives has been the development of the Star Mart(R) convenience store
brand. We now have close to 250 Star Mart convenience stores throughout Latin
America and the Caribbean. Growth of the Star Mart concept has paralleled the
strong growth of the regional economies and the increase in disposable income,
making the convenience store concept more appealing to the consumer. Non-fuel
income represents a strategic growth opportunity for our international areas.
Latin America and West Africa refined product sales for 1998 increased 13%
as compared with 1997 sales, reflecting the continuing leverage of our strong
position in these markets. Our 1998 cost containment initiatives have also
decreased controllable expenses by $.23 a barrel compared with 1997.
The Latin America manufacturing segment consists of two equity refineries,
one in Escuintla, Guatemala, with a crude capacity of 16,500 barrels per day,
and the other in Bahia Las Minas, Panama, with a crude capacity of 60,000
barrels per day. The refinery at Panama refines oils and wholesales finished
products for local sales, canal sales, and export markets, while the Guatemala
refinery supplies only internal country requirements.
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In Europe, we are in regional markets, with our assets concentrated in the
UK, Ireland and the Benelux. We also have a 50% interest in Hydro Texaco, a
Scandinavian marketing joint venture with Norsk Hydro, as well as fuels and
lubricants marketing companies in Greece and Poland. We market lubricants in all
other major European countries, ranking among the top 10 lubricant marketers. We
are also the number one supplier of lubricants and coolants to original
equipment manufacturers in Europe.
In 1998, the UK market recovered somewhat from the effects of price wars
triggered by the aggressive growth of hypermarkets. With the stabilization of
margins, we are growing our market share, primarily through the acquisition of
dealers. There are 286 more Texaco-branded retail outlets in the UK now than
there were at the end of 1997. Our commercial sales business has expanded 50%
and now shows a more balanced portfolio of end-users, equity distributors,
authorized distributors, resellers and spot sales. Our lubricants division has
made similar progress with a 41% increase in volume since 1997. A major factor
in this increase is that 50% of all vehicles leaving UK assembly lines are being
filled with Texaco lubricants. All of our progress is the result of focused
strategy, organizational efficiencies, reduced costs and customer focus.
In Ireland and the Benelux, we have double-digit market share, and we
continue to improve our cost structure to be more effective in these highly
competitive markets.
In European manufacturing, we have an interest in two refineries with a
total capacity for Texaco of 308,000 barrels per day. We own the Pembroke
refinery in Wales, UK, which has the largest Fluid Catalytic Cracker and
Alkylation units in Europe. It is one of the most modern and advanced refineries
in Europe with very high motor gasoline yields and qualities. This refinery
supplies our marketing requirements in the UK and Ireland, and also exports its
high-quality gasoline to other parts of the world. It has a highly skilled,
talented and innovative workforce, which provides competitive strength in the
areas of health and safety performance and overall plant reliability. Pembroke
is also well situated to economically comply with the European Union's new fuel
specifications for the year 2000 and beyond.
We also own a 31% interest in the 380,000-barrel-per-day Nerefco refinery
in Rotterdam, a joint venture with British Petroleum. This refinery provides the
main supply to our Netherlands marketing operations and, due to its excellent
location in Rotterdam harbor, is a key supplier to the Rotterdam fuel market and
to the German light products market. The consolidation of the Nerefco refinery
to one site was successfully completed in September 1998 with the start-up of a
new 40,000 barrels per day hydrotreater. The project was completed three months
ahead of schedule and 8% below target cost. We expect that annual reductions of
27% in operating expenses and 55% in maintenance capital will result from this
project.
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U.S. Downstream Alliances
Our U.S. downstream operations include the operations of Equilon
Enterprises LLC and Motiva Enterprises LLC. Equilon and Motiva own Equiva
Trading Company, which functions as the trading unit for both companies. They
also own Equiva Services LLC, which provides common financial, administrative,
technical and other operational support to both companies.
The combination of Equilon and Motiva is estimated to be the largest retail
gasoline marketer in the U.S., having an approximate 15% share of the domestic
gasoline market. The two companies have 10 refineries with a combined capacity
of about 1.7 million barrels per day, interests in about 31,000 miles of
pipelines and distribute gasoline through about 23,600 retail outlets.
Equilon Enterprises LLC
On January 1, 1998, Equilon was formed as a joint venture between Texaco
and Shell. Equilon, which is headquartered in Houston, Texas, combines major
elements of Texaco's and Shell's western and midwestern U.S. refining and
marketing businesses and their nationwide transportation and lubricants
businesses. We own 44% and Shell owns 56% of the company.
Equilon refines and markets gasoline and other petroleum products under
both the Texaco and Shell brand names in all or parts of 32 states. Equilon is
estimated to be the seventh largest refining company in the U.S. with six
refineries located in:
o Anacortes, Washington
o Bakersfield, California
o El Dorado, Kansas
o Martinez, California
o Los Angeles, California
o Wood River, Illinois.
Equilon owns or has interest in 66 crude oil and product terminals. It is
estimated to be the fifth largest retail gasoline marketer in the U.S.,
distributing products through approximately 9,400 service stations. Equilon has
an estimated 7.4% share of the national gasoline market and an estimated 14.3%
share of the gasoline market in its geographic area.
The year 1998 was a year of organization and transition for Equilon. About
9,000 positions in Equilon were identified and staffed using a staff selection
process designed to fill each position with the best qualified person. There was
about a 20% reduction from the previous employee level in areas outside of
refinery and retail operations.
Pursuant to consent agreements with the Federal Trade Commission and
certain state governments, Equilon divested itself of Shell's Anacortes,
Washington, refinery, certain marketing assets in Southern California, and
pipeline interests. In mid-March 1999, Equilon completed the sale of certain
marketing assets in Hawaii.
Equilon began early in 1998 to combine the operations of the two companies.
For example, it closed one refinery and targeted three lubricant blending plants
for closing or sale. It also eliminated numerous contract blending locations. In
transportation, product and crude movements were shifted into the new Equilon
system where other pipelines had previously been utilized. Sales offices were
consolidated and many offices were closed. A common enterprise-wide accounting
system is being developed that will replace the multitude of systems previously
used.
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Capturing synergies from the formation of Equilon was a high priority in
1998. After deducting start-up expenses associated with the new company, savings
were greater than expected.
Equilon will implement plans which it developed in 1998 to restructure and
strengthen its retail marketing system over the next several years. It began a
major initiative to improve supply chain management and to leverage the combined
strength of Equilon and Motiva in supply acquisition.
Motiva Enterprises LLC
On July 1, 1998, we formed Motiva as a joint venture among Shell, Texaco
and Saudi Refining, Inc., a corporate affiliate of Saudi Aramco. Motiva combines
Texaco's and Saudi Aramco's interests and major elements of Shell's eastern and
Gulf Coast U.S. refining and marketing businesses. We and Saudi Refining, Inc.,
each owns 32.5% and Shell owns 35% of Motiva. Texaco's and Saudi Aramco's
interests in these businesses were previously conducted by Star Enterprise, a
joint-venture partnership owned 50% by Texaco and 50% by Saudi Refining, Inc.
Motiva refines and markets gasoline and other petroleum products under the
Shell and Texaco brand names in all or part of 26 states and the District of
Columbia, providing product to 14,200 Shell- and Texaco-branded retail outlets.
The company owns and operates 610 retail outlets--45 Shell-branded and 565
Texaco-branded. Motiva owns and leases 2,325 retail outlets--1,705 Shell-branded
and 620 Texaco-branded -- and has 645 independent wholesale marketers and 400
open retailers. Motiva has an estimated 7.5% share of the national gasoline
market and an estimated 15.5% market share in its geographic area.
Motiva is the eighth largest refiner in the U.S., capable of refining about
819,000 barrels a day. Motiva's refineries are located in:
o Convent, Louisiana
o Delaware City, Delaware
o Norco, Louisiana
o Port Arthur, Texas.
Motiva also owns or has interests in 47 product terminals.
In 1998, Motiva undertook actions to identify and capture synergies. Some
of the major synergies captured included the hydrotreater realignment at the
Convent, Louisiana refinery, a gasoline additives synergy, consolidation of the
marketing staff and the reduction of insurance expense.
Equiva Trading Company
Equilon and Motiva jointly own Equiva Trading Company. Equiva Trading
provides supply and trading services for Equilon, Motiva and other affiliates of
Texaco and Shell. In addition, Equiva Trading conducts a large and growing
trading activity on behalf of Equilon. Equiva Trading buys and sells in excess
of 7 million barrels of hydrocarbons per day in the physical markets, making it
one of the largest petroleum supply and trading organizations in the world.
Specific lines of business include: acquisition, sales and trades of domestic
and international crude oil and products; lease crude oil acquisition and
marketing; marine chartering; and, risk management support and services.
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Equiva Services LLC
Equilon and Motiva also jointly own Equiva Services. Equiva Services was
established to provide common services to both Equilon and Motiva. Equiva
Services provides services in areas such as brand management, retail operations,
accounting, tax, treasury, information technology, safety, health and
environment. Combining these common services, rather than having a separate
service organization for each company, is one way that Equilon and Motiva are
capturing the synergies of combination despite different ownership.
Caltex Corporation
Caltex Corporation (formerly known as Caltex Petroleum Corporation) is
jointly owned 50% each by Texaco and Chevron. Caltex operates in more than 60
countries in the Asia-Pacific region, Africa, the Middle East, New Zealand and
Australia. Caltex refines crude oil and markets petroleum and convenience
products through its subsidiaries and affiliates, and is also involved in
distribution, shipping, storage, marketing, supply and trading operations.
Caltex has interests in 13 fuel refineries with equity refining capacity of
978,000 barrels per day. Additionally, it has interests in two lubricant
refineries, six asphalt plants, 17 lubricating oil blending plants and more than
500 ocean terminals and depots. Caltex continues to be a major supplier of
refined products through its large refineries in South Korea, Singapore and
Thailand, where its Star refinery is being integrated with the nearby Shell
refinery. Its trading organization provides 24-hour service to the Caltex system
and to third parties that require crude oil, feedstocks, base oils and refined
products.
Refining margins in 1998 were at their lowest level in more than 10 years,
due to worldwide oversupply of capacity, which was partly a result of the
economic disruption in many Asian countries. By focusing on full utilization of
assets, cost reductions, cost-effective investments and initiatives to improve
efficiency and maintain the integrity of the refining assets, the operating
performance of Caltex' refineries has continued to improve, mitigating the
effect of low margins to the extent possible.
Caltex and its affiliates maintain a strong marketing presence through a
network of 8,000 retail outlets, of which 4,700 are branded as Caltex. It also
operates over 425 Star Mart convenience stores. Caltex sales of crude oil and
petroleum products were 1.5 million barrels per day in 1998.
In 1998, Caltex reorganized by changing from a geographic to a functional
organizational structure. The new structure is flatter, and has improved
channels of communication to manage and allocate resources more effectively.
Additionally, Caltex is relocating its executive leadership team from Dallas,
Texas, to Singapore to be closer to its main operating area.
Caltex' business strategies are to:
o improve the financial performance of its established business operations
o selectively grow in emerging countries
o increase non-fuel earnings through convenience stores
o continue with the retail reimaging program in preferred marketing areas
o pursue initiatives to further reduce operating expenses and boost margins
o achieve top competitive performance in each market.
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In addition to the retail initiatives, Caltex has created specialized
business units that are helping Caltex' operating companies position themselves
for larger shares of the high-growth markets for lubricating oils and greases,
aviation fuels, and LPG. Caltex conducts international crude oil and petroleum
product logistics and trading operations from a subsidiary in Singapore.
Affiliates in South Korea and Japan are active in the petrochemicals business.
Their plants convert lower-value refinery output into products such as
polypropylene, benzene and paraxylene, thus providing Caltex with the
opportunity to market a wider range of higher value products.
Caltex has been an active participant in the Asia-Pacific region for many
years. This region is comprised of mature and growth markets. Caltex has
followed strategies to compete aggressively in mature markets, such as Japan,
Hong Kong, Singapore, Australia, New Zealand and South Africa. Caltex is also
active in such developing countries as Malaysia, Thailand, the Philippines and
South Korea. Caltex is also actively pursuing opportunities in less developed
countries where demand growth is expected to strengthen, such as Vietnam, Laos,
Cambodia, Sri Lanka, India, and portions of Central and East Africa.
Caltex refines, markets, transports and trades crude oil and products in
the Middle East and eastern and South Africa. In South Africa, Caltex has been
the brand leader in gasoline sales for many years, with about 1,100 retail
outlets. Caltex operates a wholly-owned 112,000 BPD refinery in Capetown.
GLOBAL GAS MARKETING
Texaco Natural Gas - North America (TNG) is a fully integrated midstream
organization that offers a wide range of services including gas gathering,
processing, transportation, storage, sales and purchases, and risk management
for natural gas and natural gas liquids. TNG's primary objective is to grow
shareholder worth by extracting value across the entire energy value-chain -
from the wellhead to the burner tip.
The majority of TNG's assets are strategically located in the U.S. Gulf
Coast area. TNG owns and operates one of the largest producer-owned gas pipeline
systems in the U.S. consisting of more than 1,600 miles of pipe with over 50
interconnects to other intrastate and interstate pipelines. The system is made
up of three pipeline companies: Sabine Pipeline Company, Bridgeline Gas
Distribution LLC, and Discovery Gas Transmission LLC.
Sabine Pipeline features an open-access interstate natural gas pipeline
that extends from Port Arthur, Texas, to the Henry Hub near Erath, Louisiana.
The Henry Hub is the official delivery mechanism for the New York Mercantile
Exchange's natural gas futures contracts. This is due in large part to Sabine's
reputation for service, flexibility and reliability.
Bridgeline Gas Distribution LLC is an intrastate pipeline system that
extends across South Louisiana from Lake Charles to New Orleans. Bridgeline
connects distribution companies, electric utilities, and over 60 industrial
end-users and satisfies more than 34% of Louisiana's natural gas demand through
sales, transportation, and storage services. It also connects to 10 major
interstate and four intrastate pipelines in the region, providing open-access
transportation and storage services. Bridgeline access allows customers the
flexibility to take their gas to the highest value markets. Attached to the
Bridgeline system is a natural gas storage cavern with over 3 billion cubic feet
of working capacity. Bridgeline's Sorrento Storage Facility acts as a "shock
absorber" in the Gulf Coast to help balance supply and demand, enabling TNG to
meet a variety of customers' needs on short notice. An additional 3 billion
cubic feet of working capacity will be available for lease beginning in 2000.
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The recent start-up of Discovery Gas Transmission, a major natural gas
gathering and transmission pipeline in the offshore waters of the Gulf of
Mexico, will allow us to add significant value from this core area in the Gulf.
The 30-inch pipeline stretches for 105 miles into the Gulf with numerous
laterals to deepwater drilling fields and provides crucial capacity to a
currently under-served area. The project also includes a gas processing plant in
Larose, Louisiana, giving Gulf Coast producers a convenient means for gathering,
processing, and transporting their gas to market. In addition, Discovery is
installing a 42,000-barrel-a-day fractionator at the site of our Paradis gas
processing plants. We hold a one-third ownership interest in the Discovery
affiliate, with the Williams Companies and British-Borneo.
In addition to the Larose gas processing plant, TNG operates five natural
gas processing plants located in South Louisiana, which have a combined capacity
of 1.2 billion cubic feet a day. TNG also has an ownership interest in six other
plants. These assets strategically position TNG to take advantage of the
significant influx of natural gas, which we expect from deepwater developments
in the Gulf of Mexico.
TNG also has substantial natural gas liquid (NGL) assets in the state of
Louisiana. Texaco Expanded NGL Distribution System (TENDS) is currently being
constructed to further leverage our strategic position in South Louisiana to
take advantage of the increasing volumes of rich gas coming on shore over the
next few years from deepwater developments. This system integrates newly
constructed and purchased pipelines with our existing assets. The result is an
integrated bi-directional natural gas liquid pipeline, fractionation, and
underground storage system with a combined pipeline length of about 500 miles,
extending from Lake Charles to Alliance, Louisiana. The TENDS project has
already provided a platform for expansion of our Louisiana infrastructure
through numerous new connections and opportunities. One example is the recently
announced joint venture with Dynegy Inc. to combine certain pipeline assets.
These combined assets will provide the first avenue to move NGLs from a
saturated market in Louisiana to Mont Belvieu, Texas, 290 miles to the west,
thus allowing producers to receive higher value for their products.
The NGL Marketing Group transports and markets NGLs throughout the world,
although its primary focus is in North America. With sales averaging nearly
400,000 barrels a day, TNG is one of the largest marketers of NGLs in the
industry. Marketing of propane to wholesale customers in the U.S. has been a
large contributor to the bottom line of this business for many years.
In Ferndale, Washington, the NGL Marketing Group operates the largest NGL
export terminal on the West Coast. This facility includes 750,000 barrels of
storage for butane and propane. Drawing on product from Canada and local
refineries, this terminal provides strategic access to markets in the Pacific
Rim.
The NGL Marketing Group markets 3.8 billion cubic feet per day of equity
and third party gas to major North American utilities, industrial customers, and
other marketing/trading companies. TNG ensures that Texaco receives the highest
netback price for its equity production as well as making sure that the gas can
flow. This unit provides customized and comprehensive risk management and other
financial tools to enable customers and suppliers to structure deals consistent
with their specialized needs. TNG also leases natural gas storage in strategic
locations to take advantage of price arbitrage as well as handle production
fluctuations. Further, TNG provides fuels management services to a number of the
cogeneration partnerships in which we have interests.
Internationally, we exited our UK wholesale gas marketing business in late
1998. Also, during March 1999, we completed the sale of our UK retail gas
marketing business.
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GLOBAL GAS AND POWER
Our Texaco Global Gas & Power unit develops, designs, markets, engineers,
finances, owns and operates cogeneration, private power and integrated
combined-cycle (IGCC) projects for the electric power, refining and chemical
industries worldwide. We can leverage our expertise in all aspects of fuels
management and power project development and operation to bring forward projects
utilizing a wide array of fuels.
Gasification
Our gasification technology converts hydrocarbon feedstocks into a synthesis
gas (syngas) that is comprised of hydrogen and carbon monoxide. The syngas can
be used as a feedstock
for other chemical processes or as a fuel to a gas turbine to produce power. We
license this technology, develop and own power and chemical projects using the
technology, and operate gasification facilities.
Recognized as a world leader in gasification technology, our proprietary
Texaco Gasification Process (TGP) is in operation or under construction at 68
plants in the refining, chemical and power generation sectors worldwide. Syngas
production at these facilities exceeds 5.1 billion standard cubic feet per day.
TGP projects that have recently been, or are soon to be, completed include:
o In Florida, Tampa Electric Company is licensing our IGCC technology for its
250-megawatt coal-fired power plant.
o In China, there are currently nine TGP plants in operation and three under
construction, each producing syngas for chemical production. TGP's success
in China has led to the signing of a multi-plant agreement with Sinopec and
the former Ministry of Chemical Industry to retrofit an additional nine
plants that are currently using competitive technology.
o The $350 million Delaware Clean Power Project at Motiva's Delaware City
Refinery will use TGP in the world's cleanest process for producing power
(steam and electricity) from petroleum coke.
o Three Italian refineries are constructing large, world-class IGCC power
plants (we have taken a 24% equity interest in one of them). These TGP
units will enable the refineries to convert high-sulfur residues into
higher-value products such as hydrogen, electricity and steam that are used
within the refineries or sold, if surplus to the refineries' needs. TGP
will provide these refineries with wider flexibility with respect to crude
selection, which can provide substantial financial savings, while
minimizing wastes at these plants.
o In countries around the world, TGP is proving to be an ideal solution for
the beneficial use of many waste materials and a significantly more
attractive option than incineration or landfilling.
Power Generation
Our power business includes conventional power generation and cogeneration
of power and steam from a single facility. We also develop, operate and invest
in power projects.
Cogeneration is a process that produces two useful forms of energy from a
single fuel, such as natural gas. The energy products are thermal energy, such
as steam, and electric power. Whether applied in a refinery or to steamflood a
heavy oil field, cogeneration boosts profitability by improving efficiency. In
the narrower context of producing oil, cogeneration is the most efficient way to
generate the steam required for steamflooding.
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To date, our largest U.S. cogeneration operations have burned natural gas
to produce heat for steamflooding our Kern River oil field in California while
simultaneously generating electricity. We are now adding to the list of 10
cogeneration facilities we presently operate with our partners in the U.S. These
facilities, in combination, produce enough electricity to power more than one
million homes. Including projects under construction or development in which we
have an equity share, our cogeneration portfolio exceeds 2,000 megawatts. The
new projects include:
o San Pascual Cogeneration, a 50-50 joint venture with Edison Mission Energy,
will build the largest cogeneration plant in the Philippines. The $400
million, 304-megawatt facility will supply steam to an adjacent Caltex
refinery and an industrial complex owned by United Coconut Chemicals Inc.,
and sell electricity to a Philippine utility company.
o P.T. Caltex Pacific Indonesia, our joint venture with Chevron, and a
private partner are building the largest cogeneration plant of its kind in
Indonesia. The $190 million, 300-megawatt gas-fired plant will supply power
and steam for use in steamflooding the Duri field in Indonesia's Central
Sumatra.
Through our gasification and cogeneration businesses, we are currently
involved in power projects, either directly or indirectly, that will produce
over 8,200 megawatts of power.
International Marketing & Business Development
Our International Marketing & Business Development division was formed in
1996 to pursue natural gas related opportunities in emerging markets throughout
the world. Initially, the division focused its activities around equity gas and
the need for viable commercialization solutions. While the original mission has
not changed, it has broadened to include the pursuit of midstream and downstream
market-driven gas and power initiatives.
Three strategies provide a basis for the pursuit of energy opportunities
around the globe. First and foremost is the desire to commercialize and
successfully market our equity gas reserves. Areas of focus include Colombia,
Kazakhstan, Angola, Trinidad, Venezuela, Poland and Australia. Since many of
these reserves are in remote locations, our challenge is to maximize the
profitability of the gas, through pipeline transportation, electric power, or
enhanced gas processing technology.
Highlights from 1998 include our completion of a study to determine an
alternative to flaring Nigerian gas reserves. We also finalized fully integrated
gas and power business plans for our reserves in Colombia and Trinidad.
Our second strategy is to apply combined midstream expertise to create new
market outlets for natural gas and electric power. Key targeted markets are
Brazil, Southeast Asia, Mexico and Saudi Arabia. In 1998, we and our partners
were awarded a competitive bid to build, own and operate a 240-megawatt power
plant in northeast Brazil.
Our final strategy is to deliver and enhance gas-related technologies,
specifically gas-to- liquids technology, to increase value to the corporation.
To do so, we have undertaken the strategic initiative to commercialize remote
gas reserves as well as add value to heavy oil producing and refining operations
through deployment of Fisher-Tropsch technology. In 1998, a significant and
exclusive licensing agreement was executed with Rentech Inc., which will allow
us to produce environmentally friendly transportation fuels and supply specialty
petroleum products. Additionally, the Rentech agreement creates more
opportunities for commercial deployment of our gasification process.
In a low-price crude oil environment, our gas-to-liquids strategy is to
promote commercial deployment of the best technology options through cooperative
efforts with the other technology companies. Potential areas for commercial
deployment include Latin America, the West Coast of Africa, Eurasia and the
Middle East.
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TECHNOLOGY
Technology is changing our industry -- and we are leading this change and
capturing greater value. Below are a few key examples of how we are leveraging
our technologies to create increased value.
Three-Dimensional Visualization
In 1998, we used our industry-leading three-dimensional (3D) visualization
seismic technology to help us make a major discovery offshore Nigeria. The same
technology enabled us to reduce the cycle time for this well to approximately
1.5 years from lease awarding to discovery. Separately, we found a way to
leverage our 3D technology to manage heat in steamflood operations to increase
production while reducing costs. In the Kern River oil field in California, we
expect that this technology application will lead to increased reserves and
higher value for us. The same technology is planned for our Duri Field in
Indonesia. We have expanded this competitive advantage and now have two
specially built centers in Bakersfield, California, and Bellaire, Texas. We are
also building two other centers in Rumbai and Duri, Indonesia.
Texaco Energy and Environmental Multispectral Imaging Spectrometer (TEEMS)
TEEMS is an airborne, hyperspectral sensor with unique capability for
identification and mapping of substances on the ground, including natural oil
seeps, soil types, vegetation types, rock types, minerals, soil moisture and
water quality. We couple the optical system with imaging radar for
high-resolution mapping of surface structure and surface texture. The TEEMS
system is installed in a twin-engine aircraft with worldwide operational
capability. The result is a world leading capability for our exploration and
environmental business needs.
Surface structure mapping with TEEMS provides insights into subsurface
geometry, allowing rapid structural highgrading of prospective trends and
efficient seismic program planning. A major driving force behind TEEMS'
development, now a proven capability, is the system's ability to detect very
minor concentrations of natural hydrocarbons disseminated in rock, soil, and
vegetation. Such natural "microseeps," invisible to the human eye and
undetectable by any other known remote sensing system, are valuable clues to the
location of oil and gas reservoirs. In environmental applications, TEEMS
provides unparalleled detail about surface conditions for establishing
environmental baselines, monitoring production operations, and managing
pipelines.
We have completed two projects using TEEMS in 1998 -- the first in
Colombia, the second in the PNZ. In Colombia, the use of TEEMS resulted in $28
million cost savings. In the PNZ, we used TEEMS data to identify and high-grade
exploration leads and to plan our seismic programs.
TEEMS also is proving to be a highly effective "technology currency" in
establishing us as a preferred partner, as we seek new upstream relationships
and business opportunities. Governments view TEEMS as a very valuable technology
available only from Texaco. Potential industry partners view TEEMS as a
mechanism for cost savings and as a competitive advantage in defining
prospective trends.
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Vertical Cable Seismic Technology
Adapting a technology that has its roots in submarine tracking systems used
during the Cold War, we are using our proprietary vertical cable seismic
technology to find hydrocarbons and cut our field development costs in complex
geological formations from the North Sea to the Gulf of Mexico. The data from
these formations can be translated into 3D images that are much more accurate
than those derived from the best conventional techniques. The collection of this
data is also cheaper than competing technologies. In fact, vertical cable
technology is currently enabling us to develop a field with the potential of 70
million to 100 million barrels in the deepwater Gulf of Mexico that would not
have been identified with the best alternative seismic technology. As the
application of this technology evolves, we will continue to increase our chances
of finding hydrocarbons, use people and equipment more effectively and reduce
costs of field development.
Multilateral Drilling
Our involvement in the MoBpTeCh (Mobil, BP, Texaco and Chevron) Cooperative
is yielding major advances in multilateral drilling opportunities, which we are
applying in offshore West Africa. Multilateral drilling enables us to extract
oil and gas from all levels of a multiple reservoir, boosting our production
while drilling fewer holes and reducing costs and risks. Through collaborations
such as MoBpTeCh, we are able to solve very formidable technological problems at
a reduced cost and share scarce, high-quality resources.
Technology Leadership Recognition
Our technology programs received two prestigious awards in the past year.
The first recognized our leadership in the formation and operation of the
DeepStar Consortium. This consortium has participants from all major offshore
upstream companies and service organizations. The collaboration provided by
DeepStar has led to a fundamental understanding of the impediments to fluid flow
and the effects of temperature on the process of moving oil from subsea wells to
a processing platform many miles away in more shallow water. This understanding
not only accelerates the development of Gulf of Mexico opportunities, but can be
applied to deepwater prospects in the waters off Great Britain, Brazil and
Nigeria. Texaco's team is being recognized by the offshore industry at the next
Offshore Technology Conference.
For the second award, our creativity and innovation were recognized by
Harts Publications. We received this recognition for the development and
application of unique technologies that improve the economics of oil production
by reducing the production of associated water. We developed and applied a
system that separates the oil and water in the wellbore and disposes of the
water before it reaches the surface. Simultaneously, it produces the oil to the
surface, thereby reducing the treating and handling expenses. The results to
date have improved our profitability and provided us with an environmental
advantage.
Technology at Work in the Downstream
Our commitment to advances in our downstream business is exemplified by the
success of our extended-life motor-vehicle coolants. These products, which our
scientists formulated from mixtures of carboxylic acids, have increased
protection capability for heavy-duty vehicles by up to 600,000 miles and keep
cars going strong for at least 150,000 miles without a change. Today, our
extended-life coolants are in new cars built by General Motors in the U.S., Ford
and Renault in Europe, and in Caterpillar heavy-duty engines worldwide.
20
<PAGE>
ADDITIONAL INFORMATION CONCERNING OUR BUSINESS
Research Expenditures
Worldwide expenditures of Texaco Inc. and subsidiary companies for
research, development and technical support amounted to approximately $138
million in 1998, $147 million in 1997 and $139 million in 1996.
Environmental Expenditures
Information regarding capital environmental expenditures of Texaco Inc. and
subsidiary companies, including equity in affiliates, during 1998, and
projections for 1999 and 2000, for air, water and solid waste pollution
abatement, and related environmental projects and facilities, is incorporated
herein by reference from pages 38 and 39 of Texaco Inc.'s 1998 Annual Report to
Stockholders.
Employees
The number of employees of Texaco Inc. and subsidiary companies as of
December 31, 1998 totaled 24,628 and, as of December 31, 1997 totaled 29,313.
In January 1998, approximately 4,300 employees, mostly service station
employees, were transferred to Equilon (see page 12). Further, during the second
quarter of 1999, we expect to transfer to Equilon about 4,100 operating and
support employees.
Sales to Significant Affiliates
Sales by Texaco Inc. and subsidiary companies to significant affiliates
totaled $4,169 million in 1998, $3,633 million in 1997 and $3,867 million in
1996.
Geographical Financial Data
Information regarding geographical financial data of Texaco Inc. and
subsidiary companies appears in Note 1, Segment Information, on pages 49 and 50
of Texaco Inc.'s 1998 Annual Report to Stockholders.
Incorporation by Reference
We have incorporated some data and information appearing in our 1998 Annual
Report to Stockholders into Items 1, 2, 3, 5, 6, 7, 8 and 14 of this Form 10-K.
No other data and information in our Annual Report to Stockholders is
incorporated by reference into, or filed as part of, this Annual Report on Form
10-K.
21
<PAGE>
FORWARD-LOOKING STATEMENTS AND
FACTORS THAT MAY AFFECT OUR BUSINESS
This Form 10-K may contain or incorporate by reference to other documents
"forward-looking statements" that are based on our current expectations,
estimates, projections, beliefs and assumptions about our company and the
industries in which we operate. We use words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "potential," and similar
expressions to identify such forward-looking statements. Section 27A of the
Securities Act of 1933 protects us from liability in private actions under the
Securities Act based on "forward-looking statements" which later prove to be
inaccurate. We have based our forward-looking statements on a number of
assumptions, any or all of which could ultimately prove to be inaccurate. We
cannot predict with any certainty the overall effect of changes in these
assumptions on our business. Following are some of the important factors that
could change these assumptions and that could adversely affect our business:
Business Risks
o incorrect estimation of reserves
o inaccurate seismic data
o mechanical failures
o decreased demand for motor fuels, natural gas and other products
o above-average temperatures
o pipeline failures
o oil spills
o worldwide and industry economic conditions
o inaccurate forecasts of crude oil, natural gas and petroleum product prices
o increasing price and product competition
o higher costs, expenses and interest rates
o the outcome of pending and future litigation and governmental proceedings
o continued availability of financing
o strikes and other industrial disputes.
Laws, Regulations and Legislation. In the U.S. and other countries in which
we operate, various laws and regulations that affect the petroleum industry are
either now in force, in standby status or under consideration, dealing with such
matters as:
o production restrictions
o import and export controls
o price controls
o crude oil and refined product allocations
o refined product specifications
o environmental, health and safety regulations
o retroactive and prospective tax increases
o cancellation of contract rights and concessions by host governments
o expropriation of property
o divestiture of operations
o foreign exchange rate changes and restrictions as to convertibility of
currencies
o tariffs and other international trade restrictions.
22
<PAGE>
Year 2000 Compliance. Factors that could affect our ability to be Year 2000
compliant by the end of 1999, include:
o the failure of our customers, suppliers, governmental entities and others
to achieve compliance and the inaccuracy of certifications received from
them
o our inability to identify and remediate every possible problem
o a shortage of necessary programmers, hardware and software.
Euro Conversion. Factors that could alter the financial impact of our euro
conversion include:
o changes in current governmental regulations and interpretations of such
regulations
o unanticipated implementation costs
o the effect of the euro conversion on product prices and margins.
We have no obligation to publicly update our forward-looking statements,
whether they become inaccurate as a result of new information, future events or
otherwise.
23
<PAGE>
Item 3. Legal Proceedings
Litigation--We have provided information about legal proceedings pending
against Texaco Inc. and subsidiary companies in Note 16, "Other Financial
Information, Commitments and Contingencies - Litigation" on page 68 of our 1998
Annual Report to Stockholders. Note 16 is incorporated here by reference.
The Securities and Exchange Commission ("SEC") requires us to report
proceedings that were instituted or contemplated by governmental authorities
against us under laws or regulations relating to the protection of the
environment. None of these proceedings is material to our business or financial
condition. Following is a brief description of those proceedings that were
either pending as of December 31, 1998, or settled during the fourth quarter of
1998.
o On June 9, 1992, the U.S. Environmental Protection Agency ("EPA"), Region
VI, served an administrative complaint on Texaco Chemical Company ("TCC").
The complaint alleges that TCC violated the State Implementation Plan at
its Port Neches, Texas chemical plant. We sold TCC to Huntsman Corporation
on April 21, 1994, and, by agreement, we retained obligations applicable to
events occurring at the plant prior to the closing date. The EPA is seeking
civil penalties of $149,000.We are contesting liability.
o On December 28, 1992, the EPA, Region VI served an administrative complaint
on TCC. The complaint alleged hazardous waste, PCB, release notification
and reporting violations at TCC's Port Neches chemical plant. The EPA is
seeking civil penalties of $3.8 million and corrective action. We are
contesting liability and agreed with the EPA to consolidate this complaint
with the June 9, 1992 complaint, described above. The consolidated matter
is pending before an EPA administrative law judge.
o On February 22, 1996, the Los Angeles Air Quality Management District
issued a notice of violation of air quality regulations to Texaco Refining
and Marketing Inc. ("TRMI"), a wholly-owned subsidiary, in connection with
refrigerant use and maintenance at the Los Angeles refinery owned by TRMI
prior to TRMI's transfer of the refinery to Equilon.
Penalties may exceed $100,000.
o In March 1998, the U.S. Department of Justice ("DOJ") filed a complaint
against us regarding spills of oil and produced water at the Aneth
Producing Field in Utah in violation of the Clean Water Act. The DOJ is
seeking a penalty of approximately $2.3 million. We are contesting
liability.
o We settled with the DOJ a suit filed by the DOJ against Texaco Trading and
Transportation Inc., a wholly-owned subsidiary, in connection with spills
along pipelines in Kansas in 1991.
o We settled with the EPA a September 1996 notice of violation from the EPA.
The notice alleged that TRMI violated the Clean Air Act New Source
Performance Standard and Emergency Planning and Right-To-Know Act at the
Bakersfield Plant owned by TRMI prior to TRMI's transfer of the Plant to
Equilon.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
24
<PAGE>
Executive Officers of Texaco Inc.
The executive and other elected officers of Texaco Inc. as of March 1, 1999
are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter I. Bijur................... 56 Chairman of the Board and Chief Executive Officer
C. Robert Black.................. 63 Senior Vice President
Patrick J. Lynch................. 61 Senior Vice President and Chief Financial Officer
John J. O'Connor ............... 52 Senior Vice President
Glenn F. Tilton ............... 50 Senior Vice President
Stephen M. Turner................ 59 Senior Vice President
William M. Wicker ............... 49 Senior Vice President
Clarence P. Cazalot, Jr.......... 48 Vice President
Eugene G. Celentano.............. 60 Vice President
Claire S. Farley................. 40 Vice President
James R. Metzger................. 51 Vice President
Robert C. Oelkers................ 54 Vice President and Comptroller
Deval L. Patrick................. 42 Vice President and General Counsel
Elizabeth P. Smith............... 49 Vice President
Robert A. Solberg................ 53 Vice President
Janet L. Stoner.................. 50 Vice President
Kjestine M. Anderson............. 45 Secretary
Michael N. Ambler................ 62 General Tax Counsel
James F. Link.................... 54 Treasurer
</TABLE>
For more than five years, each of the above listed officers of Texaco Inc.,
except for Messrs. Wicker, O'Connor and Patrick, has been actively engaged in
the business of Texaco Inc. or one of its subsidiary or affiliated companies.
Effective August 1, 1997, Mr. Wicker joined Texaco as a Senior Vice
President of Texaco Inc. for Corporate Development. During the eight years prior
to joining Texaco, Mr. Wicker had been with First Boston and Credit Suisse First
Boston, most recently as the Managing Director and Co-Head of the Global Energy
Group for Credit Suisse First Boston. Prior to this, Mr. Wicker served as Senior
Vice President of Kidder Peabody & Co.'s Energy Group and from 1983 to 1987 as a
consultant with McKinsey & Co.'s energy practice.
Effective January 1, 1998, Mr. O'Connor joined Texaco as a Senior Vice
President of Texaco Inc. and President of Worldwide Exploration and Production.
Prior to joining Texaco, Mr. O'Connor, since 1994, was Chief Executive Officer
of BHP Petroleum in Melbourne, Australia, the oil and gas exploration division
of Broken Hill Proprietary Company, Ltd. Mr. O'Connor also was a Director of
Broken Hill Proprietary Company, Ltd. Prior to joining BHP, Mr. O'Connor was
with Mobil Oil Corporation for 26 years.
Effective February 8, 1999, Mr. Patrick joined Texaco as Vice President and
General Counsel. Prior to joining Texaco, Mr. Patrick had been a partner with
the Boston law firm of Day Berry & Howard LLP since 1997. Mr. Patrick was also
Assistant Attorney General of the United States and chief of the U.S. Justice
Department's Civil Rights Division from 1994-97, where he was responsible for
enforcing federal laws prohibiting discrimination.
Effective April 1, 1999, Mr. Oelkers will become President of Texaco
International Trader Inc., while remaining a Vice President of Texaco Inc. Also
effective April 1, 1999, Mr. George J. Batavick will become Comptroller of
Texaco Inc. Effective May 1, 1999, Mr. Black will retire from Texaco.
There are no family relationships among any of the officers of Texaco Inc.
25
<PAGE>
PART II
The following information, contained in Texaco Inc.'s 1998 Annual Report to
Stockholders, is incorporated herein by reference. Page references are to the
paper document version of Texaco Inc.'s 1998 Annual Report to Stockholders, as
provided to stockholders:
<TABLE>
<CAPTION>
Texaco Inc.
1998
Annual Report
to Stockholders
Form 10-K Item Page Reference
-------------- --------------
<S> <C>
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 81 (a)
Item 6. Selected Financial Data
Five-Year Comparison of Selected Financial Data 78
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24-40
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Supplemental Market Risk Disclosures 76
Item 8. Financial Statements and Supplementary Data
Description of Significant Accounting Policies 41-42
Statement of Consolidated Income 43
Consolidated Balance Sheet 44
Statement of Consolidated Cash Flows 45
Statement of Consolidated Stockholders' Equity 46-47
Statement of Consolidated Nonowner Changes in Equity 48
Notes to Consolidated Financial Statements 49-68
Report of Independent Public Accountants 69
Supplemental Oil and Gas Information 70-75
Selected Quarterly Financial Data 77
------------
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Not applicable.
<FN>
(a) Only the data and information provided under the caption "Common
Stock-Market and Dividend Information" is deemed to be filed as part of
this Annual Report on Form 10-K.
</FN>
</TABLE>
26
<PAGE>
PART III
The following information, contained in Texaco Inc.'s Proxy Statement dated
March 16, 1999 relating to our 1999 Annual Meeting of Stockholders, is
incorporated herein by reference. Except as indicated under Items 10, 11, 12 and
13, no other data and information appearing in this Proxy Statement are deemed
to be filed as part of this Annual Report on Form 10-K. Page references are to
the paper document version of Texaco Inc.'s 1999 Proxy Statement, as provided to
stockholders:
<TABLE>
<CAPTION>
Texaco Inc.
March 16, 1999
Proxy Statement
Form 10-K Item Page Reference
-------------- --------------
<S> <C>
Item 10. Directors and Executive Officers of the Registrant
--The Board of Directors
Governance, Committees and Compensation of Directors 3-7
--Security Ownership of Directors and Management 9
--Item 1- Election of Directors 10-13
Item 11. Executive Compensation
--The Board of Directors
Compensation of Directors 7
--Summary Compensation Table 22
--Option Grants in 1998 23-25
--Aggregated Option Exercises in 1998 and Year-End Option Values 26
--Retirement Plan 27
Item 12. Security Ownership of Certain Beneficial Owners and Management
--Voting of Shares 2
--Security Ownership of Directors and Management 9
Item 13. Certain Relationships and Related Transactions
--Transactions With Directors and Officers 7-8
</TABLE>
27
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following information, contained in Texaco Inc.'s 1998 Annual Report to
Stockholders, is incorporated herein by reference. Page references are to the
paper document version of Texaco Inc.'s 1998 Annual Report to Stockholders, as
provided to stockholders:
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Texaco Inc.
1998
Annual Report
1. Financial Statements (incorporated by reference from the indicated to Stockholders
pages of Texaco Inc.'s 1998 Annual Report to Stockholders): Page Reference
---------------
<S> <C>
Description of Significant Accounting Policies................................ 41-42
Statement of Consolidated Income for the three years
ended December 31, 1998.................................................... 43
Consolidated Balance Sheet at December 31, 1998 and 1997...................... 44
Statement of Consolidated Cash Flows for the three years
ended December 31, 1998 .................................................... 45
Statement of Consolidated Stockholders' Equity
for the three years ended December 31, 1998................................. 46-47
Statement of Consolidated Nonowner Changes in Equity
for the three years ended December 31, 1998 ............................. 48
Notes to Consolidated Financial Statements.................................... 49-68
Report of Independent Public Accountants...................................... 69
</TABLE>
2. Financial Statement Schedules
We have included on page 31 of this Annual Report on Form 10-K Financial
Statement Schedule II, Valuation and Qualifying Accounts.
We have filed as part of this Annual Report on Form 10-K the following sets
of financial statements, for which we use the equity method of accounting:
o Caltex Group of Companies Combined Financial Statements
o Equilon Enterprises LLC Consolidated Financial Statements
o Motiva Enterprises LLC Financial Statements.
Financial statements and schedules of certain affiliated companies have
been omitted in accordance with the provisions of Rule 3.09 of Regulation S-X.
Financial Statement Schedules I, III, IV and V are omitted as permitted
under Rule 4.03 and Rule 5.04 of Regulation S-X.
3. Exhibits
-- (3.1) Copy of Restated Certificate of Incorporation
of Texaco Inc., as amended to and including March 2,
1999, including Certificate of Designations,
Preferences and Rights of Series B ESOP Convertible
Preferred Stock, Series D Junior Participating
Preferred Stock and Series G, H, I and J Market
Auction Preferred Shares.
-- (3.2) Copy of By-Laws of Texaco Inc., as amended to and
including July 26, 1998.
-- (4) Instruments defining the rights of holders of long-
term debt of Texaco Inc. and its subsidiary
companies are not being filed, since the total
amount of securities authorized under each of such
instruments does not exceed 10 percent of the total
assets of Texaco Inc. and its subsidiary companies
on a consolidated basis. Texaco Inc. agrees to
furnish a copy of any instrument to the Securities
and Exchange Commission upon request.
-- (10(iii)(a)) Form of severance agreement between Texaco Inc. and
elected officers of Texaco Inc.
-- (10(iii)(b)) Employment agreement dated December 30, 1997,
between Texaco Inc. and Mr. John J. O'Connor, Senior
Vice President of Texaco Inc.
28
<PAGE>
-- (10(iii)(c)) Employment agreements dated July 18, 1997, between
Texaco Inc. and Mr. William M. Wicker, Senior Vice
President of Texaco Inc.
-- (10(iii)(d)) Texaco Inc.'s 1997 Stock Incentive Plan,
incorporated herein by reference to Appendix A,
pages 39 through 44 of Texaco Inc.'s proxy statement
dated March 27, 1997, SEC File No. 1-27.
-- (10(iii)(e)) Texaco Inc.'s 1997 Incentive Bonus Plan,
incorporated herein by reference to Appendix A,
pages 45 and 46 of Texaco Inc.'s proxy statement
dated March 27, 1997, SEC File No. 1-27.
-- (10(iii)(f)) Texaco Inc.'s Stock Incentive Plan, incorporated
herein by reference to pages A-1 through A-8 of
Texaco Inc.'s proxy statement dated April 5, 1993,
SEC File No. 1-27.
-- (10(iii)(g)) Texaco Inc.'s Stock Incentive Plan, incorporated
herein by reference to pages IV-1 through IV-5
of Texaco Inc.'s proxy statement dated April 10,
1989 and to Exhibit A of Texaco Inc.'s proxy
statement dated March 29, 1991, SEC File No. 1-27.
-- (10(iii)(h)) Description of Texaco Inc.'s Supplemental Pension
Benefits Plan, incorporated herein by reference
to pages 8 and 9 of Texaco Inc.'s proxy statement
dated March 17, 1981, SEC File No. 1-27.
-- (10(iii)(i)) Description of Texaco Inc.'s Revised Supplemental
Pension Benefits Plan, incorporated herein by
reference to pages 24 through 27 of Texaco Inc.'s
proxy statement dated March 9, 1978, SEC File No.
1-27.
-- (10(iii)(j)) Description of Texaco Inc.'s Revised Incentive
Compensation Plan, incorporated herein by reference
to pages 10 and 11 of Texaco Inc.'s proxy statement
dated March 13, 1969, SEC File No. 1-27.
-- (12.1) Computation of Ratio of Earnings to Fixed Charges of
Texaco on a Total Enterprise Basis.
-- (12.2) Definitions of Selected Financial Ratios.
-- (13) Copy of those portions of Texaco Inc.'s 1998 Annual
Report to Stockholders that are incorporated herein
by reference into this Annual Report on Form 10-K.
-- (21) Listing of significant Texaco Inc. subsidiary
companies and the name of the state or other
jurisdiction in which each subsidiary was
organized.
-- (23.1) Consent of Arthur Andersen LLP.
-- (23.2) Consent of KPMG LLP.
-- (23.3) Consent of Independent Accountants of Equilon
Enterprises LLC.
-- (23.4) Consent of Independent Accountants of Motiva
Enterprises LLC.
-- (24) Powers of Attorney for the Directors and certain
Officers of Texaco Inc. authorizing, among other
things, the signing of Texaco Inc.'s Annual Report
on Form 10-K on their behalf.
-- (27) Financial Data Schedule.
(b) Reports on Form 8-K
During the fourth quarter of 1998, Texaco Inc. filed Current Reports
on Form 8-K relating to the following events:
1. October 21, 1998
Item 5. Other Events -- reported that Texaco issued an
Earnings Press Release for the third quarter and first
nine months of 1998.
2. November 30, 1998
Item 5. Other Events -- reported that Texaco and Shell
Europe Oil Products announced the termination of
discussions aimed at forming an alliance of their European
oil products marketing and manufacturing activities.
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders, Texaco Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in Texaco Inc. and subsidiary companies'
annual report to stockholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 25, 1999. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14 is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
New York, N.Y.
February 25, 1999
30
<PAGE>
<TABLE>
<CAPTION>
Schedule II
Texaco Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1998, 1997 and 1996
(In Millions of Dollars)
Balance at Additions-Charged Balance at
Beginning to Costs and End
Description of Year Expenses Deductions of Year
- ----------- ------- -------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
1998 Restructuring Program $ -- $115 $ 15 $100
==== ==== ==== ====
1996 Restructuring Program $ 20 $ -- $ 8 $ 12
==== ==== ==== ====
Year ended December 31, 1997
1996 Restructuring Program $ 72 $ 10 $ 62 $ 20
==== ==== ==== ====
Year ended December 31, 1996
1996 Restructuring Program $ -- $ 78 $ 6 $ 72
==== ==== ==== ====
<FN>
NOTE: Represents expense accruals, payments for employee separations and
special termination benefits, and curtailment costs.
</FN>
</TABLE>
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Harrison, State of New York, on the 25th day of March, 1999.
TEXACO INC.
(Registrant)
KJESTINE M. ANDERSON
By --------------------------------
(KJESTINE M. ANDERSON)
Secretary
Attest:
R. E. KOCH
By --------------------------------
(R. E. KOCH)
Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
PETER I. BIJUR ................Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
PATRICK J. LYNCH ..............Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
ROBERT C. OELKERS .............Vice President and Comptroller
(Principal Accounting Officer)
Directors:
A. CHARLES BAILLIE SAM NUNN
PETER I. BIJUR CHARLES H. PRICE, II
JOHN BRADEMAS CHARLES R. SHOEMATE
MARY K. BUSH ROBIN B. SMITH
WILLARD C. BUTCHER WILLIAM C. STEERE, JR.
EDMUND M. CARPENTER THOMAS A. VANDERSLICE
MICHAEL C. HAWLEY
FRANKLYN G. JENIFER
R. E. KOCH
By --------------------------------
(R. E. KOCH)
Attorney-in-fact for the above-named
officers and directors
March 25, 1999
32
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED FINANCIAL STATEMENTS
December 31, 1998
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998
INDEX
Page
----
General Information 1-6
Independent Auditors' Report 7
Combined Balance Sheet 8-9
Combined Statement of Income 10
Combined Statement of Comprehensive Income 10
Combined Statement of Stockholders' Equity 11
Combined Statement of Cash Flows 12
Notes to Combined Financial Statements 13-25
Note: Financial statement schedules are omitted as permitted by Rule 4.03 and
Rule 5.04 of Regulation S-X.
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
The Caltex Group of Companies (Group) is jointly owned 50% each by Chevron
Corporation and Texaco Inc. (collectively, the Stockholders) and was created in
1936 by its two owners to produce, transport, refine and market crude oil and
petroleum products. The Group is comprised of the following companies:
o Caltex Corporation (formerly Caltex Petroleum Corporation), a company
incorporated in Delaware that, through its many subsidiaries and
affiliates, conducts refining, transporting, trading, and marketing
activities in the Eastern Hemisphere;
o P. T. Caltex Pacific Indonesia, an exploration and production company
incorporated and operating in Indonesia; and,
o American Overseas Petroleum Limited, a company incorporated in the
Bahamas, that, through its subsidiary, provides services for and manages
certain exploration and production operations in Indonesia in which
Chevron and Texaco have interests, but not necessarily jointly.
A brief description of each company's operations and other items follows:
Caltex Corporation (Caltex)
- ---------------------------
Through its subsidiaries and affiliates, Caltex operates in approximately
60 countries, principally in Africa, Asia, the Middle East, New Zealand and
Australia. Caltex is involved in all aspects of the downstream business:
refining, distribution, shipping, storage, marketing, supply and trading
operations. At year-end 1998, Caltex had over 7,900 employees, of which
approximately 2% were located in the United States.
The majority of refining and certain marketing operations are conducted
through joint ventures. Caltex has equity interests in 13 refineries with equity
refining capacity of approximately 978,000 barrels per day. It continues to
improve its refineries with investments designed to provide higher yields and
meet environmental regulations. Additionally, it has interests in two lubricant
refineries, six asphalt plants, 17 lubricant blending plants and more than 500
ocean terminals and depots. Caltex also has an interest in a fleet of vessels
and owns or has equity interests in numerous pipelines. Its sales of crude oil
and petroleum products were in excess of 1.5 million barrels per day in 1998.
Caltex conducts international crude oil and petroleum product logistics and
trading operations from a subsidiary in Singapore, and is also active in the
petrochemical business, particularly in Japan and Korea.
Marketing
Caltex and its affiliates maintain a strong marketing presence through a
network of 8,000 retail outlets, of which 4,700 are branded as Caltex. It also
operates 425 Star Mart convenience stores, many of which anchor high-volume
station locations. Many stations include new ancillary revenue centers such as
quick-service restaurants, auto lube bays and brushless car washes. A
significant portion of the $1.8 billion that Caltex plans to invest over the
next three years is targeted to stimulate retail growth and continue the
roll-out of its new corporate and retail image introduced in 1996, focussing on
preferred marketing areas where the expenditures will provide the greatest
benefit to the business. Under-performing stations with poor prospects for
improvement are being eliminated.
During 1998, in response to major changes in the petroleum business,
increased competition, and partly due to the challenges created by the currency
and economic crisis in the Asia Pacific region, Caltex announced a change in
organizational structure from geographic to one modeled along functional
business lines, namely: marketing, refining, lubricants, trading, aviation, new
business development and business support. At the same time that it is
emphasizing managing its costs and improving its capital investment returns,
Caltex will use this functional focus to build or rebuild brand strength,
increase emphasis on convenience retailing, and maximize emerging business
opportunities. The new structure will position Caltex to seize opportunities
that will provide higher returns and strong long-term growth, focus on its
mission and respond to market developments more quickly, as well as place it in
a better position to serve customers, partners and suppliers more effectively.
The functional management structure is effective January 1, 1999.
1
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
Refining
Refining margins in 1998 were at their lowest level in more than ten years
due to worldwide oversupply of capacity, partly as a result of the economic
disruption in many of the Asian economies. By focusing on full utilization of
assets, cost reductions, cost-effective investment and initiatives to improve
efficiency and maintain the integrity of the refining assets, the operating
performance of the Group's refineries has continued to improve, mitigating to
some extent the effect of low margins.
During 1997, Caltex's 64% owned Thailand affiliate, Star Petroleum
Refining Company, Ltd. (SPRC), and Rayong Refining Company (RRC), an affiliate
of the Royal Dutch Petroleum Company, entered into a Memorandum of Understanding
to combine the operations of the two nearby refineries in order to achieve
significant economic benefits through increased efficiency and cost reduction.
During 1998, SPRC and RRC evaluated various proposed structures and synergies,
and conducted discussions with lenders to ensure proper approvals were obtained.
Tentative agreement has been reached to form a new entity, Alliance Refining
Company (ARC), which will be owned 32% each by Caltex and Shell and 36% by the
Petroleum Authority of Thailand (PTT) - a government entity. ARC will operate
the refineries and be responsible for ongoing maintenance and new construction.
Significant economic benefits are expected from this arrangement. Pending lender
and Thai cabinet approvals, binding agreements are expected to be signed and
operations commenced by ARC in the first half of 1999.
Over the period 1992-1996, SPRC capitalized certain start-up costs,
primarily organizational and training, related to refinery construction. These
costs were considered part of the effort required to prepare the refinery for
operations. With the issuance in 1998 of the American Institute of Certified
Public Accountants Statement of Position 98-5 - "Reporting on the Costs of
Start-up Activities", these costs would be accounted for as period expenses. The
Group has elected early adoption of this pronouncement effective January 1, 1998
and, accordingly, recorded a cumulative effect charge to income as of January 1,
1998 of $50 million representing the Group's share of these costs.
Corporate
Effective January 1, 1999, Caltex eliminated "Petroleum" from its name to
become Caltex Corporation. The change reflects the broader scope of activities
it is pursuing, particularly the rapidly growing Star Mart convenience stores
and other related services provided to its customers.
Concurrently, Caltex announced the relocation of its corporate senior
leadership team from Dallas, Texas, to Singapore. The leadership team will
reside within the primary operational area and be closer to its customers to
achieve a more timely and effective process of corporate governance. The
relocation will be completed during the first half of 1999.
Caltex recorded a charge to income of $86 million in 1998 for
restructuring and other related reorganization costs including special voluntary
and involuntary severance benefits (see Note 13 of Notes to Combined Financial
Statements).
P. T. Caltex Pacific Indonesia (CPI)
- ------------------------------------
CPI holds a Production Sharing Contract in Central Sumatra through the
year 2021. CPI also acts as operator in Sumatra for eight other petroleum
contract areas, with 33 fields, which are jointly held by Chevron and Texaco.
Exploration is pursued over an area comprising 18.3 million acres with
production established in the giant Minas and Duri fields, along with smaller
fields. Gross production from fields operated by CPI for 1998 was over 760,000
barrels per day. CPI entitlements are sold to its stockholders, who use them in
their systems or sell them to third parties. At year-end 1998, CPI had
approximately 5,900 employees, all located in Indonesia.
2
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
American Overseas Petroleum Limited (AOPL)
- ------------------------------------------
In addition to providing services to CPI, AOPL, through its subsidiary
Amoseas Indonesia Inc., manages geothermal and power generation projects for
Texaco's and Chevron's interests in Indonesia. At year-end, AOPL had
approximately 279 employees, of which 6% were located in the United States.
Economic Overview and Outlook
- -----------------------------
During the second half of 1997, many of the countries in the Pacific Rim
experienced major devaluations in their currencies compared to the U.S. dollar,
resulting in economic slowdowns throughout the area during 1998. The weak
economic conditions have negatively affected oil consumption. Although most of
the region is still experiencing economic contraction, the currencies themselves
have strengthened during 1998. There are some signs emerging of a general
stabilization in the economies of the region and there are indications of
economic recovery in some countries. The Group has significant operations
(either subsidiary or affiliate) in many of the affected countries (Korea,
Philippines, Singapore, Thailand, Malaysia, and Indonesia) which are material to
the Group's net income, cash flows and capital.
Environmental Activities
- ------------------------
The Group's activities are subject to various environmental, health and
safety regulations in each of the countries in which it operates. Such
regulations vary significantly in scope, standards and enforcement. The Group's
policy is to comply with all applicable environmental, health, and safety laws
and regulations as well as its own internal policies. The Group has an active
program to ensure that its environmental standards are maintained, which
includes closely monitoring applicable statutory and regulatory requirements, as
well as enforcement policies in each of the countries in which it operates, and
conducting periodic environmental compliance audits.
The environmental guidelines and definitions promulgated by the American
Petroleum Institute provide the basis for reporting the Group's expenditures.
For the year ended December 31, 1998, the Group, including its equity share of
affiliates, incurred total costs of approximately $138 million, consisting of
capital costs of $70 million and nonremediation related operating expenses of
$68 million. The major component of the Group's expenditures is for the
prevention of air and water pollution. As of December 31, 1998, the Group,
including its equity share of affiliates, had accrued $135 million for various
known remediation activities, including $114 million relating to the future cost
of restoring and abandoning existing oil and gas properties.
While the Group has provided for known environmental obligations that are
probable and reasonably estimable, the amount of future costs may be material to
results of operations in the period in which they are recognized. However, the
Group believes that future environmental expenditures will not materially affect
its financial position or liquidity.
Year 2000 Compliance
- --------------------
The Problem
The year 2000 problem (Y2K) relates to the inability of some computer
systems and other equipment ("systems") with embedded microchip technology to
correctly interpret and process date-sensitive data at certain key dates before,
during or after the year 2000. This could result in systems failures or
miscalculations, which could cause business disruptions. Due to the widespread
nature of this problem, the Group could be affected not only by failures of its
own systems, but also by failures of the systems of its customers, suppliers,
utilities and government entities that provide it with essential services.
3
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
Our state of readiness
Individual operating location (including major affiliates) Y2K teams and a
corporate level team were established in 1997 and early 1998. The corporate team
monitors and supports the individual locations and also evaluates progress
against the milestones outlined below. Y2K progress reports are presented
regularly to the Group management and the Stockholders.
A common rigorous process has been employed to identify, test, and
remediate systems affected by the Y2K problem and to achieve Y2K readiness. The
process consists of the following (in many cases overlapping) steps:
(1) Inventory - a list all systems and embedded microchip technology that
may have date-sensitive components - computer hardware and software, as
well as other embedded microchip systems.
(2) Business risk assessment - an assessment to determine the importance of
each system to the business including financial, operational,
environmental and safety impact.
(3) Y2K risk assessment - a determination of whether or not systems or
system components are Y2K compliant, firstly by obtaining vendor
compliance statements for all systems, then evaluating more detailed
vendor test results (for medium risk systems), and conducting our own
on site end-to-end tests (for high risk systems).
(4) Remediation and testing - remediation, testing and comprehensive
contingency plan preparation for high-risk systems.
The Group has essentially completed the inventory and business risk
assessments in its major operating areas. Most of the Y2K risk assessments are
also complete. Approximately 25-30% of the remediation and on site end-to-end
testing of high-risk systems has been performed as at February 1999, and it is
estimated that this will be completed between June - September 1999. This
includes major internal business support systems and various equipment (process
control etc) with embedded microchips. It also includes the readiness of
critical business chain partners (third party suppliers, and customers).
High-risk systems found to be Y2K non-compliant are being corrected primarily by
software/hardware upgrades and/or implementation of new systems. The Group
expects the remediation of high risk business systems will be essentially
complete by the end of 1999, however, remediation of lower risk systems may
continue into the year 2000 and beyond.
The determination of Y2K readiness of critical business chain partners has
proven to be the most challenging aspect of the Y2K program. While system
suppliers have been responsive to requests for compliance information, obtaining
responses from business chain partners on their state of readiness has been more
difficult. The Group representatives are meeting with those business chain
partners that have been identified as important to the business to determine
their state of readiness. If any critical business chain partners do not have
effective programs in place, additional contingency plans will be put in place
as necessary before the end of 1999.
Costs
The Group is using both dedicated internal and external resources in its
Y2K initiative. The total cost to address its Y2K issues is estimated at
approximately $57 million, of which approximately $15 million had been spent by
the end of 1998. These figures include work being undertaken to make compliant
some older financial and accounting systems, but do not include costs incurred
on system implementations or modifications where the primary reasons for such
are other than Y2K compliance. The Y2K project costs also include the corporate
project team, external contractors and consultants. Other internal costs such as
salaries, travel expenses, and other out of pocket costs of the operating
company teams are not included in this total.
4
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
Contingency Plans
Due to both the uncertain nature of the Y2K problem, and its
inflexible/absolute deadline, a strong emphasis has been placed on contingency
planning and preparation. Generally, in the normal course of business, the Group
has developed contingency plans to respond to equipment failures, emergencies
and business interruptions. However the Y2K issue increases the complexity of
such planning. Therefore, the Group is enhancing existing plans where possible,
and developing plans where necessary, specifically designed to mitigate the
financial and other impacts of potential high risk system Y2K related failures
and to allow it to carry on business despite possible failures. The Group
expects to complete and test, where appropriate, its contingency plans, with
particular emphasis on any unremediated (or remediated but untested) high risk
systems prior to the year 2000.
Risks
Certain risks related to the Y2K problem that could have a material
adverse effect on the Group's results of operations, liquidity and financial
condition include, but are not limited to, the failure to identify and remediate
significant Y2K problems; the failure to successfully implement contingency
plans in a timely manner; and failures by customers, suppliers, utilities and
government entities that provide essential services to correct their Y2K
problems. The dispersion of the Group's downstream operations in over 60
countries is expected to mitigate the risk of any potential widespread
disruption to its operations. The Group's upstream operations are located in
Indonesia, primarily on the islands of Sumatra and Java. Due to the isolated and
self sufficient nature of these operations, the potential risk of widespread
disruption to its exploration and production operations is also well mitigated.
The Group does not expect any unusual risks to public safety or the environment
resulting from potential Y2K related incidents at its facilities and operations.
The Group believes that the impact of any Y2K related failure in any of
its systems will most likely be localized and limited to specific facilities and
operations. Interruptions caused by such a failure could delay the Group in
being able to explore for, produce or transport hydrocarbons or steam, or
manufacture and deliver refined products to its customers for a short period.
The Group would not expect this to have a significant impact on its ability to
pursue its primary business objectives. While not expected, a worst case
scenario involving failure to address multiple high risk Y2K issues, including
failures to implement contingency plans in a timely manner, could materially
affect the Group's results of operations or liquidity in any one period. The
Group is currently unable to predict the aggregate financial or other
consequence of such potential interruptions.
The foregoing disclosure is based on the Group's current expectation,
estimates and projections, which could ultimately prove to be inaccurate.
Because of uncertainties, the actual effects of Y2K issues on the Group may be
different from its current assessment.
Supplemental Market Risk Disclosures
- ------------------------------------
The Group uses derivative financial instruments for hedging purposes.
These instruments principally include interest rate and/or currency swap
contracts, forward and option contracts to buy and sell foreign currencies, and
commodity futures, options, swaps and other derivative instruments. Hedged
market risk exposures include certain portions of assets, liabilities, future
commitments and anticipated sales. Positions are adjusted for changes in the
exposures being hedged. Since the Group hedges only a portion of its market risk
exposures, exposure remains on the unhedged portion. The Notes to the Combined
Financial Statements provide data relating to derivatives and applicable
accounting policies.
5
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
Debt and debt-related derivatives
The Group is exposed to interest rate risk on its short-term and long-term
debt with variable interest rates (approximately $2.0 billion and $1.9 billion,
before the effects of related net interest rate swaps of $0.5 billion and $0.4
billion, at December 31, 1998 and 1997, respectively). The Group seeks to
balance the benefit of lower cost variable rate debt, having inherent increased
risk, with more expensive, but less risky fixed rate debt. This is accomplished
through adjusting the mix of fixed and variable rate debt, as well as the use of
derivative financial instruments, principally interest rate swaps.
Based on the overall interest rate exposure on variable rate debt and
interest rate swaps at December 31, 1998 and 1997, a hypothetical change in the
interest rates of 2% would change interest expense by approximately $30 million
each year.
Crude oil and petroleum product hedging
The Group hedges a portion of the market risks associated with its crude
oil and petroleum product purchases and sales. The Group uses established
petroleum futures exchanges, as well as "over-the-counter" hedge instruments,
including futures, options, swaps, and other derivative products which reduce
the Group's exposure to price volatility in the physical markets.
As a sensitivity, a hypothetical 10% change in crude oil and petroleum
product prices would not result in a material loss on the outstanding
derivatives at the end of 1998 or 1997, in terms of the Group's financial
position, results of operations or liquidity.
Currency-related derivatives
The Group is exposed to foreign currency exchange risk in the countries in
which it operates. To hedge against adverse changes in foreign currency exchange
rates against the U.S. dollar, the Group sometimes enters into forward exchange
and options contracts. Depending on the exposure being hedged, the Group either
purchases or sells selected foreign currencies. The Group had net foreign
currency purchase contracts of approximately $370 million at December 31, 1998
and $417 million at December 31, 1997, to hedge certain specific transactions or
net exposures including foreign currency denominated debt. A hypothetical 10%
change in exchange rates against the U.S. dollar would not result in a net
material change in the Group's operating results or cash flows from the
derivatives and their related underlying hedged positions in 1998 or 1997.
Hedging Activities - New Accounting Standards
- ---------------------------------------------
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities", was issued by
the Financial Accounting Standards Board in 1998 and is effective for the Group
beginning January 1, 2000. SFAS No. 133 requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Changes
in the fair value of derivatives are to be recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and the type of exposure being hedged.
The Group believes the adoption of this standard will not have a material effect
on its results of operations or financial position.
Emerging Issues Task Force (EITF) 98-10, "Accounting for Energy Trading
and Risk Management Activities", is effective for 1999, and covers contracts
related to the purchase and sale of energy commodities prior to the effective
date of SFAS No. 133. This EITF consensus requires that energy contracts related
to trading activities should be marked to market with the gains and losses
included currently in net income. The Group believes adoption of this EITF
consensus will not have a material effect on its results of operations or
financial condition.
6
<PAGE>
[logo] KPMG LLP
200 Crescent Court
Suite 300
Dallas, TX 75201-1885
Independent Auditors' Report
----------------------------
To the Stockholders
The Caltex Group of Companies:
We have audited the accompanying combined balance sheets of the Caltex
Group of Companies as of December 31, 1998 and 1997, and the related combined
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
combined financial statements are the responsibility of the Group's management.
Our responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of the Caltex
Group of Companies as of December 31, 1998 and 1997 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 12 to the combined financial statements, the Group
changed its method of accounting for start-up costs in 1998 to comply with the
provisions of the AICPA's Statement of Position 98-5 - "Reporting on the Costs
of Start-up Activities".
KPMG LLP
Dallas, Texas
February 8, 1999
7
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
As of December 31,
----------------------
(Millions of dollars)
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents, including time deposits of
$17 in 1998 and $69 in 1997 $ 178 $ 282
Marketable securities 106 82
Accounts and notes receivable, less allowance for doubtful accounts of $31
in 1998 and $21 in 1997:
Trade 629 808
Affiliates 256 368
Other 194 360
-------- --------
1,079 1,536
Inventories:
Crude oil 167 127
Petroleum products 418 437
Materials and supplies 26 28
-------- --------
611 592
Deferred income taxes - 29
-------- --------
Total current assets 1,974 2,521
Investments and advances:
Equity in affiliates 2,254 2,035
Miscellaneous investments and long-term receivables,
less allowance of $21 in 1998 and $13 in 1997 109 116
-------- --------
Total investments and advances 2,363 2,151
Property, plant, and equipment, at cost:
Producing 4,386 4,058
Refining 1,319 1,272
Marketing 3,125 2,892
Other 15 13
-------- --------
8,845 8,235
Accumulated depreciation, depletion and amortization (3,747) (3,393)
-------- --------
Net property, plant and equipment 5,098 4,842
Prepaid and deferred charges 223 200
-------- --------
Total assets $ 9,658 $ 9,714
======== ========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
As of December 31,
------------------------
(Millions of dollars)
1998 1997
<S> <C> <C>
Current liabilities:
Short-term debt $ 1,475 $ 1,554
Accounts payable:
Trade and other 1,005 1,053
Stockholders 28 102
Affiliates 39 60
-------- --------
1,072 1,215
Accrued liabilities 181 138
Deferred income taxes 25 -
Estimated income taxes 86 84
-------- --------
Total current liabilities 2,839 2,991
Long-term debt 930 770
Employee benefit plans 122 106
Deferred credits and other noncurrent liabilities 1,130 1,050
Deferred income taxes 208 190
Minority interest in subsidiary companies 31 15
-------- --------
Total 5,260 5,122
Stockholders' equity:
Common stock 355 355
Capital in excess of par value 2 2
Retained earnings 4,151 4,342
Accumulated other comprehensive loss (110) (107)
-------- --------
Total stockholders' equity 4,398 4,592
-------- --------
Total liabilities and stockholders' equity $ 9,658 $ 9,714
======== ========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF INCOME
Year ended December 31,
----------------------------------------
(Millions of dollars)
1998 1997 1996
Revenues:
<S> <C> <C> <C>
Sales and other operating revenues(1) $ 16,969 $ 17,920 $ 16,895
Gain on sale of investment in affiliate - - 1,132
Income in equity affiliates 108 390 51
Dividends, interest and other income 97 47 88
--------- --------- --------
Total revenues 17,174 18,357 18,166
Costs and deductions:
Cost of sales and operating expenses(2) 15,210 15,909 14,774
Selling, general and administrative expenses 676 580 532
Depreciation, depletion and amortization 431 421 407
Maintenance and repairs 147 143 134
Foreign exchange - net 16 (55) 6
Interest expense 172 146 140
Minority interest 3 3 (2)
--------- --------- --------
Total costs and deductions 16,655 17,147 15,991
--------- --------- --------
Income before income taxes 519 1,210 2,175
Provision for income taxes 326 364 982
--------- --------- --------
Income before cumulative effect of accounting change 193 846 1,193
Cumulative effect of accounting change (no tax benefit) (50) - -
--------- --------- --------
Net income $ 143 $ 846 $ 1,193
========= ========= ========
(1) Includes sales to:
Stockholders $1,437 $1,695 $1,711
Affiliates 2,253 3,018 2,841
(2) Includes purchases from:
Stockholders $1,337 $2,174 $2,634
Affiliates 1,485 1,813 1,297
</TABLE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF COMPREHENSIVE INCOME
Year ended December 31,
-----------------------------------------
(Millions of dollars)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 143 $ 846 $ 1,193
Other comprehensive income:
Currency translation adjustments:
Change during the year (10) (84) (146)
Reclassification to net income for sale of investment in affiliate - - (240)
Unrealized gains/(losses) on investments:
Change during the year 8 (23) (40)
Reclassification of gains included in net income - (3) (35)
Related income tax (expense) benefit (1) 14 35
------ ------ -------
Total other comprehensive loss (3) (96) (426)
------ ------ -------
Comprehensive income $ 140 $ 750 $ 767
====== ====== =======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31,
--------------------------------------
(Millions of dollars)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Common stock and capital in excess of par value $ 357 $ 357 $ 357
======== ======== ========
Retained earnings:
Balance at beginning of year $ 4,342 $ 3,910 $ 4,187
Net income 143 846 1,193
Cash dividends (334) (414) (1,470)
-------- -------- --------
Balance at end of year $ 4,151 $ 4,342 $ 3,910
======== ======== ========
Accumulated other comprehensive loss:
Cumulative translation adjustments:
Balance at beginning of year $ (120) $ (36) $ 350
Change during the year (10) (84) (146)
Reclassification to net income for sale of investment in affiliate - - (240)
-------- -------- --------
Balance at end of year $ (130) $ (120) $ (36)
======== ======== =======
Unrealized holding gain on investments, net of tax:
Balance at beginning of year $ 13 $ 25 $ 65
Change during the year 7 (11) (23)
Reclassification of gains included in net income - (1) (17)
-------- -------- -------
Balance at end of year $ 20 $ 13 $ 25
======== ======== =======
Accumulated other comprehensive loss - end of year $ (110) $ (107) $ (11)
======== ======== =======
Total stockholders' equity - end of year $ 4,398 $ 4,592 $ 4,256
======== ======== ========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF CASH FLOWS
Year ended December 31,
--------------------------------------
(Millions of dollars)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 143 $ 846 $1,193
Reconciliation to net cash provided by operating activities:
Depreciation, depletion and amortization 431 421 407
Dividends (less) more than income in equity affiliates (8) (347) 38
Net losses on asset disposals/writedowns 50 16 10
Deferred income taxes 92 (51) 36
Prepaid charges and deferred credits 59 103 38
Changes in operating working capital 316 (150) (7)
Gain on sale of investment in affiliate - - (1,132)
Other 35 (13) (12)
------- ------- ------
Net cash provided by operating activities 1,118 825 571
Investing activities:
Capital expenditures (761) (905) (741)
Investments in and advances to affiliates (211) (10) (30)
Purchase of investment instruments (114) (39) (56)
Sale of investment instruments 90 73 1
Proceeds from sale of investment in affiliate - - 1,984
Proceeds from asset sales 9 156 95
------- ------- ------
Net cash (used for) provided by investing activities (987) (725) 1,253
Financing activities:
Debt with terms in excess of three months :
Borrowings 849 845 1,112
Repayments (701) (628) (1,351)
Net (decrease) increase in other debt (22) 323 (53)
Funding provided by minority interest 17 - -
Dividends paid, including minority interest (334) (414) (1,490)
------- ------- ------
Net cash (used for) provided by financing activities (191) 126 (1,782)
Effect of exchange rate changes on cash and cash equivalents (44) (150) (2)
------- ------- ------
Cash and cash equivalents:
Net change during the year (104) 76 40
Beginning of year balance 282 206 166
------- ------- ------
End of year balance $ 178 $ 282 $ 206
======= ======= ======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
12
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
Principles of combination The combined financial statements of the Caltex Group
of Companies (Group) include the accounts of Caltex Corporation and
subsidiaries, American Overseas Petroleum Limited and subsidiary, and P.T.Caltex
Pacific Indonesia. Intercompany transactions and balances have been eliminated.
Subsidiaries include companies owned directly or indirectly more than 50% except
cases in which control does not rest with the Group. The Group's accounting
policies are in accordance with U.S. generally accepted accounting principles.
Translation of foreign currencies The U.S. dollar is the functional currency for
all principal subsidiary and affiliate operations. Effective October 1, 1997,
the Group changed the functional currency for its affiliates in Japan and Korea
from the local currency to the U.S. dollar. The change in functional currency
was applied on a prospective basis.
Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ from those estimates.
Short-term investments All highly liquid investments are classified as available
for sale. Those with a maturity of three months or less when purchased are
considered as "Cash equivalents" and those with longer maturities are classified
as "Marketable securities".
Inventories Inventories are valued at the lower of cost or current market,
except as noted below. Crude oil and petroleum product inventories are stated at
cost, primarily determined using the last-in, first-out (LIFO) method. Costs
include applicable acquisition and refining costs, duties, import taxes,
freight, etc. Materials and supplies are stated at average cost. Certain trading
related inventory, which is highly transitory in nature, is marked-to-market.
Investments and advances Investments in affiliates in which the Group has an
ownership interest of 20% to 50% or majority-owned investments where control
does not rest with the Group, are accounted for by the equity method. The
Group's share of earnings or losses of these companies is included in current
results, and the recorded investments reflect the underlying equity in each
company. Investments in other affiliates are carried at cost and dividends are
reported as income.
Property, plant and equipment Exploration and production activities are
accounted for under the successful efforts method. Depreciation, depletion and
amortization expenses for capitalized costs relating to producing properties,
including intangible development costs, are determined using the
unit-of-production method. All other assets are depreciated by class on a
straight-line basis using rates based upon the estimated useful life of each
class.
Maintenance and repairs necessary to maintain facilities in operating
condition are charged to income as incurred. Additions and improvements that
materially extend the life of assets are capitalized. Upon disposal of assets,
any net gain or loss is included in income.
Long-lived assets, including proved developed oil and gas properties, are
assessed for possible impairment by comparing their carrying values to the
undiscounted future net before-tax cash flows. Impaired assets are written down
to their fair values. Impairment amounts are recorded as incremental
depreciation expense in the period when the event occurred.
13
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies - continued
Deferred credits Deferred credits primarily represent the Indonesian
government's interest in specific property, plant and equipment balances. Under
the Production Sharing Contract (PSC), the Indonesian government retains a
majority equity share of current production profits. Intangible development
costs (IDC) are capitalized for U.S. generally accepted accounting principles
under the successful efforts method, but are treated as period expenses for PSC
reporting. Other capitalized amounts are depreciated at an accelerated rate for
PSC reporting. The deferred credit balances recognize the government's share of
IDC and other reported capital costs that over the life of the PSC will be
included in income as depreciation, depletion and amortization and will be
applied against future production related profits.
Comprehensive Income On January 1, 1998, the Group adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 established standards for
reporting and presentation of comprehensive income and its components.
Comprehensive income consists of net income, currency translation adjustments
and unrealized gains/(losses) on investments and is presented in a separate
statement. SFAS No. 130 requires only additional disclosure, and does not affect
the Group's financial position or results of operations.
Derivative financial instruments The Group uses various derivative financial
instruments for hedging purposes. These instruments principally include interest
rate and/or currency swap contracts, forward and options contracts to buy and
sell foreign currencies, and commodity futures, options, swaps and other
derivative instruments. Hedged market risk exposures include certain portions of
assets, liabilities, future commitments and anticipated sales. Prior realized
gains and losses on hedges of existing non-monetary assets are included in the
carrying value of those assets. Gains and losses related to qualifying hedges of
firm commitments or anticipated transactions are deferred and recognized in
income when the underlying hedged transaction is recognized in income. If the
derivative instrument ceases to be a hedge, the related gains and losses are
recognized currently in income. Gains and losses on derivative contracts that do
not qualify as hedges are recognized currently in other income.
Accounting for contingencies Certain conditions may exist as of the date
financial statements are issued which may result in a loss to the Group, but
which will only be resolved when one or more future events occur or fail to
occur. Assessing contingencies necessarily involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending
against the Group or unasserted claims that may result in such proceedings, the
Group evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a
material liability had been incurred and the amount of the loss can be
estimated, then the estimated liability is accrued in the Group's financial
statements. If the assessment indicates that a potentially material liability is
not probable, but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss, if determinable, is disclosed.
Loss contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature and amount of the guarantee
would be disclosed. However, in some instances in which disclosure is not
otherwise required, the Group may disclose contingent liabilities of an unusual
nature which, in the judgment of management and its legal counsel, may be of
interest to Stockholders or others.
Environmental matters The Group's environmental policies encompass the existing
laws in each country in which the Group operates, and the Group's own internal
standards. Expenditures that create future benefits or contribute to future
revenue generation are capitalized. Future remediation costs are accrued based
on estimates of known environmental exposure even if uncertainties exist about
the ultimate cost of the remediation. Such accruals are based on the best
available undiscounted estimates using data primarily developed by third party
experts. Costs of environmental compliance for past and ongoing operations,
including maintenance and monitoring, are expensed as incurred. Recoveries from
third parties are recorded as assets when realizable.
14
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies - continued
Revenue recognition In general, revenue is recognized for crude oil, natural gas
and refined product sales when title passes as specified in the sales contract.
Reclassifications Certain reclassifications have been made to prior year amounts
to conform to the 1998 presentation.
Note 2 - Asset Sale
In 1997 Caltex Trading and Transport Corporation, a subsidiary of the
Group, sold for cash its 40% interest in its Bahrain refining joint venture plus
related assets at net book value of approximately $140 million.
Note 3 - Inventories
The reported value of inventory at December 31, 1998 approximated its
current cost. At December 31, 1997, the excess of current cost over the reported
value of inventory maintained on the LIFO basis was approximately $28 million.
Certain inventories were recorded at market, which was lower than the LIFO
carrying value. Adjustments to market reduced earnings $18 million in 1998 and
$36 million in 1997. Earnings increased $29 million in 1996 due to recovery of
market values over previous years' write-downs.
During the periods presented, inventory quantities valued on the LIFO
basis were reduced at certain locations. Inventory reductions decreased net
income by $4 million and $5 million (net of related market valuation adjustments
of $1 million and $14 million in 1998 and 1997, respectively), and increased net
income $4 million in 1996.
Trading inventories are recorded on a mark-to-market basis due to their
highly transitory nature. At December 31, 1998 the value of these inventories
was approximately $3 million, which approximated cost.
Note 4 - Equity in affiliates
Investments in affiliates at equity include the following:
<TABLE>
<CAPTION>
As of December 31
-----------------
(Millions of Dollars)
Equity % 1998 1997
-------- ---- ----
<S> <C> <C> <C>
Caltex Australia Limited 50% $ 324 $ 300
Koa Oil Company, Limited 50% 298 353
LG-Caltex Oil Corporation 50% 1,170 999
Star Petroleum Refining Company, Ltd. 64% 304 228
All other Various 158 155
-------- -------
$ 2,254 $ 2,035
======== =======
</TABLE>
The carrying value of the Group's investment in its affiliates in excess
of its proportionate share of affiliate net equity is being amortized over
approximately 20 years.
Effective April 1, 1996, the Group sold its 50% investment in Nippon
Petroleum Refining Company, Limited for approximately $2 billion in cash. The
Group's net income in 1996 includes a net after-tax gain of approximately $620
million related to this sale. The combined statement of income includes Group
product sales to the purchaser of approximately $0.5 billion in the first
quarter of 1996.
15
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 4 - Equity in affiliates - continued
On December 31, 1997, Caltex Australia Limited (CAL), then a subsidiary of
the Group, acquired the remaining 50% of Australian Petroleum Pty. Limited
(APPL) from a subsidiary of Pioneer International Limited, for approximately
$186 million in cash plus the issuance of an additional 90 million shares of CAL
stock. As a result of this transaction, the Group's equity in CAL declined from
75% to 50% and its indirect equity in APPL increased to 50% from 37.5%. This
transaction was recorded as a purchase. CAL is now classified as an affiliate
and the individual assets and liabilities are excluded from the Group's
consolidated financial statements.
The remaining interest in Star Petroleum Refining Company Ltd. (SPRC) is
owned by a Thailand governmental entity. Provisions in the SPRC shareholders
agreement limit the Group's control and provide for active participation of the
minority shareholder in routine business operating decisions. The agreement also
mandates reduction in Group ownership to a minority position by the year 2001;
however, it is likely that this will be delayed in view of the current economic
difficulties in the region.
Shown below is summarized combined financial information for affiliates at
equity (in millions of dollars):
<TABLE>
<CAPTION>
100% Equity Share
---------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- ------
<S> <C> <C> <C> <C>
Current assets $ 3,689 $ 4,768 $ 1,855 $ 2,400
Other assets 7,689 7,345 4,004 3,867
Current liabilities 3,547 4,740 1,795 2,411
Other liabilities 3,505 3,483 1,866 1,879
------- ------- ------- -------
Net worth $ 4,326 $ 3,890 $ 2,198 $ 1,977
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
100% Equity Share
---------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
-------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 11,811 $ 14,669 $ 15,436 $ 5,968 $ 7,452 $ 7,751
Operating income 1,101 1,078 749 539 532 364
Net income 193 853 133 58 390 51
</TABLE>
Cash dividends received from these affiliates were $50 million, $43
million, and $89 million in 1998, 1997 and 1996, respectively.
The above summarized combined financial information includes the
cumulative effect of the accounting change in 1998 as described in note 12.
Retained earnings as of December 31, 1998 and 1997, includes $1.4 billion
which represents the Group's share of undistributed earnings of affiliates at
equity.
Note 5 - Short-term debt
Short term debt consists primarily of demand and promissory notes,
acceptance credits, overdrafts and the current portion of long-term debt. The
weighted average interest rates on short-term financing as of December 31, 1998
and 1997 were 7.3% and 7.9%, respectively. Unutilized lines of credit available
for short-term financing totaled $1.3 billion as of December 31, 1998.
16
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6 - Long-term debt
Long-term debt, with related interest rates for 1998 and 1997 consist of
the following:
<TABLE>
<CAPTION>
As of December 31,
------------------
(Millions of dollars)
1998 1997
---- ----
<S> <C> <C>
U.S. dollar debt:
Variable interest rate loans with average rates
of 5.5% and 6.2%, due 2002-2010 $ 454 $ 348
Fixed interest rate term loans with average rates of 6.4%
and 6.4% due 2001-2003 130 100
Australian dollar debt:
Fixed interest rate loan with 11.2% rate due 2001 211 218
New Zealand dollar debt:
Variable interest rate loans with average rates
of 5.0% and 5.7%, due 2001-2004 78 63
Fixed interest rate loan with 8.09% rate due 2000 5 6
Malaysian ringgit debt:
Fixed interest rate loan with average rates of 9.16%
and 8.56%, due 2000-2001 33 21
South African rand debt:
Fixed interest rate loan with 17.8% rate due 2003 8 9
Other - variable interest rate loans with average rates
of 5.8% and 6.5%, due 2000-2003 11 5
------ ------
$ 930 $ 770
====== ======
</TABLE>
Aggregate maturities of long-term debt by year are as follows (in millions
of dollars): 1999 - $40 (included in short-term debt); 2000 - $115; 2001- $454;
2002 - $243; 2003 - $82; and thereafter - $36.
Note 7 - Operating leases
The Group has operating leases involving various marketing assets for
which net rental expense was $103 million, $105 million, and $92 million in
1998, 1997 and 1996, respectively.
Future net minimum rental commitments under operating leases having
non-cancelable terms in excess of one year are as follows (in millions of
dollars): 1999 - $64; 2000 - $53; 2001 - $46; 2002 - $31, 2003 - $23, and 2004;
and thereafter - $37.
Note 8 - Employee benefit plans
Effective January 1, 1998, the Group adopted SFAS No. 132, "Employers'
Disclosures about Pension and Other Post-retirement Benefits". SFAS No. 132
revises employers' disclosures about pension and other post-retirement benefit
plans, but does not change the method of accounting for such plans. The Group
has various retirement plans, including defined benefit pension plans covering
substantially all of its employees. The benefit levels, vesting terms and
funding practices vary among plans.
17
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 8 - Employee Benefit plans - continued
The following provides a reconciliation of benefit obligations, plan
assets, and funded status of the various plans, primarily foreign, and inclusive
of affiliates at equity.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
(Millions of dollars)
Other Post-retirement
---------------------
Pension Benefits Benefits
---------------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at January 1, $ 405 $ 523 $ 64 $ 58
Service cost 19 26 2 2
Interest cost 31 44 6 6
Actuarial loss 32 7 11 3
Benefits paid (72) (37) (4) (4)
Settlements and curtailments (26) - 5 -
Foreign exchange rate changes 11 (158) (5) (1)
----- ----- ------ -----
Benefit obligation at December 31, $400 $ 405 $ 79 $ 64
===== ===== ====== =====
Change in plan assets:
Fair value at January 1, $ 322 $ 399 $ - $ -
Actual return on plan assets 47 41 - -
Group contribution 62 15 4 4
Benefits paid (72) (37) (4) (4)
Settlements (26) - - -
Foreign exchange rate changes - (96) - -
----- ----- ------ -----
Fair value at December 31, $ 333 $ 322 $ - $ -
===== ===== ====== =====
Accrued benefit costs:
Funded status $ (67) $ (83) $ (79) $ (64)
Unrecognized net transition liability 4 3 - -
Unrecognized net actuarial losses 11 32 23 14
Unrecognized prior service costs 9 9 - -
----- ----- ------ -----
Accrued benefit cost $ (43) $ (39) $ (56) $ (50)
===== ===== ====== =====
Amounts recognized in the Combined Balance Sheet:
Prepaid benefit cost $ 27 $ 28 $ - $ -
Equity in affiliates (30) (40) - -
Accrued benefit liability (40) (27) (56) (50)
----- ----- ------ -----
Prepaid (accrued) benefit cost $ (43) $ (39) $ (56) $ (50)
===== ===== ====== =====
Weighted average rate assumptions:
Discount rate 7.6% 8.4% 10.0% 10.3%
Rate of increase in compensation 5.4% 6.4% 4.0% 4.2%
Expected return on plan assets 9.6% 9.4% n/a n/a
</TABLE>
18
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 8 - Employee Benefit plans - continued
<TABLE>
<CAPTION>
As of December 31,
---------------------
(Millions of dollars)
1998 1997
---- ----
<S> <C> <C>
Pension plans with accumulated benefit obligations in excess of assets
Projected benefit obligation $ 184 $ 112
Accumulated benefit obligation 157 93
Fair value of assets 87 46
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(Millions of dollars)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Components of Pension Expense
Service cost $ 19 $ 26 $ 26
Interest cost 31 44 46
Expected return on plan assets (28) (36) (37)
Amortization of prior service cost 1 3 3
Recognized net actuarial loss 5 3 4
Curtailment/settlement loss 21 - -
----- ----- ------
Total $ 49 $ 40 $ 42
===== ===== ======
Components of Other Post-retirement Benefits
Service cost $ 2 $ 2 $ 1
Interest cost 6 6 5
Special termination benefit recognition 3 - -
Curtailment recognition 3 - -
----- ----- ------
$ 14 $ 8 $ 6
===== ===== ======
</TABLE>
Other post-retirement benefits are comprised of contributory healthcare
and life insurance plans. A one percentage point change in the assumed health
care cost trend rate of 9.1% would change the post-retirement benefit obligation
by $9 million and would not have a material effect on aggregate service and
interest components.
Note 9 - Commitments and contingencies
In 1997, Caltex received a claim from the U.S. Internal Revenue Service
(IRS) for $292 million in excise tax, along with penalties and interest,
bringing the total to approximately $2 billion. The IRS claim relates to crude
oil sales to Japanese customers beginning in 1980. Prior to this time, Caltex
directly supplied crude oil to its Japanese customers, however, in 1980, a
Caltex subsidiary also became a contractual supplier of crude oil.
The IRS position is that the additional supplier constituted a transfer of
property, and was thus taxable. Caltex is challenging the claim since the
addition of another supplying company was not a taxable event. Additionally,
Caltex believes the claim is based on an overstated value. Finally, Caltex
disagrees with the imposition and calculation of interest and penalties. Caltex
believes the underlying excise tax claim is wrong. Caltex also believes the
related claim for penalties is wrong and the IRS claim for interest is flawed.
To litigate this claim, Caltex has been required to maintain a letter of
credit ($2.5 billion at February 8, 1999, including interest for 1998 and 1999).
The Stockholders have guaranteed this letter of credit. For excise taxes, unlike
income taxes, the taxpayer is required to pay a portion of the tax liability to
gain access to the courts. Caltex has made a payment of $12 million in order to
progress this claim.
19
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 9 - Commitments and contingencies - continued
Caltex also is involved in IRS tax audits for years 1987-1993. While no
claims by the IRS are outstanding for these years, in the opinion of management,
adequate provision has been made for income taxes for all years either under
examination or subject to future examination.
Caltex and certain of its subsidiaries are named as defendants, along with
privately held Philippine ferry and shipping companies and the shipping
company's insurer, in various lawsuits filed in the U.S. and the Philippines on
behalf of at least 3,350 parties, who were either survivors of, or relatives of
persons who allegedly died in, a collision in Philippine waters on December 20,
1987. One vessel involved in the collision was carrying products for Caltex
(Philippines) Inc. (a subsidiary of Caltex) in connection with a contract of
affreightment. Although Caltex had no direct or indirect ownership in or
operational responsibility for either vessel, various theories of liability have
been alleged against Caltex. The major suit filed in the U.S. (Louisiana State
Court) does not mention a specific monetary recovery although the pleadings
contain a variety of demands for various categories of compensatory as well as
punitive damages. Consequently, no reasonable estimate of damages involved or
being sought can be made at this time. Caltex sought to preclude the plaintiffs
from pursuing the Louisiana litigation on various federal and procedural
grounds. Having pursued these remedies in the federal court system without
success (including a denial of a writ of certiorari by the U.S. Supreme Court),
Caltex management intends to continue to contest all of the foregoing litigation
vigorously on various substantive and procedural grounds.
The Group may be subject to loss contingencies pursuant to environmental
laws and regulations in each of the countries in which it operates that, in the
future, may require the Group to take action to correct or remediate the effects
on the environment of prior disposal or release of petroleum substances by the
Group. The amount of such future cost is indeterminable due to such factors as
the nature of the new regulations, the unknown magnitude of any possible
contamination, the unknown timing and extent of the corrective actions that may
be required, and the extent to which such costs are recoverable from third
parties.
In the Group's opinion, while it is impossible to ascertain the ultimate
legal and financial liability, if any, with respect to the above mentioned and
other contingent liabilities, the aggregate amount that may arise from such
liabilities is not anticipated to be material in relation to the Group's
combined financial position or liquidity, or results of operations over a
reasonable period of time.
A Caltex subsidiary has a contractual commitment, until 2007, to purchase
petroleum products in conjunction with the financing of a refinery owned by an
affiliate. Total future estimated commitments under this contract, based on
current pricing and projected growth rates, are approximately $800 million per
year. Purchases (in billions of dollars) under this and other similar contracts
were $0.8, $1.0 and $0.8 in 1998, 1997 and 1996, respectively.
Caltex is contingently liable for sponsor support funding for a maximum of
$278 million in connection with an affiliate's project finance obligations.
While the project is operational, the requirements for the plant physical
completion test, which were to have been completed by June 30, 1998, have not
been fully satisfied. Thus, while an event of default exists in terms of the
financing agreement, the secured lenders have agreed not to enforce their rights
and remedies until June 30, 1999, since the affiliate was able to satisfy
certain conditions in the loan documentation. The affiliate is currently
addressing the outstanding issues to remedy the default conditions and expects
to meet all completion conditions by the agreed date.
During 1998, Caltex contributed $218 million as additional equity in the
above affiliate to meet sponsor support requirements. The other sponsor
similarly provided its proportionate share of equity under the sponsor support
agreement. In addition, during 1998, Caltex and the other sponsor provided
temporary short-term extended trade credit related to crude oil supply with an
outstanding balance owing to Caltex at December 31, 1998 of $31 million. The
possible requirement for further post-construction support is largely dependent
on refining margins and the affiliate's ability to service its secured debt.
20
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 10 - Financial Instruments
Certain Group companies are parties to financial instruments with
off-balance sheet credit and market risk, principally interest rate risk. The
Group's outstanding commitments for interest rate swaps and foreign currency
contractual amounts are:
<TABLE>
<CAPTION>
As of December 31,
---------------------
(Millions of dollars)
1998 1997
---- ----
<S> <C> <C>
Interest rate swaps - Pay Fixed, Receive Floating $653 $ 591
Interest rate swaps - Pay Floating, Receive Fixed 202 209
Commitments to purchase foreign currencies 395 467
Commitments to sell foreign currencies 25 50
</TABLE>
The Group enters into interest rate swaps in managing its interest risk,
and their effects are recognized in the statement of income at the same time as
the interest expense on the debt to which they relate. The swap contracts have
remaining maturities of up to eleven years. Net unrealized (losses) and gains on
contracts outstanding at December 31, 1998 and 1997 were ($7 million) and $6
million, respectively.
The Group enters into forward exchange contracts to hedge against some of
its foreign currency exposure stemming from existing liabilities and firm
commitments. Contracts to purchase foreign currencies (principally Australian,
Hong Kong, and Singapore dollars) hedging existing liabilities have maturities
of up to three years. Net unrealized losses applicable to outstanding forward
exchange contracts at December 31, 1998 and 1997 were $23 million and $16
million, respectively.
The Group hedges a portion of the market risks associated with its crude
oil and petroleum product purchases and sales. Established petroleum futures
exchanges are used, as well as "over-the-counter" hedge instruments, including
futures, options, swaps, and other derivative products which reduce the Group's
exposure to price volatility in the physical markets. The derivative positions
are marked-to-market for valuation purposes. Gains and losses on hedges are
deferred and recognized concurrently with the underlying commodity transactions.
Derivative gains and losses not considered to be a hedge are recognized
currently in income. Unrealized gains on commodity-based derivative hedging
contracts outstanding as of December 31, 1998 and 1997 were $14 million and $3
million, respectively.
The Group's long-term debt of $930 million and $770 million as of December
31, 1998 and 1997, respectively, had fair values of $896 million and $731
million as of December 31, 1998 and 1997, respectively. The fair value estimates
were based on the present value of expected cash flows discounted at current
market rates for similar obligations. The reported amounts of financial
instruments such as cash and cash equivalents, marketable securities, notes and
accounts receivable, and all current liabilities approximate fair value because
of their short maturities.
The Group had investments in debt securities available-for-sale at
amortized costs of $105 million and $82 million at December 31, 1998 and 1997,
respectively. The fair value of these securities at December 31, 1998 and 1997
approximates amortized costs. As of December 31, 1998 and 1997, investments in
debt securities available-for-sale had maturities less than ten years. As of
December 31, 1998 and 1997, the Group's carrying amount for investments in
affiliates accounted for at equity included $19 million and $12 million,
respectively, for after tax unrealized net gains on investments held by these
companies.
21
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 10 - Financial Instruments - continued
The Group is exposed to credit risks in the event of non-performance by
counterparties to financial instruments. For financial instruments with
institutions, the Group does not expect any counterparty to fail to meet its
obligations given their high credit ratings. Other financial instruments exposed
to credit risk consist primarily of trade receivables. These receivables are
dispersed among the countries in which the Group operates, thus limited
concentration of such risks. The Group performs ongoing credit evaluations of
its customers and generally does not require collateral. Letters of credit are
the principal security obtained to support lines of credit when the financial
strength of a customer is not considered sufficient. Credit losses have
historically been within management's expectations.
Note 11 - Taxes
Taxes charged to income consist of the following:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
(Millions of dollars)
1998 1997 1996
---- ---- ----
Taxes other than income taxes (International):
<S> <C> <C> <C>
Duties, import and excise taxes $ 1,218 $ 1,409 $ 1,349
Other 17 19 18
-------- -------- -------
Total taxes other than income taxes $ 1,235 $ 1,428 $ 1,367
======== ======== =======
Income taxes:
U.S. taxes :
Current $ 6 $ 8 $ 455
Deferred 23 (2) 19
-------- -------- -------
Total U.S. 29 6 474
-------- -------- -------
International taxes:
Current $ 228 $ 407 $ 491
Deferred 69 (49) 17
-------- -------- -------
Total International 297 358 508
-------- -------- -------
Total provision for income taxes $ 326 $ 364 $ 982
======== ======== =======
</TABLE>
22
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 11 - Taxes - continued
Income taxes have been computed on an individual company basis at rates in
effect in the various countries of operation. The effective tax rate differs
from the "expected" tax rate (U.S. Federal corporate tax rate) as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax rate 35.0% 35.0% 35.0%
Effect of recording equity in net income
of affiliates on an after tax basis (7.3) (11.3) (0.7)
Effect of dividends received from
subsidiaries and affiliates (0.3) (0.3) (0.5)
Income subject to foreign taxes at other
than U.S. statutory tax rate 26.0 5.2 8.1
Effect of sale of investment in affiliate - - 3.6
Deferred income tax valuation allowance 8.7 1.4 0.5
Other 0.7 - (0.8)
---- ---- ----
Effective tax rate 62.8% 30.0% 45.2%
==== ==== ====
</TABLE>
The increase in the effective tax rate in 1998 is primarily due to the
larger proportion of earnings from higher tax rate foreign jurisdictions, and
the effect of foreign currency translation on pre-tax income.
Deferred income taxes are provided in each tax jurisdiction for temporary
differences between the financial reporting and the tax basis of assets and
liabilities. Temporary differences and tax loss carry-forwards which give rise
to deferred tax liabilities (assets) are as follows:
<TABLE>
<CAPTION>
As of December 31,
-----------------------
(Millions of dollars)
1998 1997
---- ----
<S> <C> <C>
Depreciation $ 316 $ 314
Miscellaneous 38 22
----- ------
Deferred tax liabilities 354 336
----- ------
Investment allowances (62) (74)
Tax loss carry-forwards (63) (50)
Foreign exchange (8) (33)
Retirement benefits (48) (30)
Miscellaneous (12) (15)
----- ------
Deferred tax assets (193) (202)
Valuation allowance 72 27
----- ------
Net deferred taxes $ 233 $ 161
===== ======
</TABLE>
A valuation allowance has been established to reduce deferred income tax
assets to amounts which, in the Group's judgement are more likely than not (more
than 50%) to be utilized against current and future taxable income when those
temporary differences become deductible.
23
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 11 - Taxes - continued
Undistributed earnings of subsidiaries and affiliates, for which no U.S.
deferred income tax provision has been made, approximated $3.4 billion as of
December 31, 1998 and December 31, 1997, respectively. Such earnings have been
or are intended to be indefinitely reinvested, and become taxable in the U.S.
only upon remittance as dividends. It is not practical to estimate the amount of
tax that may be payable on the eventual remittance of such earnings. Upon
remittance, certain foreign countries impose withholding taxes which, subject to
certain limitations, are available for use as tax credits against the U.S. tax
liability. Excess U.S. foreign income tax credits are not recorded until
realized.
Note 12 - Accounting change
An affiliate of the Group capitalized certain start-up costs, primarily
organizational and training, over the period 1992-1996 related to a grassroots
refinery construction project in Thailand. These costs were considered part of
the effort required to prepare the refinery for operations. With the issuance of
the AICPA's Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities", these costs would be accounted for as period expenses. The Group
has elected early adoption of this pronouncement effective January 1, 1998 and
accordingly, recorded a cumulative effect charge to income as of January 1, 1998
of $50 million representing the Group's share of the applicable start-up costs.
Excluding the cumulative effect, the change in accounting for start-up costs did
not materially affect net income for 1998.
Note 13 - Restructuring/Reorganization
Caltex recorded a charge to income for $86 million in 1998 for various
restructuring and reorganization activities undertaken to realign the company
along functional lines and reduce redundant operating activities. The charge
includes severance and other termination benefits (for a total of 500 employees)
of $52 million for U.S. headquarter and expatriate operating staff ($26 million
severance and other termination benefits, and $26 million for employee benefit
curtailment/settlements) and $8 million for various foreign staff, and $10
million for asset and lease commitment write-offs. Other reorganization costs
were $16 million. Approximately $53 million remained as recorded liabilities as
of December 31, 1998, which will mostly be paid during 1999. These charges were
included in selling, general and administrative expenses in the combined
statement of income.
Note 14 - Combined statement of cash flows
Changes in operating working capital consist of the following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
(Millions of dollars)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Accounts and notes receivable $ 404 $ 33 $ (235)
Inventories (28) 85 (16)
Accounts payable (105) (252) 210
Accrued liabilities 41 1 18
Estimated income taxes 4 (17) 16
----- ------- ------
Total $ 316 $ (150) $ (7)
===== ====== =======
</TABLE>
Net cash provided by operating activities includes the following cash
payments for interest and income taxes:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
(Millions of dollars)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest paid (net of capitalized interest) $ 182 $ 138 $ 137
Income taxes paid $ 237 $ 440 $ 865
</TABLE>
24
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 14 - Combined statement of cash flows - continued
The deconsolidation of Caltex Australia Limited as of December 31, 1997,
as described in Note 4, resulted in a non-cash reduction in the following
combined balance sheet captions for 1997, which have not been included in the
combined statement of cash flows:
<TABLE>
<S> <C>
Net working capital $ 60
Equity in affiliates 94
Long-term debt 45
Minority interest 109
</TABLE>
No significant non-cash investing or financing transactions occurred in
1998 and 1996.
Net cash provided by operating activities in 1996 includes income tax
payments relating to the sale of an investment in an affiliate. Proceeds from
this sale are included in net cash provided by investing activities.
Note 15 - Oil and gas exploration, development and producing activities
The financial statements of Chevron Corporation and Texaco Inc. contain
required supplementary information on oil and gas producing activities,
including disclosures on affiliates at equity. Accordingly, such disclosures are
not presented herein.
25
<PAGE>
EQUILON ENTERPRISES LLC
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management............................................. 1
Report of Independent Accountants................................ 2
Statement of Consolidated Income................................. 3
Consolidated Balance Sheets...................................... 4
Statement of Consolidated Cash Flows............................. 5
Statement of Owners' Equity...................................... 6
Notes to the Consolidated Financial Statements................... 7
</TABLE>
<PAGE>
EQUILON ENTERPRISES LLC
REPORT OF MANAGEMENT
The management of Equilon Enterprises LLC ("Equilon") is responsible for
preparing the consolidated financial statements of Equilon in accordance with
generally accepted accounting principles. In doing so, management must make
estimates and judgements when the outcome of events and transactions is not
certain.
In preparing these financial statements from the accounting records,
management relies on an effective internal control system in meeting its
responsibility. This system of internal controls provides reasonable assurance
that assets are safeguarded and that the financial records are accurately and
objectively maintained. Equilon's internal auditors conduct regular and
extensive internal audits throughout the company. During these audits they
review and report on the effectiveness of the internal controls and make
recommendations for improvement.
The independent accounting firms of PricewaterhouseCoopers LLP and Arthur
Andersen LLP are engaged to provide an objective, independent audit of Equilon's
financial statements. Their accompanying report is based on an audit conducted
in accordance with generally accepted auditing standards, which includes a
review and evaluation of the effectiveness of the company's internal controls.
This review establishes a basis for their reliance thereon in determining the
nature, timing and scope of their audit.
The Audit Committee of the Board of Directors is comprised of four,
non-employee directors who review and evaluate Equilon's accounting policies and
reporting, internal controls, internal audit program and other matters as deemed
appropriate. The Audit Committee also reviews the performance of
PricewaterhouseCoopers LLP and Arthur Andersen LLP and evaluates their
independence and professional competence, as well as the results and scope of
their audit.
James M. Morgan David C. Crikelair David C. Cable
President and Chief Executive Officer Chief Financial Officer Controller
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF EQUILON ENTERPRISES LLC:
We have audited the accompanying consolidated balance sheets of Equilon
Enterprises LLC ("Equilon") and its subsidiaries as of December 31, 1998 and
January 1, 1998, and the related statements of consolidated income, owners'
equity, and cash flows for the year ended December 31, 1998. These financial
statements are the responsibility of Equilon's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Equilon
Enterprises LLC and its subsidiaries as of December 31, 1998, and January 1,
1998 and the results of their operations and their cash flows for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP ARTHUR ANDERSEN LLP
Houston, Texas Houston, Texas
March 5, 1999 March 5, 1999
2
<PAGE>
<TABLE>
<CAPTION>
EQUILON ENTERPRISES LLC
Statement of Consolidated Income
For the year ended December 31, 1998
(Millions of dollars)
<S> <C>
REVENUES
Sales and services........................................................ $21,835
Equity in income of affiliates, interest, asset sales and other........... 411
-------
Total revenues..................................................... 22,246
-------
COSTS AND EXPENSES
Purchases and other costs................................................ 17,540
Operating expenses....................................................... 2,274
Selling, general and administrative expenses............................. 1,251
Depreciation and amortization............................................ 543
Interest expense......................................................... 134
Minority interest........................................................ 2
-------
Total costs and expenses......................................... 21,744
-------
NET INCOME................................................................. $ 502
=======
<FN>
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EQUILON ENTERPRISES LLC
Consolidated Balance Sheets
(Millions of dollars)
December 31, January 1,
1998 1998
------------ ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................... $ 11 $ 1
Accounts and notes receivable (less allowance for
doubtful accounts of $14 million at December 31 and
January 1)............................................ 1,672 1,652
Accounts receivable from affiliates..................... 157 --
Inventories............................................. 699 737
Other current assets.................................... 109 78
------- --------
Total current assets............................... 2,648 2,468
Investments and Advances................................... 467 572
Property, Plant and Equipment, net......................... 7,052 6,977
Deferred Charges and other noncurrent assets............... 239 220
------- --------
Total Assets....................................... $10,406 $ 10,237
======= ========
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Notes payable, commercial paper, and current portion of
long term debt....................................... $ 2,155 $ 317
Accounts payable-- trade................................ 696 1,229
Accounts payable to owners.............................. 563 256
Accrued liabilities and other payables.................. 644 398
Formation payable to owners............................. -- 1,613
Total current liabilities.......................... 4,058 3,813
Long-term Debt and Capital Lease Obligations............... 160 162
Long-term Liabilities, Deferred Credits, and Minority
Interest................................................ 222 140
------- --------
Total Liabilities.................................. 4,440 4,115
OWNERS' EQUITY............................................. 5,966 6,122
------- --------
Total Liabilities and Owners' Equity............... $10,406 $ 10,237
======= ========
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
EQUILON ENTERPRISES LLC
Statement of Consolidated Cash Flows
For the year ended December 31, 1998
(Millions of dollars)
<S> <C>
OPERATING ACTIVITIES:
Net Income...................................................... $ 502
Reconciliation to net cash provided by operating activities
Depreciation and amortization................................ 543
Dividends from affiliates less than equity in income......... (41)
Gains on asset sales......................................... (118)
Changes in working capital
Accounts and notes receivable.............................. (20)
Accounts receivable from affiliates........................ (157)
Inventories................................................ 26
Accounts payable-- trade................................... (533)
Accounts payable to owners................................. 307
Accrued liabilities and other payables..................... 246
Other-- net.................................................. (29)
--------
Net cash provided by operating activities.................... 726
INVESTING ACTIVITIES:
Capital expenditures............................................ (651)
Proceeds from asset sales....................................... 409
--------
Net cash used in investing activities........................ (242)
FINANCING ACTIVITIES:
Repayments of borrowings having original terms in excess of
three months................................................. (9)
Repayment of formation costs.................................... (1,613)
Net increase in other short-term borrowings..................... 1,846
Distributions paid to owners.................................... (698)
--------
Net cash used in financing activities........................ (474)
CASH AND CASH EQUIVALENTS:
Increase in cash during year.................................... 10
Balance at beginning of year.................................... 1
--------
Balance at end of year.......................................... $ 11
========
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of this statement.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
EQUILON ENTERPRISES LLC
Statement of Owners' Equity
(Millions of dollars)
<S> <C>
Owners' Equity balance at January 1, 1998 ........................ $ 6,122
Net Income........................................................ 502
Distributions paid................................................ (698)
Contribution adjustment........................................... 40
-------
Owners' Equity balance at December 31, 1998.................... $ 5,966
=======
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of this statement.
</FN>
</TABLE>
6
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Equilon Enterprises LLC ("Equilon") is a joint venture combining the major
elements of Shell Oil Company ("Shell") and Texaco Inc.'s ("Texaco") Western and
Midwestern U.S. refining and marketing businesses and their nationwide trading,
transportation and lubricants businesses. Equilon is a limited liability company
organized by Shell and Texaco effective January 1, 1998 under the Delaware
Limited Liability Act, with equity interests of 56 percent and 44 percent,
respectively. Despite the foregoing ownership interests, Shell and Texaco
jointly control Equilon to the extent that many significant governance decisions
require unanimous approval.
A second joint venture company, Motiva Enterprises LLC ("Motiva"), was
formed on July 1, 1998, combining the major elements of the Eastern and Gulf
Coast U.S. refining and marketing businesses of Shell, Texaco and Saudi
Refining, Inc. ("SRI"). Equiva Trading Company and Equiva Services LLC were also
formed on July 1, 1998. Equiva Trading Company, a general partnership owned by
Equilon and Motiva, functions as the trading unit for both Equilon and Motiva.
Equiva Services LLC provides common financial, administrative, technical and
other operational support to both companies.
Equilon manufactures, distributes and markets petroleum products under both
the Shell and Texaco brands through wholesalers and its network of company owned
and contract operated service stations. Products are manufactured at six
refineries located in Puget Sound, Washington; Bakersfield, Los Angeles, and
Martinez, California; Wood River, Illinois, and El Dorado, Kansas.
Under the terms of consent agreements with the Federal Trade Commission and
certain state governments, Equilon was to divest itself of Shell's Anacortes,
Washington refinery, certain marketing assets in southern California and Hawaii,
and certain terminal and pipeline interests. With the exception of certain
assets in Hawaii, these actions were substantially complete by year-end 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements
The accompanying financial statements are presented using Shell and Texaco's
historical basis of the assets and liabilities contributed to Equilon on January
1, 1998. The consolidated financial statements generally include the accounts of
Equilon and subsidiaries in which Equilon directly or indirectly owns more than
a 50 percent voting interest. Entities where Equilon has greater than 50 percent
ownership but, as a result of contractual agreement or otherwise, does not
exercise control, are accounted for using the equity method. Other investments
are carried at cost. Equiva Services LLC and Equiva Trading Company are
consolidated based on Equilon's specifically identified interest in their cost
of services and trading activities. Intercompany accounts and transactions are
eliminated.
Use of Estimates
These financial statements were prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include the recoverability of
assets, environmental remediation, litigation, claims and assessments. Amounts
are recognized when it is probable that an asset has been impaired or a
liability has been incurred and the cost can be reasonably estimated. Actual
results could differ from those estimates.
7
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". For Equilon, SFAS No. 133 will be adopted
January 1, 2000. Equilon has not yet determined the impact that the adoption of
SFAS No. 133 in year 2000 will have on its earnings or statement of financial
position.
Revenues
Revenues for refined products and crude oil sales are recognized at the
point of passage of title specified in the contract. Revenues on forward sales
where cash has been received are recorded to deferred income until the passage
of title during delivery.
Cash Equivalents
Highly liquid investments with maturity when purchased of three months or
less are considered to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market. Hydrocarbon inventory
cost is determined on the last-in, first-out (LIFO) method. The cost of other
merchandise inventories is determined on the first-in, first-out (FIFO) method.
Average cost is utilized for inventories of materials and supplies.
Investments and Advances
The equity method of accounting is generally used for investments in certain
affiliates owned 50 percent or less, including corporate joint ventures, limited
liability companies and partnerships. Under this method, equity in pre-tax
income or losses of limited liability companies and partnerships, and the net
income or losses of corporate joint-venture companies is reflected in revenue,
rather than when realized through dividends or distributions.
The cost method is used to account for Equilon's interest in the net income
of affiliates with an ownership interest of less than twenty percent. Income
from these investments is realized through dividends.
Property, Plant and Equipment
Depreciation of property, plant and equipment is generally provided on
composite groups, using the straight-line method, with depreciation rates based
upon the estimated useful lives of the groups.
Under the composite depreciation method, the cost of partial retirements of
a group is charged to accumulated depreciation. However, when there is a
disposition of a complete group, or when the retirement is due to an
extraordinary loss, the cost and related depreciation are retired, and any gain
or loss is reflected in income.
Capitalized leases are amortized over the estimated useful life of the asset
or the lease term, as appropriate, using the straight-line method.
All maintenance and repairs, including major refinery maintenance, are
charged to expense as incurred. Renewals, betterments and major repairs that
materially extend the life of the properties are capitalized. Interest incurred
during the construction period of major additions is capitalized.
The evaluation of impairment for property, plant and equipment is based on
comparisons of carrying values against undiscounted future net pre-tax cash
flows. If an impairment is identified, the asset's carrying
8
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
amount is adjusted to fair value. Assets to be disposed of are generally valued
at the lower of net book value or fair value less cost to sell.
Derivatives
Equilon, through its affiliate, Equiva Trading Company, utilizes futures,
options and swaps to hedge the effects of fluctuations in the prices of crude
oil and refined products. Equiva Trading Company also conducts petroleum-related
commodity trading activities, the results of which are marked to market, with
gains and losses recorded in operating revenue.
Fair Market Value of Financial Instruments
The estimated fair value of long-term debt is disclosed in Note 8 to the
financial statements. The carrying amount of long-term debt with variable rates
of interest approximates fair value at both January 1, and December 31, 1998,
because borrowing terms equivalent to the stated rates were available in the
marketplace. Fair value for long-term debt with a fixed rate of interest is
determined based on discounted cash flows using estimated prevailing interest
rates.
Other financial instruments are included in current assets and liabilities
on the balance sheets and approximate fair value because of the short maturity
of such instruments. These include cash, short-term investments, notes and
accounts receivable, accounts payable and short-term debt.
Contingencies
Certain conditions may exist as of the date financial statements are issued,
which may result in a loss to the company, but which will be resolved only when
one or more future events occur or fail to occur. Equilon's management and legal
counsel assess such contingent liabilities. The assessment of loss contingencies
necessarily involves an exercise of judgement and is a matter of opinion. In
assessing loss contingencies related to legal proceedings that are pending
against the company or unasserted claims that may result in such proceedings,
Equilon's legal counsel evaluates the perceived merits of any legal proceedings
or unasserted claims as well as the perceived merits of the amount of relief
sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a
material liability had been incurred and the amount of the loss can be
estimated, then the estimated liability would be accrued in the company's
financial statements. If the assessment indicates that a potentially material
liability is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material would be
disclosed. Loss contingencies considered remote are generally not disclosed
unless they involve guarantees, in which case the nature of the guarantee would
be disclosed.
Environmental Expenditures
Equilon accrues for environmental remediation liabilities when it is
probable that such liabilities exist, based on past events or known conditions,
and the amount of such liability can be reasonably estimated. If Equilon can
only estimate a range of probable liabilities, the minimum future undiscounted
expenditure necessary to satisfy Equilon's future obligation is accrued.
For each potential liability, Equilon determines the appropriate liability
amount considering all of the available data, including technical evaluations of
the currently available facts, interpretation of existing laws and regulations,
prior experience with similar sites and the estimated reliability of financial
projections.
9
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Equilon adjusts the environmental liabilities, as required, based on the
latest experience with similar sites, changes in environmental laws and
regulations or their interpretation, development of new technology or new
information related to the extent of Equilon's obligation.
Other environmental expenditures, principally maintenance or preventive in
nature, are expensed or capitalized as appropriate.
NOTE 3 -- INTEREST COSTS
Interest costs were as follows:
<TABLE>
<CAPTION>
For the year ended
December 31,
1998
------------------
(millions of
dollars)
<S> <C>
Interest incurred................... $ 134
Interest paid....................... 95
</TABLE>
NOTE 4 -- INVENTORIES
<TABLE>
<CAPTION>
As of
--------------------------
December 31, January 1,
1998 1998
------------- -----------
(millions of dollars)
<S> <C> <C>
Crude oil......................... $ 292 $ 304
Petroleum products................ 304 325
Other merchandise................. 17 13
Materials and supplies............ 86 95
----- -----
Total................... $ 699 $ 737
===== =====
</TABLE>
The excess of estimated market value over the book value of inventories
carried at cost on the LIFO basis of accounting was approximately $353 million
at January 1, 1998 and $135 million at December 31, 1998.
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including capitalized lease assets, were as
follows:
<TABLE>
<CAPTION>
As of
---------------------------------------
December 31, January 1,
1998 1998
-------------------- -----------------
Gross Net Gross Net
----- --- ----- ---
(millions of dollars)
<S> <C> <C> <C> <C>
Manufacturing.................... $ 7,106 $ 3,847 $ 6,962 $ 3,995
Marketing........................ 2,757 2,032 2,599 2,052
Transportation................... 2,098 1,051 1,970 881
Other............................ 181 122 115 49
-------- ------- ------- -------
Total.................. $ 12,142 $ 7,052 $11,646 $ 6,977
======== ======= ======= =======
Capital lease amounts included $ 65 $ 20 $ 66 $ 23
above......................... ======== ======= ======= =======
</TABLE>
10
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Accumulated depreciation and amortization totaled $4,669 million at January
1, 1998 and $ 5,090 million at December 31, 1998. Interest capitalized as part
of property, plant and equipment during 1998 was $1 million.
Long-Lived Assets
During its first year of operation, Equilon recognized the impairment of
surplus assets resulting from the consolidation and optimization of assets
contributed by Shell and Texaco under the provisions of SFAS No. 121 "Accounting
For the Impairment of Long Lived Assets and For Long Lived Assets to be Disposed
of." Impairments from this activity totaled over $77 million, including the
write-off of abandoned assets at the Odessa refinery, shut down in October 1998,
and the write-down to estimated realizable value of three lubricant blending
plants either closed in 1998 or expected to be sold in 1999. The impairments
were primarily reflected in increased depreciation expense on the income
statement.
NOTE 6 -- INVESTMENTS AND ADVANCES
Investments in affiliates, including corporate joint venture and
partnerships, owned 50% or less are generally accounted for on the equity
method. Equilon's total investments and advances are summarized as follows:
<TABLE>
<CAPTION>
As of
------------------------
December 31, January 1,
1998 1998
---- ----
(millions of dollars)
<S> <C> <C>
Investments in affiliates accounted for on the
equity method
Pipeline affiliates............................... $ 378 $ 329
Other affiliates.................................. 52 37
----- -----
Total equity method affiliates............ 430 366
Other investments and advances...................... 37 206
----- -----
Total investments and advances............ $ 467 $ 572
</TABLE>
===== =====
Undistributed earnings of equity companies included in Equilon's accumulated
earnings as of December 31, 1998 were $41 million. Summarized financial
information for these investments and Equilon's equity share thereof is as
follows:
<TABLE>
<CAPTION>
As of
------------------------------
December 31, January 1,
1998 1998
---------------- -------------
(millions of dollars)
<S> <C> <C>
Equity Companies at 100%
Current assets...................... $ 373 $ 342
Noncurrent assets................... 2,750 2,603
Current liabilities................. (530) (515)
Noncurrent liabilities and deferred
credits.......................... (1,684) (1,767)
-------- --------
Net assets.......................... $ 909 $ 663
======== ========
</TABLE>
11
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
For the year ended
December 31,
1998
------------------
(millions of
dollars)
<S> <C>
Revenues...................................... $1,500
Income before income taxes.................... 519
Net income.................................... 362
======
</TABLE>
<TABLE>
<CAPTION>
As of
--------------------------
December 31, January 1,
1998 1998
------------- -----------
(millions of dollars)
<S> <C> <C>
Equity Companies at Equilon's Percentage Ownership
Current assets.................................... $ 115 $ 91
Noncurrent assets................................. 842 763
Current liabilities............................... (136) (126)
Noncurrent liabilities and deferred credits....... (384) (412)
----- ------
Net assets........................................ $ 437 $ 316
===== ======
</TABLE>
<TABLE>
<CAPTION>
For the year ended
December 31,
1998
------------------
(millions of
dollars)
<S> <C>
Revenues.......................................... $ 430
Income before income taxes........................ 123
Net income........................................ 109
-----
Dividends received................................ $ 68
=====
</TABLE>
NOTE 7 -- LEASE COMMITMENTS AND RENTAL EXPENSE
Equilon has leasing arrangements involving service stations and other
facilities. Renewal and purchase options are available on certain of these
leases in which Equilon is lessee. Equilon has a one year lease agreement for a
cogeneration plant at its El Dorado, Kansas refinery. This lease may be renewed
each year until 2016 at Equilon's option. The lease has been renewed with a
minimum lease rental of $11 million for 1999. Equilon has guaranteed a minimum
recoverable residual value to the lessor of $73 million, if the lease is not
renewed for the year 2000. Rental expense relative to operating leases,
including contingent rentals, is provided in the table below:
<TABLE>
<CAPTION>
For the year ended
December 31,
1998
------------------
(millions of
dollars)
<S> <C>
Rental Expense:
Minimum lease rentals.......................... $ 178
Contingent rentals............................. 7
-----
Total................................ 185
Less rental income on properties subleased
to others................................. 54
-----
Net rental expense............................. $ 131
=====
</TABLE>
12
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
As of December 31, 1998, Equilon had estimated minimum commitments for
payment of rentals under leases that, at inception, had a non-cancelable term of
more than one year, as follows:
<TABLE>
<CAPTION>
Operating leases Capital leases
---------------- --------------
(millions of dollars)
<C> <C> <C>
1999.............................................. $ 75 $ 11
2000.............................................. 47 12
2001.............................................. 43 12
2002.............................................. 36 12
2003.............................................. 37 11
After 2003........................................ 274 9
----- ----
Total................................... 512 67
Less sublease rental income....................... 85
-----
Total lease commitments................. $ 427
=====
Less amounts representing interest................ 23
Add noncancelable sublease rentals netted in
capital lease commitments above................ 10
----
Present value of total capital lease obligations.. 54
Less current portion of capital lease obligations. 7
----
Present value of long-term portion of capital
lease obligations................................. $ 47
====
</TABLE>
NOTE 8 -- DEBT
Equilon has revolving credit facilities with commitments of $1,875 million,
as support for the company's commercial paper, as well as for working capital
and other general purposes. The maximum amount outstanding during 1998 under
these facilities was $1,013 million. Equilon pays a nominal quarterly facility
fee for the $1,875 million availability with no amounts outstanding at year-end.
NOTES PAYABLE, COMMERCIAL PAPER, AND CURRENT PORTION OF LONG TERM DEBT
<TABLE>
<CAPTION>
As of
--------------------------
December 31, January 1,
1998 1998
------------- -----------
(millions of dollars)
<S> <C> <C>
Notes Payable........................................... $ -- $ 6
Commercial Paper........................................ 1,846 --
Anacortes Pollution Control Bonds....................... 34 34
Butler County Industrial Revenue Bonds.................. 25 25
California Pollution Control Bonds due 2000 through 2024 185 185
Southwestern Illinois Industrial Revenue Bonds due 2021
through 2025........................................ 58 58
Current portion of long term debt and capital lease
obligations
Indebtedness.......................................... -- 3
Capital Lease Obligations............................. 7 6
------- ------
Total......................................... $ 2,155 $ 317
======= ======
Average interest rate of short term debt...... 5.01% 3.36%
</TABLE>
13
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
As of
--------------------------
December 31, January 1,
1998 1998
------------- -----------
(millions of dollars)
<S> <C> <C>
Bakersfield-CA Pollution 1978 Series A (Revenue) 7.0% due 2009............. $ 6 $ 6
Bakersfield-CA Pollution 1978 Series A (Industrial) 7.0% due 2008.......... 1 1
Butler County Tax Abatement Bonds 7.38 to 9.75% due 2020.................... 101 101
First Farmers Bank & Trust 7.625% due 2006 through 2008..................... 4 --
Other 8.000% due 2007....................................................... 1 --
----- -----
Total long-term debt.............................................. 113 108
Capital lease obligations (see Note 7)...................................... 47 54
----- -----
Total long-term debt and capital lease obligations................ $ 160 $ 162
===== =====
Fair market value of the company's long-term debt.......................... $ 114 $ 108
===== =====
</TABLE>
Certain debt and capital lease obligations as of January 1, 1998 were
assumed from Shell and Texaco. The Pollution Control Bonds outstanding at
December 31, 1998 shown above consisted of two issues assumed from Shell and
three from Texaco. The Industrial Revenue Bonds outstanding at December 31, 1998
consisted of three issues from Shell and one from Texaco. Interest rates are
currently reset on a periodic basis for these issues and the bonds may be
converted from time to time to other modes. Bondholders have the right to tender
their bonds under certain conditions, including on interest rate resets. The Tax
Abatement Bonds outstanding at December 31, 1998 were assumed from Texaco.
Pursuant to the terms of the underlying indentures, Shell and Texaco retain
liability for debt service on the issues assumed by Equilon in the event that
Equilon fails to perform on its obligations. All other Equilon borrowings are
unsecured general obligations of Equilon and not guaranteed by any other entity.
NOTE 9 -- FORMATION PAYABLES
In accordance with the joint venture agreements, Equilon owed Shell $1,001
million and Texaco $612 million at formation. These amounts were separate from
normal trade payables and reflect amounts to reimburse Shell and Texaco for
certain capital expenditures incurred prior to the formation of the venture and
certain other items specified in the formation documents. Equilon paid these
amounts to Shell and Texaco prior to December 31, 1998. Interest was accrued on
these amounts until paid.
In addition to the foregoing payable amounts, Texaco retained $240 million
of receivables related to the contributed business as part of these
arrangements.
14
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 10 -- TRANSACTIONS WITH RELATED PARTIES
Equilon has entered into transactions with Shell, Texaco and Motiva,
including the affiliates of these companies. Such transactions are in the
ordinary course of business and include the purchase, sale and transportation of
crude oil and petroleum products, and numerous service agreements.
The aggregate amount of such transactions was as follows:
<TABLE>
<CAPTION>
For the year ended
December 31,
1998
------------------
(millions of
dollars)
<S> <C>
Sales and other operating revenue.......................... $1,368
Purchases and transportation costs............................ 4,900
Service and technology expense.......................... 794
</TABLE>
NOTE 11 -- TAXES
Equilon, as a limited liability company, is not liable for income taxes.
Income taxes are the responsibility of the owners, with earnings of Equilon
included in the owners' earnings for the determination of income tax liability.
Direct taxes other than income taxes, which are included in operating
expenses, were as follows:
<TABLE>
<CAPTION>
For the year ended
December 31,
1998
------------------
(millions of
dollars)
<S> <C>
Direct taxes
Property.............................................. $ 41
Licenses and permits.................................. 5
Other................................................. 26
----
Total direct taxes........................... $ 72
====
</TABLE>
Other taxes collected from consumers for governmental agencies that are not
included in revenues or expenses were $3,646 million for 1998.
NOTE 12 -- EMPLOYEE BENEFITS
In accordance with certain joint venture agreements related to human
resources matters, employees performing duties supporting Equilon remain
employees of the owner companies and affiliates who currently charge their
services to Equilon. It is expected that Equilon or one of its affiliates will
directly employ most personnel necessary for ongoing operations beginning April
1, 1999. Since Equilon and most of its consolidated affiliates had no directly
employed personnel at December 31, 1998, there are no liabilities related to
such on the balance sheet. Equilon does have a majority interest in a pipeline
company that employs its own personnel. The following information is applicable
to the benefit plans of that consolidated affiliate:
Pension Plans
Sponsorship for the Texas-New Mexico Pipeline Company retirement and group
pension plans was transferred from Texaco Inc. to Equilon in 1998. The remaining
benefits such as health and life insurance
15
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
remained with Texaco Inc. and will be transferred in fiscal year 1999. At
December 31, 1998, there were 74 participants in the retirement plan, and 80
participants in the pension plan.
The plan is accounted for as a defined benefit plan; therefore employees
will receive a defined amount upon retirement based on their number of years of
service and final average compensation. Actuarial studies provide the amounts
for inclusion in the audited financial statements.
At year-end 1998, the plans' assets of $20 million exceeded the accumulated
benefit obligation of $9 million. The weighted-average discount rate used in
determining the present value of the projected benefit obligation was 6.75% for
fiscal 1998. For compensation based plans, the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation and service cost was based upon an
experience-related table and approximated 4% on current salaries through 1998,
in accordance with plan terms. The expected long-term rate of return on plan
assets was 10% for 1998. The majority of plan assets are invested in a
diversified portfolio of insurance company deposits, fixed income securities and
equities.
Employee Termination Benefits
The joint venture agreements provide for Equilon and Motiva to determine the
appropriate staffing levels for their businesses. To the extent those staffing
needs result in the elimination of positions from the ranks of Shell, Texaco and
Star Enterprise, a joint venture between Texaco and SRI, affected employees are
entitled to termination benefits provided for under the benefit plans of the
applicable companies. Shell, Texaco and Star Enterprise, as the employer
companies, are responsible for administering the payment of benefits under their
respective benefit plans. Equilon and Motiva are obligated to reimburse the
employer companies for all costs resulting from the elimination of positions in
accordance with a formula included in the joint venture agreements.
The formation of Equilon and Motiva is expected to result in the termination
of 1,535 employees. Of this total, 869 employees have been terminated through
December 31, 1998. The remaining separations will be substantially completed by
mid-year 1999. In 1998 Equilon recorded a charge of $61 million for its share of
reimbursable severance and other benefit costs. Equilon has reimbursed the
employer companies $7 million in termination benefits through December 31, 1998,
and will make reimbursement for the remaining benefits in future periods in
accordance with the joint venture agreements.
NOTE 13 -- DERIVATIVES
Equilon utilizes futures, options and swaps to hedge the effects of
fluctuations in the prices of crude oil and refined products. These transactions
meet the requirements for hedge accounting, including designation and
correlation. The resulting gains or losses, measured by quoted market prices,
are accounted for as part of the transactions being hedged. On the balance
sheet, deferred gains and losses are included in current assets and liabilities.
At December 31, 1998, open derivative instruments held for hedging purposes
consisted mostly of futures. Notional contract amounts, excluding unrealized
gains and losses, were $59 million at year-end 1998. These amounts principally
represent future values of contract volumes over the remaining duration of the
outstanding futures contracts at the respective dates. These contracts hedge a
small fraction of the company's business activities, generally for the next
twelve months.
Equilon also entered into a relatively small number of petroleum-related
derivative transactions for trading purposes. The results of derivative trading
activities are marked to market, with gains and losses recorded in operating
revenue. All derivative instruments are straightforward futures, swaps and
options, with no leverage or multiplier features. At December 31, 1998, the open
derivative instruments held for trading
16
<PAGE>
EQUILON ENTERPRISES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
purposes consisted primarily of futures and swaps. The notional contract amounts
of these derivative instruments, excluding unrealized gains and losses, were $3
million at year-end 1998.
The earnings impact of positions closed in 1998 and the unrealized gains and
losses on open positions at December 31, 1998 were not material.
NOTE 14 -- CONTINGENT LIABILITIES
Equilon is subject to possible loss contingencies including actions or
claims based on environmental laws, federal regulations, and other matters.
While it is impossible to ascertain the ultimate legal and financial liability
with respect to many such contingent liabilities and commitments, Equilon has
accrued amounts related to certain such liabilities where the outcome is deemed
both probable and reasonably measurable.
Equilon, along with other oil companies, is working in cooperation with
regulatory and governmental agencies to investigate the presence and potential
sources of methyl tertiary butyl ether ("MTBE") and other gasoline constituents
in groundwater production wells that formerly provided water to the City of
Santa Monica, California. Equilon has also been named as a defendant or a
potentially responsible party in several other contamination matters and has
certain obligations for remediation of adverse environmental conditions related
to certain of its operating assets under existing laws and regulations.
On November 25, 1998, a fire occurred at the Equilon Puget Sound Refinery in
Anacortes, Washington, which resulted in six worker fatalities -- four employees
of a contractor and two Texaco employees working on behalf of Equilon.
Regulatory and governmental investigations are ongoing and wrongful death
lawsuits have been filed.
In management's opinion, the aggregate amount of liability for contingent
liabilities, in excess of financial liabilities already accrued, is not
anticipated to be material in relation to the consolidated financial position or
results of operations of Equilon.
NOTE 15 -- SUBSEQUENT EVENTS
On February 1, 1999, Equilon and Motiva sold the Shell proprietary Credit
Card Program to Associates First Capital Corporation. The proceeds from the sale
were assigned to Equilon and Motiva based on the outstanding receivable balances
at the time of the sale. The credit card receivables sold that were applicable
to Equilon amounted to $142 million.
17
<PAGE>
MOTIVA ENTERPRISES LLC
FINANCIAL STATEMENTS
December 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management.................................................. 1
Report of Independent Accountants..................................... 2
Statement of Income................................................... 3
Balance Sheets........................................................ 4
Statement of Cash Flows............................................... 5
Statement of Owners' Equity........................................... 6
Notes to Financial Statements......................................... 7
</TABLE>
<PAGE>
MOTIVA ENTERPRISES LLC
REPORT OF MANAGEMENT
The management of Motiva Enterprises LLC (the "Company") is responsible for
preparing the financial statements of the Company in accordance with generally
accepted accounting principles. In doing so, management must make estimates and
judgements when the outcome of events and transactions is not certain.
In preparing these financial statements from the accounting records,
management relies on an effective internal control system in meeting its
responsibility. This system of internal controls provides reasonable assurance
that assets are safeguarded and that the financial records are accurately and
objectively maintained. The Company's internal auditors conduct regular and
extensive internal audits throughout the Company. During these audits they
review and report on the effectiveness of the internal controls and make
recommendations for improvement.
The independent accounting firms of PricewaterhouseCoopers LLP, Deloitte &
Touche LLP and Arthur Andersen LLP are engaged to provide an objective,
independent audit of the Company's financial statements. Their accompanying
report is based on an audit conducted in accordance with generally accepted
auditing standards, which includes a review and evaluation of the effectiveness
of the Company's internal controls. This review establishes a basis for their
reliance thereon in determining the nature, timing and scope of their audit.
The Audit Committee of the Board of Directors is comprised of three,
non-employee directors who review and evaluate the Company's accounting policies
and reporting, internal controls, internal audit program and other matters as
deemed appropriate. The Audit Committee also reviews the performance of
PricewaterhouseCoopers LLP, Deloitte & Touche LLP and Arthur Andersen LLP and
evaluates their independence and professional competence, as well as the results
and scope of their audit.
L. Wilson Berry Jr. W. M. Kaparich Randy J. Braud
President and Chief Executive Officer Chief Financial Officer Controller
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS OF MOTIVA ENTERPRISES LLC:
We have audited the accompanying balance sheets of Motiva Enterprises LLC
(the "Company") as of December 31, 1998 and July 1, 1998 and the related
statements of income, owners' equity and cash flows for the period from
inception (July 1, 1998) to December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Motiva Enterprises LLC as of
December 31, 1998 and July 1, 1998 and the results of its operations and its
cash flows for the period from inception (July 1, 1998) to December 31, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
DELOITTE & TOUCHE LLP
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 5, 1999
2
<PAGE>
<TABLE>
<CAPTION>
MOTIVA ENTERPRISES LLC
Statement of Income
For the period from inception (July 1, 1998) to December 31
(Millions of dollars)
1998
----
<S> <C>
REVENUES
Sales and other revenue......................................... $5,371
COSTS AND EXPENSES
Purchases and other costs.................................. 4,079
Operating expenses......................................... 783
Selling, general and administrative expenses............. 193
Depreciation and amortization.............................. 174
Interest expense........................................... 43
Taxes other than income taxes.............................. 21
------
Total costs and expenses................................... 5,293
------
Net Income................................................. $ 78
======
<FN>
The accompanying Notes to Financial Statements are an
integral part of this statement.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MOTIVA ENTERPRISES LLC
Balance Sheets
(Millions of dollars)
July
December 31, 1,
1998 1998
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................ $ 25 $ --
Accounts and notes receivable, less allowance for
doubtful accounts of $9 million at December 31
and July 1............................................. 661 639
Inventories.............................................. 692 653
Other current assets..................................... 57 48
------- -------
Total current assets................................ 1,435 1,340
Investments and Advances.................................... 54 52
Property, Plant and Equipment
At cost.................................................. 7,187 7,095
Less accumulated depreciation............................ 2,112 2,056
------- -------
Net Property, Plant and Equipment........................ 5,075 5,039
------- -------
Deferred Charges and Other Noncurrent Assets................ 177 163
------- -------
Total Assets........................................ $ 6,741 $ 6,594
======= =======
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Commercial paper and current portion of long-term debt... $ 441 $ 909
Accounts payable and accrued liabilities................. 611 561
Accrued taxes............................................ 196 312
------- -------
Total current liabilities........................... 1,248 1,782
Long-Term Debt and Capital Lease Obligation................. 1,425 590
Accrued Environmental Remediation Liability................. 232 229
Deferred Credits and Other Noncurrent Liabilities........... 8 --
------- -------
Total Liabilities................................... 2,913 2,601
Owners' Equity.............................................. 3,828 3,993
------- -------
Total Liabilities and Owners' Equity................ $ 6,741 $ 6,594
======= =======
<FN>
The accompanying Notes to Financial Statements are an
integral part of these statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MOTIVA ENTERPRISES LLC
Statement of Cash Flows
For the period from inception (July 1, 1998) to December 31
(Millions of dollars)
1998
----
<S> <C>
OPERATING ACTIVITIES
Net Income....................................... $ 78
Reconciliation to net cash provided by
operating activities:
Depreciation and amortization.................. 174
Loss on sale of assets......................... 1
Changes in operating working capital
Accounts and notes receivable............... (22)
Inventories................................. (39)
Other current assets........................ (9)
Accounts payable and accrued liabilities.... (66)
Other-- net................................. (47)
-------
Net cash provided by operating activities... 70
INVESTING ACTIVITIES
Capital expenditures............................. (182)
Proceeds from sale of assets..................... 13
-------
Net cash used in investing activities....... (169)
FINANCING ACTIVITIES
Proceeds from borrowings......................... 1,278
Repayment of debt................................ (911)
Distributions to owners.......................... (243)
-------
Net cash provided by financing activities... 124
CASH AND CASH EQUIVALENTS
Increase during the period....................... 25
Beginning of period.............................. --
-------
End of period.................................... $ 25
=======
Supplemental cash flow information:
Interest paid during the period.................. $ 43
=======
<FN>
The accompanying Notes to Financial Statements are an
integral part of this statement.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
MOTIVA ENTERPRISES LLC
Statement of Owners' Equity
(Millions of dollars)
<S> <C>
Initial Owners' Capital Contribution, July 1, 1998................................... $ 3,993
Net Income........................................................................... 78
Distributions........................................................................ (243)
-------
Balance at December 31, 1998........................................................ $ 3,828
=======
<FN>
The accompanying Notes to Financial Statements are an
integral part of this statement.
</FN>
</TABLE>
6
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Motiva Enterprises LLC (the "Company") is a joint venture combining the
major elements of Shell Oil Company (Shell), Texaco Inc. (Texaco) and Saudi
Aramco's Gulf and East Coast U.S. refining and marketing businesses. The Company
is a limited liability company established by Shell Norco Refining Company
(Shell Norco), Shell, Texaco Refining and Marketing (East) Inc. (TRMI East) and
Saudi Refining Inc. (SRI) effective July 1, 1998 under the Delaware Limited
Liability Company Act. In accordance with the Limited Liability Company
Agreement (the "Agreement"), initial provisional ownership percentages are 35%
for Shell Norco and Shell together and 32.5% for each of TRMI East and SRI,
effective through the first full fiscal year. Also in accordance with the
Agreement, subsequent provisional ownership percentages will be determined for
the Company's second through seventh full fiscal years and final ownership
percentages will be determined for the Company's eighth full fiscal year. On
December 7, 1998, the ownership in the Company attributable to Shell Norco and
Shell was transferred to SOPC Holdings East LLC.
A second joint venture company, Equilon Enterprises LLC (Equilon), was
formed on January 1, 1998, combining the major elements of Shell and Texaco's
Western and Midwestern U.S. refining and marketing businesses and their
nationwide trading, transportation and lubricants businesses. Equiva Trading
Company (Trading) and Equiva Services LLC (Services) were also formed on July 1,
1998 and are owned equally by the Company and Equilon. Trading functions as the
trading unit for both companies. Services provides common financial,
administrative, technical and other operational support to both companies.
Trading and Services bill their services at cost.
The Company manufactures, distributes and markets petroleum products under
both the Shell and Texaco brands through its network of wholesalers, retailers
and Company owned and contract operated service stations in all or part of 26
states and the District of Columbia. Products are manufactured at four
refineries located in Delaware City, Delaware; Convent, Louisiana; Norco,
Louisiana; and Port Arthur, Texas.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Effective July 1, 1998, Shell Norco, Shell, TRMI East and SRI contributed
assets and liabilities to the Company pursuant to the terms of the Asset
Transfer and Liability Assumption Agreement, one of the joint venture agreements
establishing the Company. TRMI East and SRI contributed the assets and
liabilities of Star Enterprise (Star). The accompanying financial statements are
presented using the historical basis on July 1, 1998 of the assets and
liabilities contributed to the Company.
Use of Estimates
These financial statements are prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include the recoverability of
assets, environmental remediation, litigation and claims and assessments.
Amounts are recognized when it is probable that an asset has been impaired or a
liability has been incurred and the cost can be reasonably estimated. Actual
results could differ from those estimates.
New Accounting Standard
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133). SFAS 133 is effective for fiscal years beginning
after January 1, 2000. The Company has not determined the impact that the
adoption of SFAS 133 will have on its financial position or results of
operations.
7
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
Revenues
Revenues for refined products and crude oil sales are recognized at the
point of passage of title specified in the contract.
Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased.
Inventories
All inventories are valued at the lower of cost or market. The cost of
inventories of crude oil and petroleum products is determined on the last-in,
first-out (LIFO) method, while the cost of other merchandise inventories is
determined on the first-in, first-out (FIFO) method, and materials and supplies
are stated at average cost.
Property, Plant and Equipment
Depreciation of property, plant and equipment is provided generally on
composite groups, using the straight-line method, with depreciation rates based
upon the estimated useful lives of the groups.
Under the composite depreciation method, the cost of partial retirements of
a group is charged to accumulated depreciation. However, when there is a
disposition of a complete group, the cost and related depreciation are retired,
and any gain or loss is reflected in earnings.
Capitalized leases are amortized over the estimated useful life of the asset
or the lease term, as appropriate, using the straight-line method.
Maintenance and repairs, including major refinery maintenance, are charged
to expense as incurred. Renewals, betterments and major repairs that materially
extend the life of the properties are capitalized.
Interest incurred during the construction period of major additions is
capitalized.
The evaluation of impairment for property, plant and equipment is based on a
comparison of carrying value against undiscounted future net pre-tax cash flows.
If an impairment is identified, the asset's carrying amount is adjusted to fair
value. Assets to be disposed of are generally valued at the lower of net book
value or fair value less cost to sell.
Investments and Advances
Entities, where the Company has greater than 50 percent ownership but as a
result of contractual agreement or otherwise does not exercise control, are
accounted for using the equity method. The equity method of accounting is
generally used for investments in certain affiliates owned 50 percent or less,
including corporate joint ventures, limited liability companies and
partnerships. Under this method, equity in pre-tax income or losses of limited
liability companies and partnerships, and the net income or losses of corporate
joint venture companies is reflected in revenue, rather than when realized
through dividends or distributions.
Environmental Expenditures
The Company accrues for environmental remediation liabilities when it is
probable that such liability exists, based on past events or known conditions,
and the amount of such loss can be reasonably estimated. If the Company can only
estimate a range of probable liabilities, the minimum, undiscounted expenditure
necessary to satisfy the Company's future obligation is accrued.
8
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
For each potential liability, the Company determines the appropriate
liability amount considering all of the available data, including technical
evaluations of the currently available facts, interpretation of existing laws
and regulations, prior experience with similar sites and the estimated
reliability of financial projections.
The Company adjusts financial liabilities, as required, based on the latest
experience with similar sites, changes in environmental laws and regulations or
their interpretation, development of new technology or new information related
to the extent of the Company's obligation.
Derivatives
The Company uses interest rate swap derivative financial transactions to
minimize its borrowing cost. Amounts receivable or payable based on the interest
rate differentials of interest rate swaps are accrued monthly and are reflected
in interest expense.
The Company uses futures, options and swaps to hedge the effects of
fluctuations in the prices of crude oil and refined products. Unrealized gains
and losses on such transactions are deferred and recognized in income when the
transactions and cash are settled.
Fair Value of Financial Instruments
The estimated fair value of long-term debt is disclosed in Note 7 to the
financial statements. The carrying amount of long-term debt with variable rates
of interest approximates fair value at December 31, 1998 because borrowing terms
equivalent to the stated rates were available in the marketplace. Fair value for
long-term debt with a fixed rate of interest and interest rate swaps is
determined based on discounted cash flows using estimated prevailing interest
rates.
Other financial instruments are included in current assets and liabilities
on the balance sheet and approximate fair value because of the short maturity of
such instruments. These include cash, short-term investments, notes and accounts
receivable, accounts payable and short-term debt.
Contingencies
Certain conditions may exist as of the date financial statements are issued,
which may result in a loss to the Company, but which will only be resolved when
one or more future events occur or fail to occur. The Company's management and
legal counsel assess such contingent liabilities. The assessment of loss
contingencies necessarily involves an exercise of judgment and is a matter of
opinion. In assessing loss contingencies related to legal proceedings that are
pending against the Company or unasserted claims that may result in such
proceedings, the Company's legal counsel evaluates the perceived merits of any
legal proceeding or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a
material liability had been incurred and the amount of the loss can be
estimated, then the estimated liability would be accrued in the Company's
financial statements. If the assessment indicates that a potentially material
liability is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material would be
disclosed.
Loss contingencies considered remote are generally not disclosed unless they
involve guarantees, in which case the nature of the guarantee would be
disclosed. However, in some instances in which disclosure is not otherwise
required, the Company may disclose contingent liabilities of an unusual nature
which, in the judgment of management and its legal counsel, may be of interest
to the owners or others.
9
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES
The Company has entered into transactions with Shell, Texaco, SRI and
Equilon including the affiliates of these companies. Such transactions are in
the ordinary course of business and include the purchase, sale and
transportation of crude oil and petroleum products and numerous service
agreements.
The aggregate amounts of such transactions were as follows:
<TABLE>
<CAPTION>
For the period
from inception
(July 1, 1998)
to December 31, 1998
--------------------
(millions of dollars)
<S> <C>
Sales and other operating revenue....................... $ 857
Purchases and transportation costs......................... 2,642
Service and technology expense....................... 297
</TABLE>
Accounts receivable from related parties and accounts payable to related
parties were $73 million and $175 million, respectively, at December 31, 1998.
NOTE 4 -- SALE OF RECEIVABLES
At December 31, 1998 the Company had a third-party accounts receivable
agreement under which it has the right to sell up to $200 million of trade
accounts receivable on a continuing basis subject to limited recourse.
Receivables sold under this facility totaled $569 million for the six months
ended December 31, 1998. At December 31, 1998, $90 million of trade receivables
sold remained uncollected. The discount recorded on sales of trade receivables
amounted to $1 million for the six months ended December 31, 1998.
NOTE 5 -- INVENTORIES
<TABLE>
<CAPTION>
December 31, July 1,
1998 1998
------------- --------
(millions of dollars)
<S> <C> <C>
Crude oil and petroleum products...................... $ 597 $ 569
Other merchandise........................................... 13 12
Materials and supplies...................................... 82 72
----- -----
Total............................................. $ 692 $ 653
===== =====
</TABLE>
Due to declines in prices, December 31, 1998 crude oil and petroleum
products inventories have been reduced to estimated market value, reflecting a
$23 million valuation adjustment to the LIFO carrying value of such inventories
at December 31, 1998. At July 1, 1998, the excess of current cost over the LIFO
carrying value of crude oil and petroleum products inventories was approximately
$71 million.
10
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, 1998 July 1, 1998
----------------- ------------
Gross Net Gross Net
----- --- ----- ---
(millions of dollars)
<S> <C> <C> <C> <C>
Refining........................................................... $ 4,383 $ 2,972 $4,326 $ 2,941
Marketing.......................................................... 2,794 2,098 2,760 2,094
Other.............................................................. 10 5 9 4
------- ------- ------ -------
Total.................................................... $ 7,187 $ 5,075 $7,095 $ 5,039
======= ======= ====== =======
Capital lease amounts included above............................ $ 24 $ 12 $ 24 $ 13
======= ======= ====== =======
</TABLE>
Interest expense capitalized as part of property, plant and equipment was $4
million for the six months ended December 31, 1998.
NOTE 7 -- DEBT
Debt and capital lease obligation as of July 1, 1998 were assumed from Star
and Shell pursuant to the terms of the Asset Transfer and Liability Assumption
Agreement, one of the joint venture agreements forming the Company.
Short-Term
Debt due within one year from the dates indicated below consisted of the
following:
<TABLE>
<CAPTION>
December 31, July 1,
1998 1998
------------- --------
(millions of dollars)
<S> <C> <C>
Commercial paper................................................................ $ 1,211 $ --
Pollution control revenue bonds................................................. 277 210
Bank loans...................................................................... -- 254
Parent company note............................................................. -- 316
------- -----
1,488 780
Current maturities of long-term debt and capital lease obligation.............. 1 129
------- -----
1,489 909
Less: Short-term obligations intended to be refinanced:
Commercial paper.............................................................. 900 --
Pollution control revenue bonds............................................... 148 --
------- -----
Total short-term debt................................................. $ 441 $ 909
======= =====
</TABLE>
The weighted average interest rate for the commercial paper outstanding at
December 31, 1998 was 5.42%.
The pollution control revenue bonds outstanding at December 31, 1998 shown
above consisted of five individual issues totaling $129 million assumed from
Shell, three issues totaling $81 million assumed from Star, and $67 million
issued by the Company. For the issues assumed from Shell, interest rates are
currently reset on a daily basis for four of the issues and on a weekly basis
for the remaining issue; the bonds may be converted from time to time to other
modes. The weighted average interest rates for these issues at December 31, 1998
and July 1, 1998 were 5.02% and 3.61%, respectively. The bonds mature between
2005 and 2023, although bondholders have the right to tender their bonds under
certain conditions, including on
11
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
interest rate resets. Pursuant to the terms of the underlying indentures, Shell
retains liability for debt service on the issues the Company assumed from Shell
in the event that the Company fails to perform its obligations.
Interest rates are currently reset on a weekly basis for the issues assumed
from Star and the bonds issued by the Company, although these bonds may also be
converted from time to time to other modes. Weighted average interest rates at
December 31, 1998 and July 1, 1998 were 4.0% and 3.65%, respectively, for the
issues assumed from Star; the weighted average interest rate at December 31,
1998 was 5.35% for the bonds issued by the Company. The bonds assumed from Star
are currently supported by an irrevocable bank letter of credit, for which the
Company pays a fee based on the face amount of the letter of credit. The bonds
mature between 2014 and 2018, although bondholders have the right to tender
their bonds under certain conditions, including on interest rate resets. These
bonds, as well as $900 million of the Company's other short-term obligations
scheduled to mature in 1999, are reclassified to long-term debt at December 31,
1998 recognizing the Company's intent and ability to refinance those issues on a
long-term basis, if necessary through the use of its $1.5 billion revolving
credit facility.
The weighted average interest rate for the bank loans outstanding at July 1,
1998 which were assumed from Star, was 6.07%. The parent company note
outstanding at July 1, 1998 represented an amount due Shell in connection with
its asset contribution to the Company; its interest rate at that date was 6.02%.
Both the bank loans and the parent company note were repaid during the period
with proceeds from the Company's commercial paper program.
Long-Term
Long-term debt as of the dates indicated below consisted of the following:
<TABLE>
<CAPTION>
December 31, July 1,
1998 1998
------------ -------
(millions of
dollars)
<S> <C> <C>
Private placements............................................. $ 360 $ 400
Bank loans..................................................... -- 300
Capital lease obligation....................................... 18 19
------- -----
378 719
Less: Amounts due within one year.............................. 1 129
------- -----
377 590
Add: Short-term obligations intended to be refinanced:
Commercial paper............................................. 900 --
Pollution control revenue bonds.............................. 148 --
------- -----
Total long-term debt................................. $ 1,425 $ 590
======= =====
</TABLE>
At December 31, 1998 the Company was party to a $1.5 billion extendible
364-day revolving credit facility with a syndicate of major U.S. and
international banks. This facility is available as support for the issuance of
the Company's commercial paper and certain of its pollution control revenue
bonds, as well as for working capital and for other general corporate purposes.
The Company had no amounts outstanding under this facility during 1998. The
Company pays a facility fee on this facility, based on its total amount. Under
this agreement, interest on any amounts borrowed would be based on short-term
rates at the time of borrowing.
Private placements of $360 million at December 31, 1998 (originally $400
million at July 1, 1998) were assumed from Star, and consist of $110 million and
$250 million issued to various insurance companies in 1991 and 1992,
respectively. All of the notes carry fixed interest rates; the weighted average
interest rates were 8.6% for the 1991 issue and 7.6% for the 1992 issue. These
notes have varying maturities lasting until the year 2009.
12
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
A term bank loan facility was also assumed from Star on July 1, 1998 at
which time its weighted average interest rate was 6.05%. This facility was
repaid in full and terminated during the period with proceeds from the Company's
commercial paper program.
All Company borrowings are unsecured and with the exception of the pollution
control revenue bonds assumed from Shell, are non-recourse to the owners.
Long-term debt borrowing agreements include financial covenants regarding net
worth, leverage and liens. As of December 31, 1998 the Company was in compliance
with all covenants.
The amounts of long-term debt maturities during each of the next five years
are $0 million, $0 million, $45 million, $63 million and $65 million,
respectively. The preceding maturities are before consideration of short-term
obligations intended to be refinanced and also exclude capital lease
obligations.
Fair Value of Financial Instruments
The estimated fair values, at the dates indicated below, of the Company's
long-term debt and related derivative financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, July 1,
1998 1998
------------------- ------------
Carrying Fair Carrying Fair
Value Value Value Value
------- ----- ------- -----
(millions of dollars)
<S> <C> <C> <C> <C>
Long-term debt.................. $ 1,425 $ 1,472 $ 590 $ 626
Interest rate swaps............ -- 1.6 -- 0.4
</TABLE>
NOTE 8 -- DERIVATIVES
Debt-Related Derivatives
Many of the Company's interest bearing liabilities reflected on its balance
sheet are floating rate instruments. To reduce the impact of changes in interest
rates on this floating rate debt, the Company assumed certain interest rate swap
agreements in the notional amount of $100 million previously entered into by
Star. All such interest rate swaps require the counterparty of the swap to pay
to the Company a floating rate of interest on notional amounts of principal, and
for the Company to pay to the counterparty a fixed rate of interest on the same
amounts of notional principal. In all cases, the Company remains obligated to
pay the variable rate owing to the holder of the underlying obligations. These
interest rate swaps effectively convert $100 million of floating rate debt to a
fixed rate of 6% through the year 2000.
Each party to any interest rate swap agreement is exposed to credit risk for
nonperformance of the other party. The Company has such exposure, but since the
counterparties are major financial institutions, does not anticipate
nonperformance by counterparties.
Commodity Derivatives
The Company utilizes futures, options and swaps to hedge the effects of
fluctuations in the prices of crude oil and refined products. These transactions
meet the requirements for hedge accounting, including designation and
correlation. The resulting gains or losses, measured by quoted market prices,
are accounted for as part of the transactions being hedged. On the balance
sheet, deferred gains and losses are included in current assets and liabilities.
At December 31, 1998, the Company had open derivative commodity contracts
required to be settled in cash, consisting mostly of futures. Notional contract
amounts, excluding unrealized gains and losses, were $101 million at December
31, 1998. These amounts principally represent future values of contract volumes
13
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
over the remaining duration of outstanding futures contracts at the respective
dates. These contracts hedge a small fraction of the company's business
activities, generally for the next two months.
Unrealized losses on open positions at December 31, 1998 were $5 million.
The earnings impact of closed positions for the six months ended December 31,
1998 was not material.
NOTE 9 -- LEASE COMMITMENTS AND RENTAL EXPENSE
The Company has leasing arrangements involving service stations and other
facilities. Renewal and purchase options are available on certain of these
leases in which the Company is lessee.
The Company has a one-year lease agreement for a cogeneration plant being
constructed in proximity to the Company's Delaware City refinery. The lease
commences upon completion of the facility's construction, which is estimated to
be in the first quarter of 2000. The lease may be renewed at the Company's
option for seventeen consecutive one-year terms. The minimum lease commitment
for the first year (year 2000) is expected to be approximately $20 million (not
included in the table below). The Company, as construction agent for the
project, is obligated to reimburse the lessor for approximately 89 percent of
the project's construction cost if certain agreed-upon requirements are not met.
The accumulated expenditures to date at December 31, 1998 were $168 million. At
the end of the first one-year lease, if not renewed, the Company has guaranteed
a minimum recoverable residual value to the lessor of approximately 89 percent
of the total project construction cost.
As of December 31, 1998, the Company had estimated minimum commitments for
payment of rentals under leases which, at inception, had a noncancelable term of
more than one year, as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Lease
------ -----
(millions of
dollars)
<C> <C> <C>
1999....................................................................... $ 47 $ 4
2000....................................................................... 38 4
2001....................................................................... 30 4
2002....................................................................... 21 4
2003....................................................................... 18 4
After 2003................................................................. 51 13
----- ----
Total lease commitments.......................................... $ 205 33
=====
Less amounts representing interest......................................... 15
----
Present value of total capital lease obligation............................ 18
Less current portion of capital lease obligation........................... 1
----
Present value of long-term portion of capital lease obligation............ $ 17
====
</TABLE>
14
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
Rental expense relative to operating leases, including contingent rentals,
is provided in the table below:
<TABLE>
<CAPTION>
For the period
from inception
(July 1, 1998) to
December 31,
1998
-----------------
(millions of
dollars)
<S> <C>
Rental expense:
Minimum lease rentals.................................................................... $ 52
Contingent rentals....................................................................... 5
----
Total............................................................................ 57
Less rental income on properties subleased to others.................................... 25
----
Net rental expense......................................................................... $ 32
====
</TABLE>
NOTE 10 -- EMPLOYEE BENEFIT PLANS
In accordance with certain joint venture agreements related to human
resources matters, employees performing duties supporting the Company remain
employees of Shell, Texaco and Star, who currently charge their services to the
Company. It is expected that the Company or one of its affiliates will directly
employ the personnel necessary for continued support on April 1, 1999. Since the
Company has no directly employed personnel at December 31, 1998, there are no
liabilities related to such on the balance sheet. Pensions and other post
employment benefits costs are not separately identified in billings for employee
services from Shell, Texaco and Star, and therefore are not disclosed.
The joint venture agreements provide for the Company and Equilon to
determine the appropriate staffing levels for their businesses. To the extent
those staffing needs result in the elimination of positions from the ranks of
Shell, Texaco and Star, affected employees are entitled to termination benefits
provided for under the benefit plans of the applicable companies. Shell, Texaco
and Star, as the employer companies, are responsible for administering the
payment of benefits under their respective benefit plans. The Company and
Equilon are obligated to reimburse the employer companies for all costs
resulting from the elimination of positions in accordance with a formula
included in the joint venture agreements.
The formation of the Company and Equilon is expected to result in the
termination of 1,535 employees. Of this total, 869 employees have been
terminated through December 31, 1998. The remaining separations will be
substantially completed by mid-year 1999. In 1998 the Company recorded a charge
of $30 million for its share of reimbursable severance and other benefit costs.
The Company has reimbursed the employer companies $3 million in termination
benefits through December 31, 1998, and will make reimbursement for the
remaining benefits in future periods in accordance with the joint venture
agreements.
NOTE 11 -- CONTINGENT LIABILITIES
Except for environmental obligations, the Company generally did not assume
any contingent liabilities with respect to events occurring before July 1, 1998.
While it is impossible to ascertain the ultimate legal and financial
liability with respect to many contingent liabilities and commitments (including
lawsuits, claims, guarantees, federal regulations, environmental issues, etc.),
the Company has accrued amounts related to certain such liabilities. The Company
does not expect that the aggregate amount of commitments and contingent
liabilities in excess of amounts accrued at December 31, 1998, if any, will have
a material effect on the financial position or results of operations of the
Company.
15
<PAGE>
MOTIVA ENTERPRISES LLC
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 12 -- TAXES
The Company, as a limited liability company, is not liable for income taxes.
Income taxes are the responsibility of the owners, with earnings of the Company
included in the owners' earnings for the determination of income tax liability.
Excise taxes collected from consumers for governmental agencies that are not
included in revenues or expenses were $2,062 million for the six month period
ended December 31, 1998.
NOTE 13 -- SUBSEQUENT EVENT
On February 1, 1999 the Company and Equilon sold the Shell Proprietary
Credit Card Program to Associates First Capital Corporation. The proceeds from
the sale were assigned to the Company and Equilon based on the outstanding
receivable balances at the time of the sale. The credit card receivables sold
that were applicable to the Company amounted to $108 million.
16
<PAGE>
APPENDIX
DESCRIPTION OF GRAPHIC/IMAGE/ILLUSTRATION MATERIAL INCLUDED IN
EXHIBIT 13 - TEXACO INC.'S 1998 ANNUAL REPORT TO STOCKHOLDERS
The following information is depicted in graphic/image/illustration form in
Texaco Inc.'s 1998 Annual Report to Stockholders filed as Exhibit 13 to Texaco
Inc.'s 1998 Annual Report on Form 10-K and all page references included in the
following descriptions are to the actual and complete paper format version of
Texaco Inc.'s 1998 Annual Report to Stockholders as provided to Texaco Inc.'s
stockholders:
This Appendix describes the graphic material contained in the portion of Texaco
Inc.'s 1998 Annual Report to Stockholders which is incorporated by reference
into Texaco Inc.'s 1998 Annual Report on Form 10-K, in response to Form 10-K,
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
1. The first graph is located on Page 26. The bar graph is entitled
"Texaco's U.S. Realized Crude Oil Price Per Barrel" and is reflected in
dollars. The U.S. realized crude oil price per barrel, in dollars, for
each year are depicted as follows:
<TABLE>
<S> <C> <C>
1996 $17.93
1997 $17.34
1998 $10.60
</TABLE>
Below the graph a footnote appears which states, "Prices in 1998 fell
to historically low levels."
2. The second graph is located on Page 27. The bar graph is entitled "Cash
Expenses Per Barrel" and is reflected in dollars. A note above the
graph appears which states, "Excludes operations now in Equilon and
special items." The cash expenses per barrel, in dollars, for each year
are depicted as follows:
<TABLE>
<S> <C> <C>
1996 $3.93
1997 $4.08
1998 $3.74
</TABLE>
Below the graph a footnote appears which states, "Tight controls on
expenses led to an 8% reduction per barrel in 1998."
<PAGE>
3. The third graph is located on Page 29. The bar graph is entitled "U.S.
Production" and is reflected in thousands of barrels of oil equivalent
a day. The U.S. production, in thousands of barrels of oil equivalent a
day, for each year are depicted as follows:
<TABLE>
<CAPTION>
Crude Oil Natural Gas Total
--------- ----------- -----
<S> <C> <C> <C> <C>
1996 388 279 667
1997 396 284 680
1998 433 280 713
</TABLE>
Below the graph a footnote appears which states, "Growth of 5% in 1998
due to higher production in California and the Gulf of Mexico."
4. The fourth graph is located on Page 30. The bar graph is entitled "U.S.
Production Costs Per Barrel" and is reflected in dollars. The U.S.
production costs per barrel, in dollars, for each year are depicted as
follows:
<TABLE>
<S> <C> <C>
1996 $3.82
1997 $3.94
1998 $4.07
</TABLE>
Below the graph a footnote appears which states, "Slight rise due to
higher lifting costs of acquired Monterey properties."
5. The fifth graph is located on Page 31. The bar graph is entitled
"International Production" and is reflected in thousands of barrels of
oil equivalent a day. The International production, in thousands of
barrels of oil equivalent a day, for each year are depicted as follows:
<TABLE>
<CAPTION>
Crude Oil Natural Gas Total
--------- ----------- -----
<S> <C> <C> <C> <C>
1996 399 64 463
1997 437 79 516
1998 497 91 588
</TABLE>
Below the graph a footnote appears which states, "Production grew by
14% in 1998 due to continuing development in the North Sea, Indonesia
and the Middle East."
6. The sixth graph is located on Page 31. The bar graph is entitled
"International Exploratory Expenses" and is reflected in millions of
dollars. The International exploratory expenses, in millions of
dollars, for each year are depicted as follows:
<TABLE>
<S> <C> <C>
1996 $226
1997 $282
1998 $204
</TABLE>
<PAGE>
Below the graph a footnote appears which states, "Reduction in 1998
spending due to low-price environment."
7. The seventh graph is located on Page 31. The bar graph is entitled
"International Production Costs Per Barrel" and is reflected in
dollars. The International production costs per barrel, in dollars, for
each year are depicted as follows:
<TABLE>
<S> <C> <C>
1996 $4.47
1997 $4.30
1998 $3.74
</TABLE>
Below the graph a footnote appears which states, "Lower lifting costs
per barrel through operating efficiencies and increased production."
8. The eighth graph is located on Page 34. The bar graph is entitled
"International Refinery Input" and is reflected in thousands of barrels
a day. The International refinery input, in thousands of barrels a day,
for each year and geographical location are depicted as follows:
<TABLE>
<CAPTION>
Europe Caltex LA/WA Total
------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
1996 340 364 58 762
1997 336 408 60 804
1998 350 417 65 832
</TABLE>
Below the graph a footnote appears which states, "Texaco's refinery
system supplies key markets."
9. The ninth graph is located on Page 37. The bar graph is entitled
"Capital and Exploratory Expenditures - Geographical" and is reflected
in billions of dollars. Capital and exploratory expenditures, in
billions of dollars, for each year and geographical location are
depicted as follows:
<TABLE>
<CAPTION>
Acquisition of
Monterey
United States International Resources Total
------------- ------------- --------- -----
<S> <C> <C> <C> <C>
1996 $1.6 $1.8 $ - $3.4
1997 $2.3 $2.2 $1.4 $5.9
1998 $2.0 $2.0 $ - $4.0
</TABLE>
Below the graph a footnote appears which states, "Balanced spending on
a worldwide portfolio of projects."
<PAGE>
10. The tenth graph is located on Page 37. The bar graph is entitled
"Capital and Exploratory Expenditures - Functional" and is reflected in
billions of dollars. Capital and exploratory expenditures, in billions
of dollars, for each year and function are depicted as follows:
<TABLE>
<CAPTION>
Manufacturing,
marketing, Acquisition of
Exploration and Global gas distribution Monterey
production marketing and other Resources Total
---------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
1996 $2.3 $0.1 $1.0 $ - $3.4
1997 $3.0 $0.2 $1.3 $1.4 $5.9
1998 $2.7 $0.1 $1.2 $ - $4.0
</TABLE>
Below the graph a footnote appears which states, "Continued emphasis on
exploration and production projects."
<PAGE>
INDEX TO EXHIBITS
The exhibits designated by an asterisk are incorporated herein by reference
to documents previously filed by Texaco Inc. with the Securities and Exchange
Commission, SEC File No. 1-27.
Exhibits
<TABLE>
<S> <C>
(3.1) Copy of Restated Certificate of Incorporation of Texaco Inc., as
amended to and including March 2, 1999, including Certificate of
Designations, Preferences and Rights of Series B ESOP Convertible
Preferred Stock, Series D Junior Participating Preferred Stock
and Series G, H, I and J Market Auction Preferred Shares.
(3.2) Copy of By-Laws of Texaco Inc., as amended to and including July
26, 1998.
(10(iii)(a)) Form of severance agreement between Texaco Inc. and elected
officers of Texaco Inc.
(10(iii)(b)) Employment agreement dated December 30, 1997, between Texaco Inc.
and Mr. John J. O'Connor, Senior Vice President of Texaco Inc.
(10(iii)(c)) Employment agreements dated July 18, 1997, between Texaco Inc. and
Mr. William M. Wicker, Senior Vice President of Texaco Inc.
(10(iii)(d)) Texaco Inc.'s 1997 Stock Incentive Plan, incorporated herein by
reference to Appendix A, pages 39 through 44 of Texaco Inc.'s
proxy statement dated March 27, 1997. *
(10(iii)(e)) Texaco Inc.'s 1997 Incentive Bonus Plan, incorporated herein by reference
to Appendix A, pages 45 and 46 of Texaco Inc.'s proxy statement dated
March 27, 1997. *
(10(iii)(f)) Texaco Inc.'s Stock Incentive Plan, incorporated herein by reference to
pages A-1 through A-8 of Texaco Inc.'s proxy statement dated April 5, 1993. *
(10(iii)(g)) Texaco Inc.'s Stock Incentive Plan, incorporated herein by reference to pages
IV-1 through IV-5 of Texaco Inc.'s proxy statement dated April 10, 1989
and to Exhibit A of Texaco Inc.'s proxy statement dated March 29, 1991. *
(10(iii)(h)) Texaco Inc.'s Incentive Bonus Plan, incorporated herein by reference to page
IV-5 of Texaco Inc.'s proxy statement dated April 10, 1989. *
(10(iii)(i)) Description of Texaco Inc.'s Supplemental Pension Benefits Plan, incorporated
herein by reference to pages 8 and 9 of Texaco Inc.'s proxy statement dated
March 17, 1981. *
(10(iii)(j)) Description of Texaco Inc.'s Revised Supplemental Pension
Benefits Plan, incorporated herein by reference to pages 24
through 27 of Texaco Inc.'s proxy statement dated March 9, 1978. *
(10(iii)(k)) Description of Texaco Inc.'s Revised Incentive Compensation Plan,
incorporated herein by reference to pages 10 and 11 of Texaco Inc.'s proxy
statement dated March 13, 1969. *
(12.1) Computation of Ratio of Earnings to Fixed Charges of Texaco on a
Total Enterprise Basis.
(12.2) Definitions of Selected Financial Ratios.
(13) Copy of those portions of Texaco Inc.'s 1998 Annual Report to
Stockholders that are incorporated herein by reference into this
Annual Report on Form 10-K.
<PAGE>
(21) Listing of significant Texaco Inc. subsidiary companies and the
name of the state or other jurisdiction in which each subsidiary
was organized.
(23.1) Consent of Arthur Andersen LLP.
(23.2) Consent of KPMG LLP.
(23.3) Consent of Independent Accountants of Equilon Enterprises LLC.
(23.4) Consent of Independent Accountants of Motiva Enterprises LLC.
(24) Powers of Attorney for the Directors and certain Officers of
Texaco Inc. authorizing, among other things, the signing of
Texaco Inc.'s Annual Report on Form 10-K on their behalf.
(27) Financial Data Schedule.
</TABLE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
TEXACO INC.
(as amended to and including March 2, 1999)
A Restated Certificate of Incorporation was duly adopted by the Board of
Directors of Texaco Inc. on April 27, 1990, pursuant to Section 245 of the
General Corporation Law of the State of Delaware and was amended on December 22,
1992, November 9, 1994, September 10, 1997 and March 2, 1999. This document only
restates and integrates the provisions of the Company's Restated Certificate of
Incorporation as heretofore amended or supplemented.
The Company was incorporated under the laws of Delaware on August 26,
1926, as The Texas Corporation.
I.
The name of this Company is TEXACO INC.
II.
Its principal office in the State of Delaware is located at 32 Loockerman
Square, Suite L-100, in the City of Dover, County of Kent, and the name of its
resident agent is The Prentice-Hall Corporation System, Inc., whose address is
32 Loockerman Square, Suite L-100, Dover, Delaware.
III.
The objects or purposes for which the Company is formed and the nature of
the business to be carried on, any one or all of which it may pursue in the
United States of America and the states, districts, territories and possessions
thereof and in foreign countries, are as follows:
A. to engage in and carry on the petroleum business and the various
branches thereof, including the extraction, production, storage, transportation,
purchase and sale of oil and gas, natural gas liquids, shale and other
hydrocarbon substances and their products and by-products, and refining,
treating, applying, compounding, processing and otherwise preparing them for
market;
B. to engage in and carry on any other business, without limit as to kind
and whether or not related to, similar to or different from, the petroleum
business, including but not limited to, the businesses of mining, manufacturing,
processing, storage, construction, service, transportation and merchandising;
C. to acquire, own, hold, enjoy, lease, deal in, operate, dispose of and
convey real and personal property of every kind and description, rights and
interests therein, and the business, property, assets and good will of any
person, partnership, association, firm, corporation or other entity;
D. to acquire, own, hold, enjoy, deal in and sell, transfer or otherwise
dispose of stock, bonds, notes and other securities, as well as accounts,
contracts and evidences of indebtedness of any person, partnership, association,
firm, corporation or other entity, in whatsoever business or activity engaged
and whether private or public in character, and to exercise all rights in
respect thereto;
1
<PAGE>
E. to make secured and unsecured loans, with or without interest, to
assume or guarantee the stock, bonds, and obligations of, or otherwise to
assist, any person, partnership, association, firm, corporation or other entity,
in whatsoever business or activity engaged and whether public or private in
character, when so doing, in the opinion of the Board of Directors, would tend
to promote the business of this Company;
F. to acquire, own, hold, enjoy, grant, deal in, transfer, sell or
otherwise dispose of intangible property of every kind and description,
including, without limitation, patents, patent rights, trademarks, trade names,
copyrights, licenses, formulae and chooses in action of any kind;
G. to do all and everything useful in or incidental to the accomplishment
of the objects and purposes herein stated, as principal, agent, contractor,
trustee, or otherwise, either alone or in association with others, to the same
extent and as fully as could natural persons.
No enumeration of specific objects, purposes or powers, or particular
description of business in this article shall be held to limit or restrict in
any manner those enumerations or descriptions which are general in their
character, and the objects, powers and descriptions of one section shall in no
wise be limited or restricted by reference to or inference from the terms of any
other section.
IV.
The total number of shares of all classes of stock which the Company shall
have authority to issue is 730,000,000 shares, consisting of 30,000,000 shares
of Preferred Stock of the par value of $1.00 each and 700,000,000 shares of
Common Stock of the par value of $3.125 each.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions of the Preferred Stock and the
Common Stock are as follows:
(A) The Preferred Stock may be issued from time to time in one or more
series. Subject to the limitations set forth herein and any limitations
prescribed by law, the Board of Directors is expressly authorized, prior to
issuance of any series of Preferred Stock, to fix by resolution or resolutions
providing for the issue of any series the number of shares included in such
series and the designation, relative powers, preferences and rights, and the
qualifications, limitations or restrictions of such series. Pursuant to the
foregoing general authority vested in the Board of Directors, but not in
limitation of the powers conferred on the Board of Directors thereby and by the
General Corporation Law of the State of Delaware, the Board of Directors is
expressly authorized to determine with respect to each series of Preferred
Stock:
1. the designation or designations of such series and the number of
shares (which number from time to time may be decreased by the Board of
Directors, but not below the number of such shares of such series then
outstanding, or may be increased by the Board of Directors unless
otherwise provided in creating such series) constituting such series;
2. the rate or amount and times at which, and the preferences and
conditions under which, dividends shall be payable on shares of such
series, the status of such dividends as cumulative or
2
<PAGE>
non-cumulative, the date or dates from which dividends, if cumulative,
shall accumulate, and the status of such as participating or
non-participating after the payment of dividends as to which such shares
are entitled to any preference;
3. the rights and preferences, if any, of the holders of shares of
such series upon the liquidation, dissolution or winding up of the affairs
of, or upon any distribution of the assets of, the Company, which amount
may vary depending upon whether such liquidation, dissolution or winding
up is voluntary or involuntary and, if voluntary, may vary at different
dates, and the status of the shares of such series as participating or
non-participating after the satisfaction of any such rights and
preferences;
4. the full or limited voting rights, if any, to be provided for
shares of such series, in addition to the voting rights provided by law;
5. the times, terms and conditions, if any, upon which shares of
such series shall be subject to redemption, including the amount the
holders of shares of such series shall be entitled to receive upon
redemption (which amount may vary under different conditions or at
different redemption dates) and the amount, terms, conditions and manner
of operation of any purchase, retirement or sinking fund to be provided
for the shares of such series;
6. the rights, if any, of holders of shares of such series to
convert such shares into, or to exchange such shares for, shares of any
other class or classes or of any other series of the same class, the
prices or rates of conversion or exchange, and adjustments thereto, and
any other terms and conditions applicable to such conversion or exchange;
7. the limitations, if any, applicable while such series is
outstanding on the payment of dividends or making of distributions on, or
the acquisition or redemption of, Common Stock or any other class of
shares ranking junior, either as to dividends or upon liquidation, to the
shares of such series;
8. the conditions or restrictions, if any, upon the issue of any
additional shares (including additional shares of such series or any other
series or of any other class) ranking on a parity with or prior to the
shares of such series either as to dividends or upon liquidation; and
9. any other relative powers, preferences and participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, of shares of such series;
in each case, so far as not inconsistent with the provisions of this Certificate
of Incorporation or the General Corporation Law of the State of Delaware as then
in effect. All shares of Preferred Stock shall be identical and of equal rank
except in respect to the particulars that may be fixed by the Board of Directors
as provided above, and all shares of each series of Preferred Stock shall be
identical and of equal rank except as to the times from which cumulative
dividends, if any, thereon shall be cumulative.
B. Pursuant to the authority conferred upon the Board of Directors by the
Restated Certificate of Incorporation, the Board of Directors has created the
following series of Preferred Stock, with the following voting powers,
preferences and relative, participating, optional or other special rights, and
the following qualifications, limitations or restrictions.
3
<PAGE>
Series B ESOP Convertible Preferred Stock
SECTION 1. Designation and Amount; Special Purpose Restricted Transfer
Issue.
(A) The shares of such series shall be designated as "Series B ESOP
Convertible Preferred Stock" ("Series B Preferred Stock") and the number of
shares constituting such series shall be 833,333 1/3.
(B) Shares of Series B Preferred Stock shall be issued only to State
Street Bank and Trust Company, as trustee (the "Trustee") of the employee stock
ownership plan feature of the Employees Thrift Plan of the Company (the "Plan").
All references to the holder of shares of Series B Preferred Stock shall mean
the Trustee or any successor trustee under the Plan. In the event of any
transfer of record ownership of shares of Series B Preferred Stock to any person
other than any successor trustee under the Plan, the shares of Series B
Preferred Stock so transferred, upon such transfer and without any further
action by the Company or the holder thereof, shall be automatically converted
into shares of Common Stock on the terms otherwise provided for the conversion
of shares of Series B Preferred Stock into shares of Common Stock pursuant to
Section 5 hereof and no such transferee shall have any of the voting powers,
preferences and relative, participating, optional or special rights ascribed to
shares of Series B Preferred Stock hereunder but, rather, only the powers and
rights pertaining to the Common Stock into which such shares of Series B
Preferred Stock shall be so converted. In the event of such a conversion, the
transferee of the shares of Series B Preferred Stock shall be treated for all
purposes as the record holder of the shares of Common Stock into which such
shares of Series B Preferred Stock have been automatically converted as of the
date of such transfer. Certificates representing shares of Series B Preferred
Stock shall bear a legend to reflect the foregoing provisions. Notwithstanding
the foregoing provisions of this paragraph (B) of Section 1, shares of Series B
Preferred Stock (i) may be converted into shares of Common Stock as provided by
Section 5 hereof and the shares of Common Stock issued upon such conversion may
be transferred by the holder thereof as permitted by law and (ii) shall be
redeemable by the Company upon the terms and conditions provided by Sections 6,
7 and 8 hereof.
SECTION 2. Dividends and Distribution.
(A) Subject to the provisions for adjustment hereinafter set forth, the
holders of shares of Series B Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available therefor, cash dividends ("Preferred Dividends") in an amount per
share equal to $57.00 per share per annum, and no more, payable semiannually in
arrears, one-half on the 20th day of December and one-half on the 20th day of
June of each year (each a "Dividend Payment Date") commencing on June 20, 1989,
to holders of record at the start of business on such Dividend Payment Date. In
the event that any Dividend Payment Date shall fall on any day other than a
"Business Day" (as hereinafter defined), the dividend payment due on such
Dividend Payment Date shall be paid on the Business Day immediately preceding
such Dividend Payment Date. Preferred Dividends shall begin to accrue on
outstanding shares of Series B Preferred Stock from the date of issuance of such
shares of Series B Preferred Stock. Preferred Dividends shall accrue on a daily
basis whether or not the Company shall have earnings or surplus at the time, but
Preferred Dividends accrued after issuance on the shares of Series B Preferred
Stock for any period less than a full semiannual period between Dividend Payment
Dates shall be computed on the basis of a 360-day year of 30-day months. Accrued
but unpaid Preferred Dividends shall cumulate as of the Dividend Payment Date on
which they first become payable, but no interest shall accrue on accumulated but
unpaid Preferred Dividends.
4
<PAGE>
(B) So long as any shares of Series B Preferred Stock shall be
outstanding, no dividend shall be declared or paid or set apart for payment on
any other series of stock ranking on a parity with the Series B Preferred Stock
as to dividends, unless there shall also be or have been declared and paid or
set apart for payment on the Series B Preferred Stock, dividends for all
dividend payment periods of the Series B Preferred Stock ending on or before the
Dividend Payment Date of such parity stock, ratably in proportion to the
respective amounts of dividends accumulated and unpaid through such dividend
period on the Series B Preferred Stock and accumulated and unpaid on such parity
stock through the dividend payment period on such parity stock next preceding
such Dividend Payment Date. In the event that full cumulative dividends on the
Series B Preferred Stock have not been declared and paid or set apart for
payment when due, the Company shall not declare or pay or set apart for payment
any dividends or make any other distributions on, or make any payment on account
of the purchase, redemption or other retirement of any other class of stock or
series thereof of the Company ranking, as to dividends or as to distributions in
the event of a liquidation, dissolution or winding up of the Company, junior to
the Series B Preferred Stock until full cumulative dividends on the Series B
Preferred Stock shall have been paid or declared and set apart for payment;
provided, however, that the foregoing shall not apply to (i) any dividend
payable solely in any shares of any stock ranking, as to dividends and as to
distributions in the event of a liquidation, dissolution or winding up of the
Company, junior to the Series B Preferred Stock or (ii) the acquisition of
shares of any stock ranking, as to dividends or as to distributions in the event
of a liquidation, dissolution or winding up of the Company, junior to the Series
B Preferred Stock in exchange solely for shares of any other stock ranking, as
to dividends and as to distributions in the event of a liquidation, dissolution
or winding up of the Company, junior to the Series B Preferred Stock.
SECTION 3. Voting Rights.
The holders of shares of Series B Preferred Stock shall have the following
voting rights:
(A) The holders of Series B Preferred Stock shall be entitled to vote on
all matters submitted to a vote of the stockholders of the Company, voting
together with the holders of Common Stock as one class. The holder of each share
of Series B Preferred Stock shall be entitled to a number of votes equal to the
number of shares of Common Stock into which such share of Series B Preferred
Stock could be converted on the record date for determining the stockholders
entitled to vote, rounded to the nearest one-tenth of a vote; it being
understood that whenever the "Conversion Price" (as defined in Section 5 hereof)
is adjusted as provided in Section 9 hereof, the voting rights of the Series B
Preferred Stock shall also be similarly adjusted.
(B) Except as otherwise required by law or set forth herein, holders of
Series B Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for the taking of any corporate
action; provided, however, that the vote of at least 66 2/3% of the outstanding
shares of Series B Preferred Stock, voting separately as a series, shall be
necessary to adopt any alteration, amendment or repeal of any provision of the
Restated Certificate of Incorporation of the Company, as amended, or this
Resolution (including any such alteration, amendment or repeal effected by any
merger or consolidation in which the Company is the surviving or resulting
corporation), if such amendment, alteration or repeal would alter or change the
powers, preferences or special rights of the shares of Series B Preferred Stock
so as to affect them adversely.
5
<PAGE>
SECTION 4. Liquidation, Dissolution or Winding Up.
(A) Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of Series B Preferred Stock shall be entitled to
receive out of assets of the Company which remain after satisfaction in full of
all valid claims of creditors of the Company and which are available for payment
to stockholders, and subject to the rights of the holders of any stock of the
Company ranking senior to or on a parity with the Series B Preferred Stock in
respect of distributions upon liquidation, dissolution or winding up of the
Company, before any amount shall be paid or distributed among the holders of
Common Stock or any other shares ranking junior to the Series B Preferred Stock
in respect of distributions upon liquidation, dissolution or winding up of the
Company, liquidating distributions in the amount of $600 per share, plus an
amount equal to all accrued and unpaid dividends thereon to the date fixed for
distribution, and no more. If upon any liquidation, dissolution or winding up of
the Company, the amounts payable with respect to the Series B Preferred Stock
and any other stock ranking as to any such distribution on a parity with the
Series B Preferred Stock are not paid in full, the holders of the Series B
Preferred Stock and such other stock shall share ratably in any distribution of
assets in proportion to the full respective preferential amounts to which they
are entitled. After payment of the full amount to which they are entitled as
provided by the foregoing provisions of this paragraph 4(A), the holders of
shares of Series B Preferred Stock shall not be entitled to any further right or
claim to any of the remaining assets of the Company.
(B) Neither the merger or consolidation of the Company with or into any
other corporation, nor the merger or consolidation of any other corporation with
or into the Company, nor the sale, lease, exchange or other transfer of all or
any portion of the assets of the Company, shall be deemed to be a dissolution,
liquidation or winding up of the affairs of the Company for purposes of this
Section 4, but the holders of Series B Preferred Stock shall nevertheless be
entitled in the event of any such merger or consolidation to the rights provided
by Section 8 hereof.
(C) Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, stating the payment date or dates
when, and the place or places where, the amounts distributable to holders of
Series B Preferred Stock in such circumstances shall be payable, shall be given
by first-class mail, postage prepaid, mailed not less than twenty (20) days
prior to any payment date stated therein, to the holders of Series B Preferred
Stock, at the address shown on the books of the Company or any transfer agent
for the Series B Preferred Stock.
SECTION 5. Conversion into Common Stock.
(A) A holder of shares of Series B Preferred Stock shall be entitled, at
any time prior to the close of business on the date fixed for redemption of such
shares pursuant to Sections 6, 7 and 8 hereof, to cause any or all of such
shares to be converted into shares of Common Stock, initially at a conversion
rate equal to the ratio of $600 to the amount which initially shall be $60 and
which shall be adjusted as hereinafter provided (and, as so adjusted, is
hereinafter sometimes referred to as the "Conversion Price") (that is, a
conversion rate initially equivalent to ten shares of Common Stock for each
share of Series B Preferred Stock so converted, which is subject to adjustment
as the Conversion Price is adjusted as hereinafter provided).
(B) Any holder of shares of Series B Preferred Stock desiring to convert
such shares into shares of Common Stock shall surrender the certificate or
certificates representing the shares of Series B Preferred Stock being
converted, duly assigned or endorsed for transfer to the Company (or
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<PAGE>
accompanied by duly executed stock powers relating thereto), at the principal
executive office of the Company or the offices of the transfer agent for the
Series B Preferred Stock or such office or offices in the continental United
States of an agent for conversion as may from time to time be designated by
notice to the holders of the Series B Preferred Stock by the Company or the
transfer agent for the Series B Preferred Stock, accompanied by written notice
of conversion. Such notice of conversion shall specify (i) the number of shares
of Series B Preferred Stock to be converted and the name or names in which such
holder wishes the certificate or certificates for Common Stock and for any
shares of Series B Preferred Stock not to be so converted to be issued and (ii)
the address to which such holder wishes delivery to be made of such new
certificates to be issued upon such conversion.
(C) Upon surrender of a certificate representing a share or shares of
Series B Preferred Stock for conversion, the Company shall issue and send by
hand delivery (with receipt to be acknowledged) or by first-class mail, postage
prepaid, to the holder thereof or to such holder's designee, at the address
designated by such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled upon conversion.
In the event that there shall have been surrendered a certificate or
certificates representing shares of Series B Preferred Stock, only part of which
are to be converted, the Company shall issue and deliver to such holder or such
holder's designee a new certificate or certificates representing the number of
shares of Series B Preferred Stock which shall not have been converted.
(D) The issuance by the Company of shares of Common Stock upon a
conversion of shares of Series B Preferred Stock into shares of Common Stock
made at the option of the holder thereof shall be effective as of the earlier of
(i) the delivery to such holder or such holder's designee of the certificates
representing the shares of Common Stock issued upon conversion thereof or (ii)
the commencement of business on the second business day after the surrender of
the certificate or certificates for the shares of Series B Preferred Stock to be
converted, duly assigned or endorsed for transfer to the Company (or accompanied
by duly executed stock powers relating thereto) as provided by this Resolution.
On and after the effective day of conversion, the person or persons entitled to
receive the Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock, but no
allowance or adjustment shall be made in respect of dividends payable to holders
of Common Stock in respect of any period prior to such effective date. The
Company shall not be obligated to pay any dividends which shall have been
declared and shall be payable to holders of shares of Series B Preferred Stock
on a Dividend Payment Date if such Dividend Payment Date for such dividend is
subsequent to the effective date of conversion of such shares.
(E) The Company shall not be obligated to deliver to holders of Series B
Preferred Stock any fractional share of shares of Common Stock issuable upon any
conversion of such shares of Series B Preferred Stock, but in lieu thereof may
make a cash payment in respect thereof in any manner permitted by law.
(F) The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for issuance upon the conversion of
shares of Series B Preferred Stock as herein provided, free from any preemptive
rights, such number of shares of Common Stock as shall from time to time be
issuable upon the conversion of all the shares of Series B Preferred Stock then
outstanding. Nothing contained herein shall preclude the Company from issuing
shares of Common Stock held in its treasury upon the conversion of shares of
Series B Preferred Stock into Common Stock pursuant to the terms hereof. The
Company shall prepare and shall use its best efforts to obtain and keep in force
such governmental or regulatory permits or other authorizations as may be
required by law, and shall comply with all requirements as to registration or
qualification of the Common Stock, in order to enable the
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<PAGE>
Company lawfully to issue and deliver to each holder of record of Series B
Preferred Stock such number of shares of its Common Stock as shall from time to
time be sufficient to effect the conversion of all shares of Series B Preferred
Stock then outstanding and convertible into shares of Common Stock.
SECTION 6. Redemption at the Option of the Company.
(A) The Series B Preferred Stock shall be redeemable, in whole or in part,
at the option of the Company at any time after December 20, 1991, or at any time
after the date of issuance, if permitted by paragraph (D) of this Section 6, at
the following redemption prices per share:
<TABLE>
<CAPTION>
During the Twelve-
Month Period Price Per
Beginning December 20 Share
<S> <C>
1988 $ 657.00
1989 $ 651.30
1990 $ 645.60
1991 $ 639.90
1992 $ 634.20
1993 $ 628.50
1994 $ 622.80
1995 $ 617.10
1996 $ 611.40
1997 $ 605.70
</TABLE>
and thereafter at $600 per share, plus, in each case, an amount equal to all
accrued and unpaid dividends thereon to the date fixed for redemption. Payment
of the redemption price shall be made by the Company in cash or shares of Common
Stock, or a combination thereof, as permitted by paragraph (F) of this Section
6. From and after the date fixed for redemption, dividends on shares of Series B
Preferred Stock called for redemption will cease to accrue, such shares will no
longer be deemed to be outstanding and all rights in respect of such shares of
the Company shall cease, except the right to receive the redemption price. If
less than all of the outstanding shares of Series B Preferred Stock are to be
redeemed, the Company shall either redeem a portion of the shares of each holder
determined pro rata based on the number of shares held by each holder or shall
select the shares to be redeemed by lot, as may be determined by the Board of
Directors of the Company.
(B) Unless otherwise required by law, notice of redemption will be sent
to the holders of Series B Preferred Stock at the address shown on the books of
the Company or any transfer agent for the Series B Preferred Stock by
first-class mail, postage prepaid, mailed not less than twenty (20) days nor
more than sixty (60) days prior to the redemption date. Each such notice shall
state: (i) the redemption date; (ii) the total number of shares of the Series B
Preferred Stock to be redeemed and, if fewer than all the shares held by such
holder are to be redeemed, the number of such shares to be redeemed from such
holder; (iii) the redemption price; (iv) the place or places where certificates
for such shares are to be surrendered for payment of the redemption price; (v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the conversion rights of the shares to be redeemed,
the period within which conversion rights may be exercised, and the Conversion
Price and number of shares of Common Stock issuable upon conversion of a share
of Series B Preferred Stock at the time. Upon surrender of the certificate for
any shares so called for redemption and not previously converted (properly
endorsed or assigned for transfer, if the Board of Directors of the Company
shall so require
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<PAGE>
and the notice shall so state), such shares shall be redeemed by the Company at
the date fixed for redemption and at the redemption price set forth in this
Section 6.
(C) In the event of a change in the federal tax law of the United States
of America which has the effect of precluding the Company from claiming any of
the tax deductions for dividends paid on the Series B Preferred Stock when such
dividends are used as provided under Section 404(k) (2) of the Internal Revenue
Code of 1986, as amended and in effect on the date shares of Series B Preferred
Stock are initially issued, the Company may, in its sole discretion and
notwithstanding anything to the contrary in paragraph (A) of this Section 6,
elect to redeem any or all of such shares for the amount payable in respect of
the shares upon liquidation of the Company pursuant to Section 4 hereof.
(D) Notwithstanding anything to the contrary in paragraph (A) of this
Section 6, the Company may elect to redeem any or all of the shares of Series B
Preferred Stock at any time on or prior to December 20, 1991, on the terms and
conditions set forth in paragraphs (A) and (B) of this Section 6, if the last
reported sales price, regular way, of a share of Common Stock, as reported on
the New York Stock Exchange Composite Tape or, if the Common Stock is not listed
or admitted to trading on the New York Stock Exchange, on the principal national
securities exchange on which such stock is listed or admitted to trading or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange, on the National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or, if Common
Stock is not quoted on such National Market System, the average of the closing
bid and asked prices in the over-the-counter market as reported by NASDAQ, for
at least twenty (20) trading days within a period of thirty (30) consecutive
trading days ending within five (5) days of the notice of redemption, equals or
exceeds one hundred fifty percent (150%) of the Conversion Price (giving effect
in making such calculation to any adjustments required by Section 9 hereof).
(E) In the event that the Plan is terminated in accordance with its
terms, and notwithstanding anything to the contrary in paragraph (A) of this
Section 6, the Company shall, as soon thereafter as practicable, call for
redemption all then outstanding shares of Series B Preferred Stock for the
amount payable in respect of the shares upon liquidation of the Company pursuant
to Section 4 hereof.
(F) The Company, at its option, may make payment of the redemption price
required upon redemption of shares of Series B Preferred Stock in cash or in
shares of Common Stock, or in a combination of such shares and cash, any such
shares of Common Stock to be valued for such purposes at their Fair Market Value
(as defined in paragraph (G) of Section 9 hereof).
SECTION 7. Other Redemption Rights.
Shares of Series B Preferred Stock shall be redeemed by the Company for
cash or, if the Company so elects, in shares of Common Stock, or a combination
of such shares and cash, any such shares of Common Stock to be valued for such
purpose as provided by paragraph (F) of Section 6, at a redemption price of $600
per share plus accrued and unpaid dividends thereon to the date fixed for
redemption, at the option of the holder, at any time and from time to time upon
notice to the Company given not less than five (5) business days prior to the
date fixed by the holder in such notice for such redemption, upon certification
by such holder to the Company of the following events: (i) when and to the
extent necessary for such holder to provide for distributions required to be
made to participants under, or to satisfy an investment election provided to
participants in accordance with, the Plan, or any successor plan; (ii) when and
to the extent necessary for such holder to make any payments of principal,
interest or premium due and payable (whether as scheduled or upon acceleration)
under the Loan
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<PAGE>
Agreement among the Trustee, certain banking parties thereto (collectively, the
"Banks") and Chase Manhattan Bank (National Association), as agent for the Banks
or any indebtedness incurred by the holder for the benefit of the Plan; or (iii)
in the event that the Plan is not initially determined by the Internal Revenue
Service to be qualified within the meaning of Sections 401(a) and 4975(e)(7) of
the Internal Revenue Code of 1986, as amended.
SECTION 8. Consolidation, Merger, etc.
(A) In the event that the Company shall consummate any consolidation or
merger or similar business combination, pursuant to which the outstanding shares
of Common Stock are by operation of law exchanged solely for or changed,
reclassified or converted solely into stock of any successor or resulting
corporation (including the Company) that constitutes "qualifying employer
securities" with respect to a holder of Series B Preferred Stock within the
meaning of Section 409(l) of the Internal Revenue Code of 1986, as amended, and
Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as
amended, or any successor provisions of law, and, if applicable, for a cash
payment in lieu of fractional shares, if any, the shares of Series B Preferred
Stock of such holder shall, in connection with such consolidation, merger or
similar business combination, be assumed by and shall become preferred stock of
such successor or resulting corporation, having in respect of such corporation,
insofar as possible, the same powers, preferences and relative, participating,
optional or other special rights (including the redemption rights provided by
Sections 6, 7 and 8 hereof), and the qualifications, limitations or restrictions
thereon, that the Series B Preferred Stock had immediately prior to such
transaction, except that after such transaction each share of the Series B
Preferred Stock shall be convertible, otherwise on the terms and conditions
provided by Section 5 hereof, into the number and kind of qualifying employer
securities so receivable by a holder of the number of shares of Common Stock
into which such shares of Series B Preferred Stock could have been converted
immediately prior to such transaction; provided, however, that if by virtue of
the structure of such transaction, a holder of Common Stock is required to make
an election with respect to the nature and kind of consideration to be received
in such transaction, which election cannot practicably be made by the holders of
the Series B Preferred Stock, then the shares of Series B Preferred Stock shall,
by virtue of such transaction and on the same terms as apply to the holders of
Common Stock, be converted into or exchanged for the aggregate amount of stock,
securities, cash or other property (payable in kind) receivable by a holder of
the number of shares of Common Stock into which such shares of Series B
Preferred Stock could have been converted immediately prior to such transaction
if such holder of Common Stock failed to exercise any rights of election to
receive any kind or amount of stock, securities, cash or other property (other
than such qualifying employer securities and a cash payment, if applicable, in
lieu of fractional shares) receivable upon such transaction (provided that, if
the kind or amount of qualifying employer securities receivable upon such
transaction is not the same for each non-electing share, then the kind and
amount so receivable upon such transaction for each non-electing share shall be
the kind and amount so receivable per share by the plurality of the non-electing
shares). The rights of the Series B Preferred Stock as preferred stock of such
successor or resulting corporation shall successively be subject to adjustments
pursuant to Section 9 hereof after any such transaction as nearly equivalent as
practicable to the adjustment provided for by such section prior to such
transaction. The Company shall not consummate any such merger, consolidation or
similar transaction unless all then outstanding shares of Series B Preferred
Stock shall be assumed and authorized by the successor or resulting corporation
as aforesaid.
(B) In the event that the Company shall consummate any consolidation or
merger or similar business combination, pursuant to which the outstanding shares
of Common Stock are by operation of law exchanged for or changed, reclassified
or converted into other stock or securities or cash or any
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<PAGE>
other property, or any combination thereof, other than any such consideration
which is constituted solely of qualifying employer securities (as referred to in
paragraph (A) of this Section 8) and cash payments, if applicable, in lieu of
fractional shares, outstanding shares of Series B Preferred Stock shall, without
any action on the part of the Company or any holder thereof (but subject to
paragraph (C) of this Section 8), be automatically converted by virtue of such
merger, consolidation or similar transaction immediately prior to such
consummation into the number of shares of Common Stock into which such shares of
Series B Preferred Stock could have been converted at such time so that each
share of Series B Preferred Stock shall, by virtue of such transaction and on
the same terms as apply to the holders of Common Stock, be converted into or
exchanged for the aggregate amount of stock, securities, cash or other property
(payable in like kind) receivable by a holder of the number of shares of Common
Stock into which such shares of Series B Preferred Stock could have been
converted immediately prior to such transaction; provided, however, that if by
virtue of the structure of such transaction, a holder of Common Stock is
required to make an election with respect to the nature and kind of
consideration to be received in such transaction, which election cannot
practicably be made by the holders of the Series B Preferred Stock, then the
shares of Series B Preferred Stock shall, by virtue of such transaction and on
the same terms as apply to the holders of Common Stock, be converted into or
exchanged for the aggregate amount of stock, securities, cash or other property
(payable in kind) receivable by a holder of the number of shares of Common Stock
into which such shares of Series B Preferred Stock could have been converted
immediately prior to such transaction if such holder of Common Stock failed to
exercise any rights of election as to the kind or amount of stock, securities,
cash or other property receivable upon such transaction (provided that, if the
kind or amount of stock, securities, cash or other property receivable upon such
transaction is not the same for each non-electing share, then the kind and
amount of stock, securities, cash or other property receivable upon such
transaction for each non-electing share shall be the kind and amount so
receivable per share by a plurality of the non-electing shares).
(C) In the event the Company shall enter into any agreement providing
for any consolidation or merger or similar business combination described in
paragraph (B) of this Section 8, then the Company shall as soon as practicable
thereafter (and in any event at least ten (10) business days before consummation
of such transaction) give notice of such agreement and the material terms
thereof to each holder of Series B Preferred Stock and each such holder shall
have the right to elect, by written notice to the Company, to receive, upon
consummation of such transaction (if and when such transaction is consummated),
from the Company or the successor of the Company, in redemption and retirement
of such Series B Preferred Stock, a cash payment equal to the amount payable in
respect of shares of Series B Preferred Stock upon liquidation of the Company
pursuant to Section 4 thereof. No such notice of redemption shall be effective
unless given to the Company prior to the close of business on the fifth business
day prior to consummation of such transaction, unless the Company or the
successor of the Company shall waive such prior notice, but any notice of
redemption so given prior to such time may be withdrawn by notice of withdrawal
given to the Company prior to the close of business on the fifth business day
prior to consummation of such transaction.
SECTION 9. Anti-Dilution Adjustments.
(A) In the event the Company shall, at any time or from time to time
while any of the shares of the Series B Preferred Stock are outstanding, (i) pay
a dividend or make a distribution in respect of the Common Stock in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
in each case whether by reclassification of shares, recapitalization of the
Company (including a recapitalization effected by a merger or consolidation to
which Section 8 hereof does not apply) or otherwise, the
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<PAGE>
Conversion Price in effect immediately prior to such action shall be adjusted by
multiplying such Conversion Price by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately before such event, and
the denominator of which is the number of shares of Common Stock outstanding
immediately after such event. An adjustment made pursuant to this paragraph 9(A)
shall be given effect, upon payment of such a dividend or distribution, as of
the record date for the determination of stockholders entitled to receive such
dividend or distribution (on a retroactive basis) and in the case of a
subdivision or combination shall become effective immediately as of the
effective date thereof.
(B) In the event that the Company shall, at any time or from time to
time while any of the shares of Series B Preferred Stock are outstanding, issue
to holders of shares of Common Stock as a dividend or distribution, including by
way of a reclassification of shares or a recapitalization of the Company, any
right or warrant to purchase shares of Common Stock (but not including as such a
right or warrant any security convertible into or exchangeable for shares of
Common Stock) at a purchase price per share less than the Fair Market Value (as
hereinafter defined) of a share of Common Stock on the date of issuance of such
right or warrant, then, subject to the provisions of paragraphs (E) and (F) of
this Section 9, the Conversion Price shall be adjusted by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the number of shares of Common Stock which could be purchased at
the Fair Market Value of a share of Common Stock at the time of such issuance
for the maximum aggregate consideration payable upon exercise in full of all
such rights or warrants, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the maximum number of shares of Common Stock that could be
acquired upon exercise in full of all such rights and warrants.
(C) In the event the Company shall, at any time or from time to time
while any of the shares of Series B Preferred Stock are outstanding, issue, sell
or exchange shares of Common Stock (other than pursuant to any right or warrant
to purchase or acquire shares of Common Stock (including as such a right or
warrant any security convertible into or exchangeable for shares of Common
Stock) and other than pursuant to any employee or director incentive or benefit
plan or arrangement, including any employment, severance or consulting
agreement, of the Company or any subsidiary of the Company heretofore or
hereafter adopted) for a consideration having a Fair Market Value, on the date
of such issuance, sale or exchange, less than the Fair Market Value of such
shares on the date of issuance, sale or exchange, then, subject to the
provisions of paragraphs (E) and (F) of this Section 9, the Conversion Price
shall be adjusted by multiplying such Conversion Price by the fraction the
numerator of which shall be the sum of (i) the Fair Market Value of all the
shares of Common Stock outstanding on the day immediately preceding the first
public announcement of such issuance, sale or exchange plus (ii) the Fair Market
Value of the consideration received by the Company in respect of such issuance,
sale or exchange of shares of Common Stock, and the denominator of which shall
be the product of (a) the Fair Market Value of a share of Common Stock on the
day immediately preceding the first public announcement of such issuance, sale
or exchange multiplied by (b) the sum of the number of shares of Common Stock
outstanding on such day plus the number of shares of Common Stock so issued,
sold or exchanged by the Company. In the event the Company shall, at any time or
from time to time while any shares of Series B Preferred Stock are outstanding,
issue, sell or exchange any right or warrant to purchase or acquire shares of
Common Stock (including as such a right or warrant any security convertible into
or exchangeable for shares of Common Stock), other than any such issuance to
holders of shares of Common Stock as a dividend or distribution (including by
way of a reclassification of shares or a recapitalization of the Company) and
other than pursuant to any employee or director incentive or benefit plan or
arrangement (including any employment, severance or consulting
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agreement) of the Company or any subsidiary of the Company heretofore or
hereafter adopted, for a consideration having a Fair Market Value, on the date
of such issuance, sale or exchange, less than the Non-Dilutive Amount (as
hereinafter defined), then, subject to the provisions of paragraphs (E) and (F)
of this Section 9, the Conversion Price shall be adjusted by multiplying such
Conversion Price by a fraction the numerator of which shall be the sum of (i)
the Fair Market Value of all the shares of Common Stock outstanding on the day
immediately preceding the first public announcement of such issuance, sale or
exchange plus (ii) the Fair Market Value of the consideration received by the
Company in respect of such issuance, sale or exchange of such right or warrant
plus (iii) the Fair Market Value at the time of such issuance of the
consideration which the Corporation would receive upon exercise in full of all
such rights or warrants, and the denominator of which shall be the product of
(a) the Fair Market Value of a share of Common Stock on the day immediately
preceding the first public announcement of such issuance, sale or exchange
multiplied by (b) the sum of the number of shares of Common Stock outstanding on
such day plus the maximum number of shares of Common Stock which could be
acquired pursuant to such right or warrant at the time of the issuance, sale or
exchange of such right or warrant (assuming shares of Common Stock could be
acquired pursuant to such right or warrant at such time).
(D) In the event the Company shall, at any time or from time to time
while any of the shares of Series B Preferred Stock are outstanding, make an
Extraordinary Distribution (as hereinafter defined) in respect of the Common
Stock, whether by dividend, distribution, reclassification of shares or
recapitalization of the Company (including a recapitalization or
reclassification effected by a merger or consolidation to which Section 8 hereof
does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of
Common Stock, the Conversion Price in effect immediately prior to such
Extraordinary Distribution or Pro Rata Repurchase shall, subject to paragraphs
(E) and (F) of this Section 9, be adjusted by multiplying such Conversion Price
by the fraction the numerator of which is (i) the product of (x) the number of
shares of Common Stock outstanding immediately before such Extraordinary
Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value of a
share of Common Stock on the day before the ex-dividend date with respect to an
Extraordinary Distribution which is paid in cash and on the distribution date
with respect to an Extraordinary Distribution which is paid other than in cash,
or on the applicable expiration date (including all extensions hereof) of any
tender offer which is a Pro Rata Repurchase, or on the date of purchase with
respect to any Pro Rata Repurchase which is not a tender offer, as the case may
be, minus (ii) the Fair Market Value of the Extraordinary Distribution or the
aggregate purchase price of the Pro Rata Repurchase, as the case may be, and the
denominator of which shall be the product of (a) the number of shares of Common
Stock outstanding immediately before such Extraordinary Dividend or Pro Rata
Repurchase minus, in the case of a Pro Rata Repurchase, the number of shares of
Common Stock repurchased by the Company multiplied by (b) the Fair Market Value
of a share of Common Stock on the day before the ex-dividend date with respect
to an Extraordinary Distribution which is paid in cash and on the distribution
date with respect to an Extraordinary Distribution which is paid other than in
cash, or on the applicable expiration date (including all extensions thereof) of
any tender offer which is a Pro Rata Repurchase or on the date of purchase with
respect to any Pro Rata Repurchase which is not a tender offer, as the case may
be. The Company shall send each holder of Series B Preferred Stock (i) notice of
its intent to make any dividend or distribution and (ii) notice of any offer by
the Company to make a Pro Rata Repurchase, in each case at the same time as, or
as soon as practicable after, such offer is first communicated (including by
announcement of a record date in accordance with the rules of any stock exchange
on which the Common Stock is listed or admitted to trading) to holders of Common
Stock. Such notice shall indicate the intended record date and the amount and
nature of such dividend or distribution, or the number of shares subject to such
offer for a Pro Rata Repurchase and the purchase price payable by
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the Company pursuant to such offer, as well as the Conversion Price and the
number of shares of Common Stock into which a share of Series B Preferred Stock
may be converted at such time.
(E) Notwithstanding any other provisions of this Section 9, the Company
shall not be required to make any adjustment to the Conversion Price unless such
adjustment would require an increase or decrease of at least one percent (1%) in
the Conversion Price. Any lesser adjustment shall be carried forward and shall
be made no later than the time of, and together with, the next subsequent
adjustment which, together with any adjustment or adjustments so carried
forward, shall amount to an increase or decrease of at least one percent (1%) in
the Conversion Price.
(F) If the Company shall make any dividend or distribution on the Common
Stock or issue any Common Stock, other capital stock or other security of the
Company or any rights or warrants to purchase or acquire any such security,
which transaction does not result in an adjustment to the Conversion Price
pursuant to the foregoing provisions of this Section 9, the Board of Directors
of the Company shall consider whether such action is of such a nature that an
adjustment to the Conversion Price should equitably be made in respect of such
transaction. If in such case the Board of Directors of the Company determines
that an adjustment to the Conversion Price should be made, an adjustment shall
be made effective as of such date, as determined by the Board of Directors of
the Company. The determination of the Board of Directors of the Company as to
whether an adjustment to the Conversion Price should be made pursuant to the
foregoing provisions of this paragraph 9(F), and, if so, as to what adjustment
should be made and when, shall be final and binding on the Company and all
stockholders of the Company. The Company shall be entitled to make such
additional adjustments in the Conversion Price, in addition to those required by
the foregoing provisions of this Section 9, as shall be necessary in order that
any dividend or distribution in shares of capital stock of the Company,
subdivision, reclassification or combination of shares of stock of the Company
or any recapitalization of the Company shall not be taxable to the holders of
the Common Stock.
(G) For purposes of this Resolution, the following definitions shall
apply:
"Business Day" shall mean each day that is not a Saturday, Sunday or a day
on which state or federally chartered banking institutions in New York, New York
are not required to be open.
"Current Market Price" of publicly traded shares of Common Stock or any
other class of capital stock or other security of the Company or any other
issuer for any day shall mean the last reported sales price, regular way, or, in
the event that no sale takes place on such day, the average of the reported
closing bid and asked prices, regular way, in either case as reported on the New
York Stock Exchange Composite Tape or, if such security is not listed or
admitted to trading on the New York Stock Exchange, on the principal national
securities exchange on which such security is listed or admitted to trading or,
if not listed or admitted to trading on any national securities exchange, on the
NASDAQ National Market System or, if such security is not quoted on such
National Market System, the average of the closing bid and asked prices on each
such day in the over-the-counter market as reported by NASDAQ or, if bid and
asked prices for such security on each such day shall not have been reported
through NASDAQ, the average of the bid and asked prices for such day as
furnished by any New York Stock Exchange member firm regularly making a market
in such security selected for such purpose by the Board of Directors of the
Company or a committee thereof, in each case, on each trading day during the
Adjustment Period. "Adjustment Period" shall mean the period of five (5)
consecutive trading days preceding, and including, the date as of which the Fair
Market Value of a security is to be determined. The "Fair Market Value" of any
security which is not publicly traded or of any other property shall mean the
fair value thereof as determined by an independent investment banking or
appraisal firm
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experienced in the valuation of such securities or property selected in good
faith by the Board of Directors of the Company or a committee thereof, or, if no
such investment banking or appraisal firm is in the good faith judgment of the
Board of Directors or such committee available to make such determination, as
determined in good faith by the Board of Directors of the Company or such
committee.
"Extraordinary Distribution" shall mean any dividend or other distribution
to holders of Common Stock (effected while any of the shares of Series B
Preferred Stock are outstanding) (i) of cash, where the aggregate amount of such
cash dividend or distribution together with the amount of all cash dividends and
distributions made during the preceding period of 12 months, when combined with
the aggregate amount of all Pro Rata Repurchases (for this purpose, including
only that portion of the aggregate purchase price of such Pro Rata Repurchase
which is in excess of the Fair Market Value of the Common Stock repurchased as
determined on the applicable expiration date (including all extensions thereof)
of any tender offer or exchange offer which is a Pro Rata Repurchase, or the
date of purchase with respect to any other Pro Rata Repurchase which is not a
tender offer or exchange offer made during such period), exceeds twelve and
one-half percent (12 1/2%) of the aggregate Fair Market Value of all shares of
Common Stock outstanding on the day before the ex-dividend date with respect to
such Extraordinary Distribution which is paid in cash and on the distribution
date with respect to an Extraordinary Distribution which is paid other than in
cash, and/or (ii) of any shares of capital stock of the Company (other than
shares of Common Stock), other securities of the Company (other than securities
of the type referred to in paragraph (B) or (C) of this Section 9), evidences of
indebtedness of the Company or any other person or any other property (including
shares of any subsidiary of the Company) or any combination thereof. The Fair
Market Value of an Extraordinary Distribution for purposes of paragraph (D) of
this Section 9 shall be equal to the sum of the Fair Market Value of such
Extraordinary Distribution plus the amount of any cash dividends which are not
Extraordinary Distributions made during such 12-month period and not previously
included in the calculation of an adjustment pursuant to paragraph (D) of this
Section 9.
"Fair Market Value" shall mean, as to shares of Common Stock or any other
class of capital stock or securities of the Company or any other issuer which
are publicly traded, the average of the Current Market Prices of such shares or
securities for each day of the Adjustment Period. "Non-Dilutive Amount" in
respect of an issuance, sale or exchange by the Corporation of any right or
warrant to purchase or acquire shares of Common Stock (including any security
convertible into or exchangeable for shares of Common Stock) shall mean the
remainder of (i) the product of the Fair Market Value of a share of Common Stock
on the day preceding the first public announcement of such issuance, sale or
exchange multiplied by the maximum number of shares of Common Stock which could
be acquired on such date upon the exercise in full of such rights and warrants
(including upon the conversion or exchange of all such convertible or
exchangeable securities), whether or not exercisable (or convertible or
exchangeable) at such date, minus (ii) the aggregate amount payable pursuant to
such right or warrant to purchase or acquire such maximum number of shares of
Common Stock; provided, however, that in no event shall the Non-Dilutive Amount
be less than zero. For purposes of the foregoing sentence, in the case of a
security convertible into or exchangeable for shares of Common Stock, the amount
payable pursuant to a right or warrant to purchase or acquire shares of Common
Stock shall be the Fair Market Value of such security on the date of the
issuance, sale or exchange of such security by the Company.
"Pro Rata Repurchase" shall mean any purchase of shares of Common Stock by
the Company or any subsidiary thereof, whether for cash, shares of capital stock
of the Company, other securities of the Company, evidences of indebtedness of
the Company or any other person or any other property
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(including shares of a subsidiary of the Company), or any combination thereof,
effected while any of the shares of Series B Preferred Stock are outstanding,
pursuant to any tender offer or exchange offer subject to Section 13(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any
successor provision of law, or pursuant to any other offer available to
substantially all holders of Common Stock; provided, however, that no purchase
of shares by the Company, or any subsidiary thereof made in open market
transactions shall be deemed a Pro Rata Repurchase. For purposes of this
paragraph 9(G), shares shall be deemed to have been purchased by the Company or
any subsidiary thereof "in open market transactions" if they have been purchased
substantially in accordance with the requirements of Rule 10b-18 as in effect
under the Exchange Act, on the date shares of Series B Preferred Stock are
initially issued by the Company or on such other terms and conditions as the
Board of Directors of the Company or a committee thereof shall have determined
are reasonably designed to prevent such purchases from having a material effect
on the trading market for the Common Stock.
(A) Whenever an adjustment to the Conversion Price and the related
voting rights of the Series B Preferred Stock is required pursuant to this
Resolution, the Company shall forthwith place on file with the transfer agent
for the Common Stock and the Series B Preferred Stock, and with the Secretary of
the Company, a statement signed by two officers of the Company stating the
adjusted Conversion Price determined as provided herein and the resulting
conversion ratio, and the voting rights (as appropriately adjusted), of the
Series B Preferred Stock. Such statement shall set forth in reasonable detail
such facts as shall be necessary to show the reason and the manner of computing
such adjustment, including any determination of Fair Market Value involved in
such computation. Promptly after each adjustment to the Conversion Price and the
related voting rights of the Series B Preferred Stock, the Company shall mail a
notice thereof and of the then prevailing conversion ratio to each holder of
shares of the Series B Preferred Stock.
SECTION 10. Ranking; Attributable Capital and Adequacy of Surplus;
Retirement of Shares.
(A) The Series B Preferred Stock shall rank senior to the Common Stock as
to the payment of dividends and the distribution of assets on liquidation,
dissolution and winding up of the Company, and, unless otherwise provided in the
Restated Certificate of Incorporation of the Company, as the same may be
amended, or a certificate of designations relating to a subsequent series of
Preferred Stock, par value $1.00 per share, of the Company, the Series B
Preferred Stock shall rank junior to all series of the Company's Preferred
Stock, par value $1.00 per share, as to the payment of dividends and the
distribution of assets on liquidation, dissolution or winding up.
(B) In addition to any vote of stockholders required by law, the vote of
the holders of a majority of the outstanding shares of Series B Preferred Stock
shall be required to increase the par value of the Common Stock or otherwise
increase the capital of the Company allocable to the Common Stock for the
purpose of the Delaware General Corporation Law (the "DGCL") if, as a result
thereof, the surplus of the Company for purposes of the DGCL would be less than
the amount of Preferred Dividends that would accrue on the then outstanding
shares of Series B Preferred Stock during the following three years.
(C) (C)(C)Any shares of Series B Preferred Stock acquired by the Company
by reason of the conversion or redemption of such shares as provided by this
Resolution, or otherwise so acquired, shall be retired as shares of Series B
Preferred Stock and restored to the status of authorized but unissued shares of
Preferred Stock, par value $1.00 per share, of the Company, undesignated as to
series, and may thereafter be reissued as part of a new series of such Preferred
Stock as permitted by law.
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SECTION 11. Miscellaneous.
(A) All notices referred to herein shall be in writing, and all notices
hereunder shall be deemed to have been given upon the earlier of receipt thereof
or three (3) business days after the mailing thereof if sent by registered mail
(unless first-class mail shall be specifically permitted for such notice under
the terms of this Resolution) with postage prepaid, addressed: (i) if to the
Company, to its office at 2000 Westchester Avenue, White Plains, New York 10650
(Attention: Secretary) or to the transfer agent for the Series B Preferred
Stock, or other agent of the Company designated as permitted by this Resolution
or (ii) if to any holder of the Series B Preferred Stock or Common Stock, as the
case may be, to such holder at the address of such holder as listed in the stock
record books of the Company (which may include the records of any transfer agent
for the Series B Preferred Stock or Common Stock, as the case may be) or (iii)
to such other address as the Company or any such holder, as the case may be,
shall have designated by notice similarly given.
(B) The term "Common Stock" as used in this Resolution means the Company's
Common Stock, par value $6.25 per share, as the same exists at the date of
filing of a certificate of designations relating to Series B Preferred Stock or
any other class of stock resulting from successive changes or reclassifications
of such Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value. In the event that, at
any time as a result of an adjustment made pursuant to Section 9 of this
Resolution, the holder of any share of the Series B Preferred Stock upon
thereafter surrendering such shares for conversion, shall become entitled to
receive any shares or other securities of the Company other than shares of
Common Stock, the Conversion Price in respect of such other shares or securities
so receivable upon conversion of shares of Series B Preferred Stock shall
thereafter be adjusted, and shall be subject to further adjustment from time to
time, in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to Common Stock contained in Section 9 hereof, and the
provisions of Sections 1 through 8, 10 and 11 of this Resolution with respect to
the Common Stock shall apply on like or similar terms to any such other shares
or securities.
(C) The Company shall pay any and all stock transfer and documentary stamp
taxes that may be payable in respect of any issuance or delivery of shares of
Series B Preferred Stock or shares of Common Stock or other securities issued on
account of Series B Preferred Stock pursuant hereto or certificates representing
such shares or securities. The Company shall not, however, be required to pay
any such tax which may be payable in respect of any transfer involved in the
issuance or delivery of shares of Series B Preferred Stock or Common Stock or
other securities in a name other than that in which the shares of Series B
Preferred Stock with respect to which such shares or other securities are issued
or delivered were registered, or in respect of any payment to any person with
respect to any such shares or securities other than a payment, to the registered
holder thereof, and shall not be required to make any such issuance, delivery or
payment unless and until the person otherwise entitled to such issuance,
delivery or payment has paid to the Company the amount of any such tax or has
established, to the satisfaction of the Company, that such tax has been paid or
is not payable.
(D) In the event that a holder of shares of Series B Preferred Stock shall
not by written notice designate the name in which shares of Common Stock to be
issued upon conversion of such shares should be registered or to whom payment
upon redemption of shares of Series B Preferred Stock should be made or the
address to which the certificate or certificates representing such shares, or
such payment, should be sent, the Company shall be entitled to register such
shares, and make such payment, in the name of the holder of such Series B
Preferred Stock as shown on the records of the Company and
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to send the certificate or certificates representing such shares, or such
payment, to the address of such holder shown on the records of the Company.
(E) Unless otherwise provided in the Restated Certificate of
Incorporation, as the same may be amended, of the Company, all payments in the
form of dividends, distributions on voluntary or involuntary dissolution,
liquidation or winding-up or otherwise made upon the shares of Series B
Preferred Stock and any other stock ranking on a parity with the Series B
Preferred Stock with respect to such dividend or distribution shall be pro rata,
so that amounts paid per share on the Series B Preferred Stock and such other
stock shall in all cases bear to each other the same ratio that the required
dividends, distributions or payments, as the case may be, then payable per share
on the shares of the Series B Preferred Stock and such other stock bear to each
other.
(F) The Company may appoint, and from time to time discharge and change, a
transfer agent for the Series B Preferred Stock. Upon any such appointment or
discharge of a transfer agent, the Company shall send notice thereof by
first-class mail postage prepaid, to each holder or record of Series B Preferred
Stock.
Series D Junior Participating Preferred Stock
SECTION 1. Designation and Amount.
The shares of such series shall be designated as "Series D Junior
Participating Preferred Stock" and the number of shares constituting such series
shall be 3,000,000.
SECTION 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series D Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series D Junior Participating Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the 15th day of March, June, September and December in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series D Junior Participating Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a) $5.00
or (b) subject to the provision for adjustment hereinafter set forth, 100 times
the aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of common stock, par value
$6.25 per share, of the Company (the "Common Stock") or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock, since the immediately preceding Quarterly Dividend Payment
Date, or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series D Junior
Participating Preferred Stock. In the event the Company shall at any time after
March 16, 1989 (the "Rights Declaration Date") (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the amount to which holders of shares
of Series D Junior Participating Preferred Stock were entitled immediately prior
to such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of
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Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Company shall declare a dividend or distribution on the Series D
Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $5.00 per share on the
Series D Junior Participating Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series D Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
D Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares of
Series D Junior Participating Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series D Junior Participating
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series D Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 45 days prior to the date fixed for the payment thereof.
SECTION 3. Voting Rights.
The holders of shares of Series D Junior Participating Preferred Stock
shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series D Junior Participating Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the stockholders of
the Company. In the event the Company shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series D Junior
Participating Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares
of Series D Junior Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Company.
(C) If at the time of any annual meeting of stockholders for the election
of directors, the equivalent of six quarterly dividends (whether or not
consecutive) payable on any share or shares of
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preferred stock are in default, the number of directors constituting the Board
of Directors of the Company shall be increased by two. The holders of record of
the Series D Junior Participating Preferred Stock, voting separately as a class
with the holders of shares of any one or more other series of preferred stock
upon which like voting rights have been conferred, shall be entitled at said
meeting of stockholders (and at each subsequent annual meeting of stockholders),
unless all dividends in arrears have been paid or declared and set apart for
payment prior thereto, to vote for the election of two directors of the Company,
the holders of any Series D Junior Participating Preferred Stock being entitled
to cast 100 votes per share of Series D Junior Participating Preferred Stock,
with the remaining directors of the Company to be elected by the holders of
shares of any other class or classes or series of stock entitled to vote
therefor. Until the default in payments of all dividends which permitted the
election of said directors shall cease to exist, any director who shall have
been so elected pursuant to the next preceding sentence may be removed at any
time, either with or without cause, only by the affirmative vote of the holders
of the shares at the time entitled to cast a majority of the votes entitled to
be cast for the election of any such director at a special meeting of such
holders called for that purpose, and any vacancy thereby created may be filled
by the vote of such holders. If and when such default shall cease to exist, the
holders of the Series D Junior Participating Preferred Stock and the holders of
shares of any one or more series of preferred stock upon which like voting
rights have been conferred shall be divested of the foregoing special voting
rights, subject to revesting in the event of each and every subsequent like
default in payments of dividends. Upon the termination of the foregoing special
voting rights, the terms of office of all persons who may have been elected
directors pursuant to said special voting rights shall forthwith terminate, and
the number of directors constituting the Board of Directors shall be reduced by
two.
(D) Except as set forth herein, holders of Series D Junior Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
SECTION 4. Certain Restrictions.
(A) In the event that full cumulative dividends on the Series D Junior
Participating Preferred Stock have not been declared and paid or set apart for
payment when due, the Company shall not declare or pay or set apart for payment
any dividends or make any other distributions on, or make any payment on account
of the purchase, redemption or other retirement of any other class of stock or
series thereof of the Company ranking, as to dividends or as to distributions in
the event of a liquidation, dissolution or winding-up of the Company, junior to
the Series D Junior Participating Preferred Stock until full cumulative
dividends on the Series D Junior Participating Preferred Stock shall have been
paid or declared and set apart for payment; provided, however, that the
foregoing shall not apply to (i) any dividend payable solely in any shares of
any stock ranking, as to dividends and as to distributions in the event of a
liquidation, dissolution or winding-up of the Company, junior to the Series D
Junior Participating Preferred Stock or (ii) the acquisition of shares of any
stock ranking, as to dividends or as to distributions in the event of a
liquidation, dissolution or winding-up of the Company, junior to the Series D
Junior Participating Preferred Stock in exchange solely for shares of any other
stock ranking, as to dividends and as to distributions in the event of a
liquidation, dissolution or winding-up of the Company, junior to the Series D
Junior Participating Preferred Stock.
(B) The Company shall not permit any subsidiary of the Company to purchase
or otherwise acquire for consideration any shares of stock of the Company unless
the Company could, under paragraph (A) of this Section 4, purchase or otherwise
acquire such shares at such time and in such manner.
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SECTION 5. Reacquired Shares.
Any shares of Series D Junior Participating Preferred Stock purchased or
otherwise acquired by the Company in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of Preferred Stock and
may be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth herein.
SECTION 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the Company, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series D Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series D Junior Participating Preferred Stock
shall have received $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series D Liquidation Preference"). Following the payment of
the full amount of the Series D Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series D Junior
Participating Preferred Stock unless, prior thereto, the holders of shares of
Common Stock shall have received an amount per share (the "Common Adjustment")
equal to the quotient obtained by dividing (i) the Series D Liquidation
Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph
(C) below to reflect such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock) (such number in clause (ii)
immediately above being referred to as the "Adjustment Number"). Following the
payment of the full amount of the Series D Liquidation Preference and the Common
Adjustment in respect of all outstanding shares of Series D Junior Participating
Preferred Stock and Common Stock, respectively, holders of Series D Junior
Participating Preferred Stock and holders of shares of Common Stock shall
receive their ratable and proportionate share of the remaining assets to be
distributed in the ratio of the Adjustment Number to one (1) with respect to
such Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series D Liquidation Preference and the
liquidation preferences of all other series of Preferred Stock, if any, which
rank on a parity with the Series D Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(C) In the event the Company shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
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<PAGE>
SECTION 7. Consolidation, Merger, etc.
In case the Company shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case the shares of Series D Junior Participating
Preferred Stock shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 100 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Company
shall at any time after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series D Junior
Participating Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
SECTION 8. Redemption.
The outstanding shares of Series D Junior Participating Preferred Stock
may be redeemed at the option of the Board of Directors as a whole, or in part,
at any time, or from time to time, at a cash price per share equal to the
product of the Adjustment Number times the Average Market Value (as such term is
hereinafter defined) of the Common Stock on the date of mailing of the notice of
redemption, plus all dividends which on the redemption date have accrued on the
shares to be redeemed and have not been paid, or declared and a sum sufficient
for the payment thereof set apart, without interest. The "Average Market Value"
as of a particular date is the average of the closing sale prices of the Common
Stock during the 10 consecutive Trading Day period immediately preceding such
date on the Composite Tape for New York Stock Exchange Listed Stocks, or, if
such stock is not quoted on the Composite Tape, on the New York Stock Exchange,
or, if such stock is not listed on such Exchange, on the principal United States
securities exchange registered under the Securities Exchange Act of 1934, as
amended, on which such stock is listed, or, if such stock is not listed on any
such exchange, the average of the closing sale prices with respect to a share of
Common Stock during such 10-day period, as quoted on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system then in use,
or if no such quotations are available, the fair market value of the Common
Stock as determined by the Board of Directors in good faith. The term "Trading
Day" shall mean a day on which the principal national securities exchange on
which the Common Stock is listed or admitted to trading is open for the
transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, a Monday, Tuesday, Wednesday,
Thursday or Friday on which banking institutions in the State of New York are
not authorized or obligated by law or executive order to close.
SECTION 9. Ranking.
The Series D Junior Participating Preferred Stock shall rank junior to the
Company's Series B ESOP Convertible Preferred Stock, and shall rank junior to
all other series of the Company's Preferred Stock unless the terms of any such
other series shall provide otherwise, as to the payment of dividends and the
distribution of assets.
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<PAGE>
SECTION 10. Amendment.
The Restated Certificate of Incorporation of the Company shall not be
further amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series D Junior Participating Preferred
Stock so as to affect them adversely without the affirmative vote of the holders
of a majority or more of the outstanding shares of Series D Junior Participating
Preferred Stock, voting separately as a class.
SECTION 11. Fractional Shares.
Series D Junior Participating Preferred Stock may be issued in fractions
of a share which shall entitle the holder, in proportion to such holder's
fractional shares, to exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all other rights of holders of Series D
Junior Participating Preferred Stock.
Market Auction Preferred Shares
SECTION 1. Designation; Amount and Series.
The Preferred Stock authorized hereby consists of 1,200 shares (each share
a series) designated as "Market Auction Preferred Shares" (referred to as the
"Auction Preferred", the "Preferred Stock" or the "Remarketing Preferred")
issuable in the following groups of series (each group a "Series"): 300 shares
designated "Market Auction Preferred Shares, Series G-1 through G-300" (the
"Series G Preferred Stock"), 300 shares designated "Market Auction Preferred
Shares, Series H-1 through H-300" (the "Series H Preferred Stock"), 300 shares
designated "Market Auction Preferred Shares, Series I-1 through I-300" (the
"Series I Preferred Stock") and 300 shares designated "Market Auction Preferred
Shares, Series J-1 through J-300" (the "Series J Preferred Stock"). Except as
expressly provided herein, each share of each separate Series of Auction
Preferred shall be identical and equal in all aspects to every other share of
such Series, and the shares of all of the Series shall be identical and equal in
all respects.
SECTION 2. Definitions.
Any references to Sections or subsections that are made in this part of
Article IV(B) shall be to Sections or subsections contained in this part of
Article IV(B). Unless the context or use indicates another or different meaning
or intent, the following terms shall have the following meanings when used in
this part of Article IV(B), whether used in the singular or plural:
"Act" means the Securities Act of 1933, as amended.
"Additional Payments" means an amount equal to the product of (i) the
Default Rate on the date on which such Failure to Deposit occurred (or, if such
Failure to Deposit relates to a failure to pay dividends other than at the end
of a Dividend Period, the Default Rate computed using the Percentage applicable
to the rating category below "baa3" or "BBB-" as of the Business Day immediately
preceding the Auction Date or the date of the immediately preceding Remarketing
for such shares), times (ii) a fraction, the numerator of which will be the
number of days during which such failure existed and was not cured as described
in Section 3(i)(B) (including the day such failure occurs and excluding the day
such failure is cured) and the denominator of which will be 360, times (iii) the
full
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amount of the dividends required to be paid on the Dividend Payment Date with
respect to which such failure occurred.
"Affiliate" means any Person controlled by, in control of, or under common
control with, the Corporation.
"Applicable `AA' Composite Commercial Paper Rate", on any date, means, in
the case of any Dividend Period of (1) 1 to 48 days, the interest equivalent of
the 30-day rate, (2) 49 days or more but less than 70 days, the interest
equivalent of the 60-day rate, (3) 70 days or more but less than 85 days, the
arithmetic average of the interest equivalent of the 60-day and 90-day rates,
(4) 85 days or more but less than 120 days, the interest equivalent of the
90-day rate, (5) 120 days or more but less than 148 days, the arithmetic average
of the interest equivalent of the 90-day and 180-day rates, (6) 148 days or more
but less than 184 days, the interest equivalent of the 180-day rate, in each
case, on commercial paper placed on behalf of issuers whose corporate bonds are
rated "AA" by S&P or "Aa" by Moody's, or the equivalent of such rating by
another rating agency, as made available on a discount basis or otherwise by the
Federal Reserve Bank of New York for the Business Day immediately preceding such
date. In the event that the Federal Reserve Bank of New York does not make
available any of the foregoing rates, then such rates shall be the 30-day,
60-day, 90-day or 180-day rate or arithmetic average of such rates, as the case
may be, as quoted on a discount basis or otherwise, by the Commercial Paper
Dealers to the Auction Agent or the applicable Remarketing Agent as of the close
of business on the Business Day next preceding such date. If any Commercial
Paper Dealer does not quote a rate required to determine the Applicable "AA"
Composite Commercial Paper Rate, the Applicable "AA" Composite Commercial Paper
Rate shall be determined on the basis of the quotation or quotations furnished
by the remaining Commercial Paper Dealer (if any) and any Substitute Commercial
Paper Dealer or Substitute Commercial Paper Dealers selected by the Corporation
to provide such rate or rates or, if the Corporation does not select any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by
the remaining Commercial Paper Dealer (if any). For purposes of this definition,
the "interest equivalent" means the equivalent yield on a 360-day basis of a
discount-basis security to an interest-bearing security.
"Applicable Determining Rate" means (i) for any Dividend Period from 1 to
48 days, Standard Dividend Period or Short-Dividend Period of 183 days or less,
the Applicable "AA" Composite Commercial Paper Rate, (ii) for any Short Dividend
Period of 184 to 364 days, the Applicable Treasury Bill Rate and (iii) for any
Long Dividend Period, the Applicable Treasury Note Rate.
"Applicable Rate" means the dividend rate payable on a share of Preferred
Stock for any Dividend Period subsequent to the Initial Dividend Period for such
share established pursuant to Section 3 below.
"Applicable Treasury Bill Rate" for any Short Dividend Period in excess of
183 days and "Applicable Treasury Note Rate" for any Long Dividend Period, on
any date, means the interest equivalent of the rate for direct obligations of
the United States Treasury having an original maturity which is equal to, or
next lower than, the length of such Short Dividend Period or Long Dividend
Period, as the case may be, as published weekly by the Federal Reserve Board in
"Federal Reserve Statistical Release H.15(519)-Selected Interest Rates", or any
successor publication by the Federal Reserve Board, within 5 Business Days
preceding such date. In the event that the Federal Reserve Board does not
publish such rate, or if such release is not available, the Applicable Treasury
Bill Rate or Applicable Treasury Note Rate will be the arithmetic mean of the
secondary market bid rates as of approximately 3:30 P.M., New York City time, on
the Business Day next preceding such date of the U.S. Government Securities
Dealers furnished to the Auction Agent or the applicable Remarketing
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<PAGE>
Agent for the issue of direct obligations of the United States Treasury, in an
aggregate principal amount of at least $250,000 with a remaining maturity equal
to, or next lower than, the length of such Short Dividend Period or Long
Dividend Period, as the case may be. If any U.S. Government Securities Dealer
does not quote a rate required to determine the Applicable Treasury Bill Rate or
the Applicable Treasury Note Rate, the Applicable Treasury Bill Rate or
Applicable Treasury Note Rate shall be determined on the basis of the quotation
or quotations furnished by the remaining U.S. Government Securities Dealer (if
any) or any Substitute U.S. Government Securities Dealer or Dealers selected by
the Corporation to provide such rate or rates or, if the Corporation does not
select any such Substitute U.S. Government Securities Dealer, by the remaining
U.S. Government Securities Dealer (if any); provided that, if the Corporation is
unable to cause such quotations to be furnished to the Auction Agent or the
applicable Remarketing Agent by such sources, the Corporation may cause such
rates to be furnished to the Auction Agent or the applicable Remarketing Agent
by such alternative source as the Corporation in good faith deems to be
reliable. For purposes of this definition, the "interest equivalent" of a rate
stated on a discount basis shall be equal to the quotient of (A) the discount
rate divided by (B) the difference between 1.00 and the discount rate.
"Articles of Incorporation" means the Restated Certificate of
Incorporation, as amended, of the Corporation.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agent" means The Bank of New York, unless or until another bank
or trust company has been appointed as such by the Corporation.
"Auction Agent Agreement" has the meaning set forth in Section 8 below.
"Auction Date" means, for any Series of Auction Preferred, the first
Business Day preceding the first day of each Dividend Period for such Series
other than the Initial Dividend Period for such Series.
"Auction Method" means a method of determining Dividend Periods and
dividend rates for the Auction Preferred of a Series pursuant to the Auction
Procedures.
"Auction Preferred" means the Auction Preferred, including the Converted
Remarketing Preferred, being auctioned pursuant to the Auction Procedures.
"Auction Procedures" means the procedures for conducting Auctions set
forth in Section 7 below.
"Board of Directors" means the Board of Directors of the Corporation or
any duly authorized committee of the Board of Directors acting on behalf
thereof.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in these Auction
Procedures, that has been selected by the Corporation and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.
"Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a day on which banks in The City of New York are
authorized or obliged by law to close.
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<PAGE>
"Certificate of Designations" or "Certificate" means the Certificate of
Designations, Preferences and Rights of Market Auction Preferred Shares of the
Corporation dated and filed with the Delaware Secretary of State on December 22,
1992.
"Chief Financial Officer" has the meaning set forth in Section 3(g)(ii)
below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Morgan Stanley and First Boston or, in
lieu thereof, their respective affiliates or successors.
"Converted Auction Preferred" means shares of Auction Preferred which, by
reason of an election by the Method Selection Agent of a different Dividend
Determination Method, will become Remarketing Preferred at the end of the
then-current Dividend Period applicable thereto.
"Converted Remarketing Preferred" means shares of Remarketing Preferred
which, by reason of an election by the Method Selection Agent of a different
Dividend Determination Method, will become Auction Preferred at the end of the
then-current Dividend Period applicable thereto.
"Corporation" means Texaco Inc., a Delaware corporation, or its successor.
"Date of Original Issue", with respect to any share of Preferred Stock,
means the date on which the Corporation originally issued such share of
Preferred Stock.
"Default Period" has the meaning set forth in Section 6(b)(i) below.
"Default Rate" means the higher of (A) the Maximum Applicable Rate
obtained by multiplying the Applicable Determining Rate, determined as of the
Business Day next preceding the date of the Failure to Deposit that, pursuant to
Section 3(i), caused the application of such Default Rate, by the Percentage for
the rating category below "baa3" or "BBB-", and (B) (i) if the Corporation has
failed timely to pay dividends, the dividend rate in effect for the Dividend
Period in respect of which such Failure to Deposit occurred, or (ii) if the
Corporation has failed timely to pay the redemption price (including accumulated
and unpaid dividends) of shares of any Series of Preferred Stock called for
redemption, the dividend rate in effect on the date such redemption price was to
have been paid. The Percentage used to determine the Default Rate for any shares
of Preferred Stock shall be the Percentage for the rating category below "baa3"
or "BBB-" (i) in effect on the immediately preceding Auction Date or the date of
the immediately preceding Remarketing, in the case of a Default Rate that
applies to the portion of a Dividend Period occurring after a failure to pay
dividends and (ii) in effect on the date of determination, in all other cases.
"Depository Agreement" means each agreement among the Corporation, the
Remarketing Depository and a Remarketing Agent.
"Dividend Determination Method" or "Method" shall mean either the Auction
Method or the Remarketing Method.
"Dividend Payment Date" has the meaning set forth in Section 3(b)(iii)
below.
"Dividend Period" has the meaning set forth in Section 3(b)(v) below.
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<PAGE>
"Dividend Quarter" has the meaning set forth in Section 3(b)(iii) below.
"Dividends-Received Deduction" has the meaning set forth in Section
3(f)(v) below.
"Existing Holder" means a Person who has signed a Master Purchaser's
Letter and is listed as the beneficial owner of any shares of Auction Preferred
in the records of the Auction Agent.
"Failure to Deposit" means the failure by the Corporation to pay to the
Paying Agent by 11:00 A.M., New York City Time, in immediately available funds,
(i) on a Dividend Payment Date, the full amount of any dividend (whether or not
earned or declared) to be paid on such Dividend Payment Date on any shares of
Preferred Stock or (ii) on any redemption date, the full redemption price
(including accumulated and unpaid dividends), to be paid on such redemption date
for any shares of Preferred Stock.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"First Boston" means The First Boston Corporation.
"Holder" means an Existing Holder or any beneficial owner of Preferred
Stock acquired pursuant to a Remarketing.
"Initial Auction Date" means the Business Day immediately preceding the
first day of a Dividend Period for Auction Preferred.
"Initial Dividend Rate" has the meaning set forth in Section 3(g)(i)
below.
"Initial Dividend Period" means the periods commencing on the Date of
Original Issue and ending on the respective days immediately preceding the
Initial Dividend Payment Dates for each Series of Preferred Stock.
"Initial Dividend Payment Date" has the meaning set forth in Section 3(b)
below.
"Long Dividend Period" has the meaning set forth in Section 3(b)(v) below.
"Marketing Conditions" means the following factors: (i) short-term and
long-term market rates and indices of such short-term and long-term rates, (ii)
market supply and demand for short-term and long-term securities, (iii) yield
curves for short-term and long-term securities comparable to the Preferred
Stock, (iv) industry and financial conditions which may affect the Preferred
Stock, (v) the number of shares of Preferred Stock to be sold pursuant to an
Auction or a Remarketing, as the case may be, (vi) the number of potential
purchasers of Preferred Stock, (vii) the Dividend Periods and dividend rates at
which current and potential holders would remain or become holders, (viii)
current tax laws and administrative interpretations with respect thereto and
(ix) the Corporation's current and projected funding requirements based on its
asset and liability position, tax position and current financing objectives. If
Marketing Conditions are being assessed by the Chief Financial Officer, such
officer's evaluation of the factors described in clauses (vi) and (vii) above
may be based on discussions with one or more Broker-Dealers or Remarketing
Agents.
If Marketing Conditions are being assessed by the Term Selection Agent or
the Method Selection Agent, such agent's evaluation of the factor described in
clause (ix) above may be based on discussions with representatives of the
Corporation.
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<PAGE>
"Maximum Applicable Rate", as of any date, means the rate obtained by
multiplying the Applicable Determining Rate then in effect for a Dividend Period
by the Percentage (as it may be adjusted from time to time based on certain
factors by the Chief Financial Officer in accordance with the provisions hereof)
determined as set forth below based on the lower of the credit ratings assigned
to the Preferred Stock by Moody's and S&P.
<TABLE>
<CAPTION>
Credit Rating
- ------------------------------------------------------------------------------
<S> <C> <C>
Moody's S & P Percentage
"aa3" or Above AA- or Above 150%
"a3" to "a1" A- to A+ 200%
"baa3" to "baa1" BBB- to BBB+ 225%
Below "baa3" Below BBB 275%
</TABLE>
The Corporation will take all reasonable action necessary to enable
Moody's and S&P to provide ratings for the Preferred Stock. If either Moody's or
S&P does not make such rating available or neither Moody's nor S&P shall make
such a rating available, the Corporation will designate a rating agency or
rating agencies as a substitute rating agency or substitute rating agencies, as
the case may be, subject to the approval of Morgan Stanley and First Boston,
such approval not to be unreasonably withheld, and the Corporation will take all
reasonable action to enable such rating agency or rating agencies to provide a
rating or ratings for each Series of Preferred Stock. If either Moody's or S&P
shall change its rating categories for preferred stock, or if one or more
substitute rating agencies are designated, then the determination set forth
above will be made based upon the substantially equivalent new rating categories
for preferred stock of such rating agency or substitute rating agency.
"Memorandum" means the Private Placement Memorandum dated December 16,
1992 relating to the Corporation and the placement of the shares of Preferred
Stock.
"Method Selection Agent" means any entity appointed by the Corporation to
act on its behalf in selecting Dividend Determination Methods for a Series of
Preferred Stock, provided that if the Corporation shall appoint more than one
entity to so act with respect to a Series, "Method Selection Agent" shall mean,
unless the context otherwise requires, all entities so appointed.
"Method Selection Agreement" means an agreement between the Corporation
and the Method Selection Agent pursuant to which the Method Selection Agent
agrees to determine the Method applicable to a Series of Preferred Stock.
"Minimum Holding Period" has the meaning set forth in Section 3(f)(v)
below.
"Moody's" means Moody's Investors Service, Inc., or its successor, so long
as such agency (or successor) is in the business of rating securities of the
type of the Preferred Stock and, if such agency is not in such business, then a
Substitute Rating Agency.
"Morgan Stanley" means Morgan Stanley & Co. Incorporated.
"Normal Dividend Payment Date" has the meaning set forth in Section
3(b)(ii) below.
"Notice of Change in Dividend Period" has the meaning set forth in Section
3(d)(ii) below.
"Notice of Method Revocation" has the meaning set forth in Section
3(C)(ii) below.
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"Notice of Method Selection" has the meaning set forth in Section 3(C)(i)
below.
"Notice of Percentage Increase" has the meaning set forth in Section
3(h)(i) below.
"Notice of Removal" has the meaning set forth in Section 3(C)(iii) below.
"Notice of Revocation" has the meaning set forth in Section 3(d)(ii)
below.
"Outstanding" means, as of any date, shares of Preferred Stock theretofore
issued except, without duplication, (i) any shares of Preferred Stock
theretofore cancelled, delivered to the Corporation for cancellation or redeemed
and (ii) as of any Auction Date or Remarketing Date, any shares of Preferred
Stock subject to redemption on the next following Business Day.
"Participant" means the member of the Securities Depository that will act
on behalf of an Existing Holder or a Potential Holder, in the case of Auction
Preferred, or the beneficial owner, in the case of Remarketing Preferred, and
that is identified as such in such Holder's or Potential Holder's Master
Purchaser's Letter.
"Paying Agent" means the Auction Agent unless another bank or trust
company has been appointed to act as the paying agent for the shares of
Preferred Stock by resolution of the Board of Directors.
"Percentage" has the meaning set forth in Section 3(h)(i) below.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Purchaser's Letter" means a Master Purchaser's Letter substantially in
the form of Appendix E to the Memorandum delivered to the initial purchasers of
the Preferred Stock which each prospective purchaser of Preferred Stock will be
required to sign as a condition to purchasing Preferred Stock or participating
in an Auction or Remarketing.
"Redemption Agent" means the Auction Agent unless another bank or trust
company has been appointed to act as the redemption agent for the shares of
Preferred Stock by resolution of the Board of Directors.
"Remarketing" means the implementation of Remarketing Procedures.
"Remarketing Agent" means, at any time, the entity or entities appointed
by the Corporation to act on its behalf in establishing dividend rates and
Dividend Periods for Remarketing Preferred and to act on behalf of holders of
Remarketing Preferred in remarketing such Remarketing Preferred as provided in
the Remarketing Procedures.
"Remarketing Depository" means The Bank of New York, and its successors or
any other depository selected by the Corporation which agrees to follow the
procedures required to be followed by such depository in connection with shares
of Remarketing Preferred with a Dividend Period of less than 7 days.
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<PAGE>
"Remarketing Method" means a method of determining Dividend Periods and
dividend rates for the Preferred Stock.
"Remarketing Preferred" means the Preferred Stock, including the Converted
Auction Preferred for which the dividend rate and Dividend Period are to be
determined pursuant to the Remarketing Method.
"Remarketing Procedures" means the procedures for remarketing shares of
Remarketing Preferred as set forth in Section 9.
"Securities Depository" means The Depository Trust Company or any other
securities depository selected by the Corporation that agrees to follow the
procedures required to be followed by such securities depository in connection
with the Preferred Stock.
"Series" means any of the Series G, Series H, Series I or Series J of the
Preferred Stock authorized by this Certificate.
"Short Dividend Period" has the meaning set forth in Section 3(b)(v)
below.
"Standard Dividend Period" has the meaning set forth in Section 3(b)(v)
below.
"Standard & Poor's" or "S&P" means Standard & Poor's Corporation, or its
successor, so long as such agency (or successor) is in the business of rating
securities of the type of the Preferred Stock and, if such agency is not in such
business, then a Substitute Rating Agency.
"Stock Books" means the stock transfer books of the Corporation maintained
by the Paying Agent.
"Substitute Commercial Paper Dealer" means Goldman, Sachs & Co., Shearson
Lehman Brothers Inc. or Merrill Lynch, Pierce, Fenner & Smith Incorporated, or
their respective affiliates or successors or, if none of such firms furnishes
commercial paper quotations, a leading dealer in the commercial paper market
selected by the Corporation in good faith.
"Substitute Rating Agency" means a nationally recognized statistical
rating organization (as that term is used in the rules and regulations of the
Securities Exchange Act of 1934) selected by the Corporation, subject to
approval by Morgan Stanley and First Boston, which approval is not to be
unreasonably withheld.
"Substitute U.S. Government Securities Dealers" means Goldman, Sachs &
Co., Shearson Lehman Brothers Inc. or Merrill Lynch, Pierce, Fenner & Smith
Incorporated, or their respective affiliates or successors or, if none of such
firms provides quotes in U.S. government securities, a leading dealer in the
government securities market selected by the Corporation in good faith.
"Tender Agent" means, at any time, the bank or the organization (initially
The Bank of New York) appointed by the Corporation to perform the duties of
Tender Agent as provided in the Remarketing Procedures.
"Term Selection Agent" means any entity appointed by the Corporation to
act on its behalf in establishing the length of any Dividend Period other than
the Standard Dividend Period, the Dividend Payment Dates for any Short Dividend
Period and, in the case of any Long Dividend Period, additional redemption
provisions, if any, for a Series of Auction Preferred, provided that if the
Corporation shall
30
<PAGE>
appoint more than one entity to so act with respect to a Series, "Term Selection
Agent" shall mean, unless the context otherwise requires, all entities so
appointed.
"U.S. Government Securities Dealers" means Morgan Stanley and First Boston
or, in lieu thereof, their respective affiliates or successors.
SECTION 3. Dividends.
(a) Holders of shares of Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available therefor, cumulative cash dividends at the Applicable Rate per annum,
determined as set forth in Section 3(f) below, and no more, payable on the
respective dates set forth below.
(b) (i) Dividends on the shares of Preferred Stock of each Series shall
accumulate (whether or not declared) from the Date of Original Issue.
(ii) Dividends on each Series of Preferred Stock shall be payable on
the Initial Dividend Payment Date for such Series. After the Initial
Dividend Periods, dividends on any shares of Preferred Stock with (a) a
Dividend Period of 1 to 48 days (which, in the case of Auction Preferred,
shall be a period of days divisible by 7) will be payable on the day
following the last day of such Dividend Period, (b) a Standard Dividend
Period will be payable on the day following the last day of such Standard
Dividend Period (which last day of such Standard Dividend Period will
normally be each seventh Wednesday following the preceding Dividend
Payment Date for such Series), (c) a Short Dividend Period, on the day
following the last day of such Short Dividend Period and on such other
Dividend Payment Dates as established at the time such Short Dividend
Period is determined and (d) a Long Dividend Period, on the day following
the last day of such Long Dividend Period and on the March 31, June 30,
September 30 and December 31 of each year during such dividend period.
Each day on which dividends on shares of Preferred Stock of each Series
would be payable as determined as set forth in this clause (ii) but for
adjustments set forth in Section 3(f)(v) below, other than adjustments to
reflect changes in the Minimum Holding Period, is referred to herein as a
"Normal Dividend Payment Date".
(iii) Each date on which dividends for each share of Preferred Stock
shall be payable as set forth herein is referred to herein as a "Dividend
Payment Date". If applicable, the period from the preceding Dividend
Payment Date to the next Dividend Payment Date for any share of Preferred
Stock with a Long Dividend Period is herein referred to as a "Dividend
Quarter". Although any particular Dividend Payment Date may not occur on
the originally scheduled Normal Dividend Payment Date because of the
adjustments set forth in Section 3(f)(v) below, each succeeding Dividend
Payment Date shall be, subject to such adjustments, the date determined as
set forth in clause (ii) above as if each preceding Dividend Payment Date
had occurred on the respective originally scheduled Normal Dividend
Payment Date.
(iv) Dividend Periods may be of any duration (including perpetual
duration) and not less than (i) seven days in the case of Auction
Preferred (other than Converted Remarketing Preferred) and (ii) one day in
the case of Remarketing Preferred (other than Converted Auction
Preferred). The duration of each subsequent Dividend Period following the
Initial Dividend Period for each Series and the Applicable Rate for such
subsequent Dividend Period will be determined by either the Auction Method
or the Remarketing Method.
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<PAGE>
(v) The Initial Dividend Payment Date for the Initial Dividend Period
for Series G Preferred Stock shall be February 11, 1993, for Series H
Preferred Stock shall be February 18, 1993, for Series I Preferred Stock
shall be February 25, 1993 and for Series J Preferred Stock shall be March
4, 1993. After the Initial Dividend Period for each Series of Preferred
Stock, each subsequent Dividend Period for any shares of Preferred Stock
shall (except for the adjustments for non-Business Days described in
Section 3(f)(v) below) be 49 days (each such 49-day period, subject to any
adjustment as a result of a change in law adjusting the Minimum Holding
Period as described in Section 3(f)(v) below, being referred to herein as
a "Standard Dividend Period"), unless as provided in clause (d) below, the
Term Selection Agent or the applicable Remarketing Agent, as the case may
be, specifies that any such subsequent Dividend Period for a particular
share of Preferred Stock shall be (A) a Dividend Period of 1 to 48 days
(which in the case of Auction Preferred, shall be a period of days
divisible by 7), (B) a Dividend Period of 50 to 364 days and consisting of
a whole number of weeks (a "Short Dividend Period") or (C) a Dividend
Period of 365 days or longer and consisting of a whole number of weeks (a
"Long Dividend Period"). Each such Dividend Period of 1 to 48 days,
Standard Dividend Period, Short Dividend Period and Long Dividend Period
(together with (i) any Initial Dividend Periods and (ii) any period
commencing on a redemption date on which there is a Failure to Deposit and
ending on the date the redemption price for such shares is paid to the
Paying Agent) being referred to herein as a "Dividend Period").
(c) (i) Subject to certain limitations set forth in clause (v) below,
either Dividend Determination Method may be selected by the Method
Selection Agent for a Series of Preferred Stock for any subsequent
Dividend Period with respect to all shares of such Series, provided that
such Method Selection Agent determines at the time of such selection that
a change in the Dividend Determination Method will be the most favorable
financing alternative for the Corporation based upon the then-current
Marketing Conditions. If more than one entity is serving as Method
Selection Agent for a Series, such entities shall act in concert in
performing their duties, provided that notices referred to herein may be
given by one entity on behalf of all such entities. The Method Selection
Agent for any Series of Preferred Stock will make such selection in a
notice (a "Notice of Method Selection") sent by such Method Selection
Agent to the Corporation, the Term Selection Agent, the Auction Agent, the
Securities Depository, the Remarketing Depository, the Tender Agent and
any applicable Remarketing Agent by telephone (with confirmation in
writing), and to any other record holders of the shares of Preferred Stock
of such Series by first-class mail, postage prepaid, not less then seven
Business Days prior to the first day of such subsequent Dividend Period.
Each Notice of Method Selection will state the Method selected by the
Method Selection Agent. If the Method Selection Agent for a Series which
is then a Series of Remarketing Preferred selects the Auction Method for
any subsequent Dividend Period, the Remarketing Agent for such Series will
establish Dividend Periods and Applicable Rates for shares of such Series
until the Initial Auction Date in a manner that will best promote an
orderly transition to the Auction Method. Any Dividend Determination
Method so selected by the Method Selection Agent for a Series shall
continue in effect for such Series until the Method Selection Agent
selects the other Method in the aforesaid manner. Until a Method Selection
Agent for any Series has been appointed, the Dividend Determination Method
will be the Auction Method.
(ii) A Notice of Method Selection may be revoked (a "Notice of Method
Revocation") by the Method Selection Agent on or prior to 10:00 A.M. on
the second Business Day preceding the first day of the sub-sequent
Dividend Period by giving a Notice of Method Revocation to the
Corporation, the Term Selection Agent, the Securities Depository, the
Remarketing Depository,
32
<PAGE>
the Auction Agent, the Tender Agent, any applicable Remarketing Agent and
any other record holders of the shares of Preferred Stock of such Series.
(iii) Any Notice of Method Selection with respect to any subsequent
Dividend Period for any Series of Preferred Stock shall be deemed to have
been withdrawn if on or prior to the second Business Day preceding the
first day of such subsequent Dividend Period the Corporation shall have
removed the Method Selection Agent for such Series, provided that the
Corporation shall have given a notice (a "Notice of Removal") to the Term
Selection Agent, the Securities Depository, the Remarketing Depository,
the Auction Agent, the Tender Agent, any applicable Remarketing Agent and
any other record holders of shares of Preferred Stock of such Series no
later than 3:00 P.M., New York City time, on such second Business Day. If
more than one entity has been appointed and is acting as Method Selection
Agent for that Series, such Notice of Method Selection shall be deemed to
have been withdrawn only if the Corporation shall have removed all such
entities; and the removal at any time by the Corporation of one or more
but not all such entities shall not effect a deemed withdrawal of a Notice
of Method Selection and in any such event no Notice of Removal need be
given. If the Method Selection Agent for any Series of Preferred Stock
resigns or is removed (or, in either case, if more than one entity has
been appointed and is acting as Method Selection Agent for that Series
then all such entities), the Dividend Determination Method applicable to
such Series in effect at the time of such resignation or removal will
continue in effect until the Corporation appoints a successor Method
Selection Agent for such Series and such Method Selection Agent sends a
Notice of Method Selection. If, as a result of the resignation or removal
of the Method Selection Agent, the Dividend Determination Method for any
Series will continue to be the Auction Method, then the duration of the
next succeeding Dividend Period for such Series will be the Standard
Dividend Period.
(iv) Any Method for a Series of Preferred Stock selected by the Method
Selection Agent for such Series pursuant to a Notice of Method Selection
(except a Notice of Method Selection that is revoked or deemed to have
been withdrawn) shall be conclusive and binding on the Corporation and the
holders of Preferred Stock of such Series. If the Notice of Method
Selection is not revoked or deemed to have been withdrawn, any Method so
selected by the Method Selection Agent for a Series will continue in
effect for that Series until such Method Selection Agent or any successor
selects the other Method in the aforesaid manner. No defect in the Notice
of Method Selection, the Notice of Method Revocation or the Notice of
Removal of the Method Selection Agent or in the mailing thereof shall
affect the validity of any change in the Dividend Determination Method or
any withdrawal, revocation or removal.
(v) Notwithstanding the foregoing, the Method Selection Agent
shall not be entitled to change the Dividend Determination Method then
applicable to a Series if (i) at the time of an election that the
Remarketing Method apply to a Series, the Corporation has not appointed
(and given notice or taken such other action as may be necessary for the
timely effectiveness of such appointment) a Remarketing Agent, a Tender
Agent, a Securities Depository and a Remarketing Depository for such
Series, (ii) at the time of an election that the Auction Method apply to a
Series, the Corporation has not appointed (and given notice or taken such
other action as aforesaid) an Auction Agent, a Securities Depository and
at least one Broker-Dealer for such Series, or such election would result
in more than one Dividend Period for the shares of Preferred Stock of such
Series or (iii) at the time of any such election, a Failure to Deposit has
occurred and is continuing. Once the Method Selection Agent has selected a
Dividend Determination Method for a Series in the aforesaid manner, such
selection shall become effective on the last day of the Dividend Period(s)
then applicable to shares of Preferred Stock of such Series
notwithstanding any
33
<PAGE>
Failure to Deposit for such Series which may occur after the delivery of
the Notice of Method Selection by such Method Selection Agent, the failure
to remarket tendered shares of Remarketing Preferred of such Series, in
the case of the selection of the Remarketing Method, or the lack of
Sufficient Clearing Bids in the Auction for such Series, in the case of
the selection of the Auction Method.
(d) (i) With respect to shares of Auction Preferred, each successive
Dividend Period shall commence on the Dividend Payment Date for the
preceding Dividend Period for such Series and shall end (A) in the case of
a Dividend Period of 7 to 48 days or a Standard Dividend Period, on the
day preceding the next Dividend Payment Date and (B) in the case of a
Short Dividend Period or a Long Dividend Period, on the last day of the
Short Dividend Period or Long Dividend Period, as the case may be,
specified by the Term Selection Agent, in the related Notice of Change in
Dividend Period.
(ii) The Term Selection Agent will give telephonic and written notice,
not less than 10 and not more than 30 days prior to an Auction Date and
based on the then-current Marketing Conditions, to the Corporation, the
Auction Agent, the Method Selection Agent, the Securities Depository and
any other record holders of a Series of Auction Preferred if it determines
that the next succeeding Dividend Period for such Series will be a
Dividend Period of 7 to 48 days, a Short Dividend Period or a Long
Dividend Period (any such notice, a "Notice of Change in Dividend
Period"); provided, that if the then-current Dividend Period is less than
10 days, the Term Selection Agent will give such Notice of Change in
Dividend Period no less than 5 days prior to an Auction Date. Each such
Notice of Change in Dividend Period shall be in substantially the form of
Exhibit D to the Auction Agent Agreement and shall specify the following
terms, (A) the next succeeding Dividend Period for such Series as a
Dividend Period of 7 to 48 days, a Short Dividend Period or a Long
Dividend Period; provided that a Dividend Period of 7 to 48 days shall
only be established so long as corporate holders of such Series of
Preferred Stock shall not lose entitlement to the Dividends-Received
Deduction as a result of the length of such Dividend Period, (B) the term
thereof, (C) in the case of a Short Dividend Period, the Dividend Payment
Dates with respect thereto and (D) in the case of a Long Dividend Period,
additional redemption provisions or restrictions on redemption, if any, as
authorized in Section 4(b)(ii) hereof. However, for any Auction occurring
after the initial Auction, the Term Selection Agent may not give a Notice
of Change in Dividend Period (and any such Notice of Change in Dividend
Period shall be null and void) unless Sufficient Clearing Bids were made
in the last occurring Auction for any Series and full cumulative
dividends, if any, for all Series of Auction Preferred payable prior to
the date of such notice have been paid in full. The Term Selection Agent
may establish a Dividend Period of 7 to 48 days, a Short Dividend Period
or a Long Dividend Period for any Series of Preferred Stock, if the Term
Selection Agent determines that such Dividend Period and, in the case of a
Long Dividend Period, additional redemption provisions or restrictions on
redemption, provide the Corporation with the most favorable financing
alternative based upon the then-current Marketing Conditions. A Notice of
Change in Dividend Period may be revoked by the Term Selection Agent on or
prior to 10:00 A.M. New York City time on the related Auction Date by
telephonic and written notice (a "Notice of Revocation"), in substantially
the form of Exhibit E to the Auction Agent Agreement, to the Corporation,
the Auction Agent, the Method Selection Agent, the Securities Depository
and any other record holders of the shares of such Series, specifying that
the Term Selection Agent has determined that because of subsequent changes
in such Marketing Conditions, such Dividend Period would not result in the
most favorable financing alternative for the Corporation. Notices of
Revocation given by the Term Selection Agent will be conclusive and
binding upon the Corporation and the holders of shares of Auction
Preferred and,
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<PAGE>
except as set forth below in clause (iv), a Notice of Change in Dividend
Period given by the Term Selection Agent will be conclusive and binding
upon the Corporation and the holder of shares of Auction Preferred.
(iii) Any Notice of Change in Dividend Period with respect to any
subsequent Dividend Period for any Series of Auction Preferred will be
deemed to have been withdrawn if on or prior to the second Business Day
preceding an Auction Date the Corporation shall have removed the Term
Selection Agent, provided that the Corporation shall have given Notice of
Removal to the Auction Agent, the Method Selection Agent and the
Securities Depository and any other record holders of the shares of such
Series, no later than 3:00 P.M., New York City time, on such second
Business Day. If the Term Selection Agent resigns or is removed, the
Dividend Period for each Series of Auction Preferred shall be a Standard
Dividend Period until the Corporation appoints a successor Term Selection
Agent for such Series and such Term Selection Agent sends a Notice of
Change in Dividend Period.
(iv) If the Term Selection Agent does not give a Notice of Change in
Dividend Period with respect to the next succeeding Dividend Period for
any Series of Auction Preferred or has given such a Notice of Change in
Dividend Period and gives a Notice of Revocation with respect thereto or
such Notice of Change in Dividend Period is deemed to be withdrawn, such
next succeeding Dividend Period shall be a Standard Dividend Period with
respect to such Series. In addition, in the event the Term Selection Agent
has given a Notice of Change in Dividend Period with respect to the next
succeeding Dividend Period for a Series of Preferred Stock and such notice
has not been revoked or deemed to be withdrawn, but Sufficient Clearing
Bids are not made in the related Auction or such Auction is not held for
any reason, such next succeeding Dividend Period for such Series will,
notwithstanding such Notice of Change in Dividend Period, be a Standard
Dividend Period and the Term Selection Agent may not again give a Notice
of Change in Dividend Period (and any such Notice of Change in Dividend
Period shall be null and void) for such Series until Sufficient Clearing
Bids have been made in an Auction for such Series.
(e) (i) With respect to shares of Remarketing Preferred, the duration of
each subsequent Dividend Period and the Applicable Rate for each such
subsequent Dividend Period shall be established by the Remarketing Agent
for such shares of Remarketing Preferred and will be conclusive and
binding on the Corporation and the holders of such shares.
(ii) For each Dividend Period the applicable Remarketing Agent shall
establish a dividend rate, not in excess of the Maximum Applicable Rate,
which it determines shall be the lowest rate at which tendered shares of
Remarketing Preferred would be remarketed at $250,000 per share. In
establishing each Dividend Period and dividend rate, each Remarketing
Agent will establish Dividend Periods and dividend rates which it
determines will result in the most favorable financing alternative for the
Corporation based on the then-current Marketing Conditions.
(iii) Each Holder will be deemed to have tendered its shares of
Remarketing Preferred for sale by Remarketing on the Business Day
immediately preceding the first day of each subsequent Dividend Period
applicable thereto, unless it gives irrevocable notice otherwise.
Consequently, a Holder will hold shares of Remarketing Preferred only for
a Dividend Period and at a dividend rate accepted by that holder, except
for one or more successive Dividend Periods of one day resulting from a
Failure to Deposit or the failure to remarket such shares as described
below. At any time, any or all shares of Remarketing Preferred of a Series
may have Dividend Periods of various lengths. Depending on Marketing
Conditions at the time of Remarketing, any or all shares
35
<PAGE>
of Remarketing Preferred of a Series may have different Applicable Rates,
including those set on the same day for Dividend Periods of equal length.
(f) (i) Not later than 11:00 A.M. New York City time on the Dividend
Payment Date (except as provided in Section 3(f)(v) below) for each share
of Preferred Stock, the Corporation is required to deposit with the Paying
Agent sufficient immediately available funds for the payment of declared
dividends.
(ii) Each dividend shall be payable to the holder or holders of
record of such shares of Preferred Stock as such holders' names appear on
the Stock Books on the Business Day next preceding the applicable Dividend
Payment Date. Subject to Section 3(i) below, dividends in arrears
(including any Additional Payments) for any past Dividend Payment Date may
be declared by the Board of Directors and paid at any time, without
reference to any regular Dividend Payment Date, to the holder or holders
of record as such holders appear on the Stock Books as of the Business Day
next preceding such Dividend Payment Date. Any dividend payment made on
any shares of Preferred Stock shall first be credited against the
dividends accumulated with respect to the earliest Dividend Payment Date
for which dividends have not been paid with respect to such shares.
(iii) So long as the shares of Preferred Stock are held of record by
the nominee of the Securities Depository or the Remarketing Depository, as
the case may be, dividends will be paid to the nominee of the Securities
Depository or the Remarketing Depository, on each Dividend Payment Date.
Dividends on shares of Preferred Stock held through the Securities
Depository will be paid through the Securities Depository on each Dividend
Payment Date in accordance with its normal procedures.
(iv) Dividends on any shares of Preferred Stock held by the Remarketing
Depository will be paid through the Remarketing Depository on each
Dividend Payment Date by wire or other transfer of immediately available
funds to a Holder's account with a commercial bank in the United States so
long as such Holder has provided the Remarketing Depository with the
necessary information to effect such transfer. Any payments not made by
wire or other transfer will be made by check to the Holder of such
Preferred Stock.
(v) In the case of dividends payable with respect to a share of
Preferred Stock with a Dividend Period of 7 to 48 days, a Standard
Dividend Period or a Short Dividend Period, if:
(A) (x) The Securities Depository shall continue to make
available to Participants the amounts due as dividends on such
shares of Preferred Stock in next-day funds on the dates on which
such dividends are payable and (y) a Normal Dividend Payment Date is
not a Business Day, or the day next succeeding such Normal Dividend
Payment Date is not a Business Day, then dividends shall be payable
on the first Business Day preceding such Normal Dividend Payment
Date that is next succeeded by a Business Day; or
(B) (x) The Securities Depository shall make available to
Participants the amounts due as dividends on such shares of
Preferred Stock in immediately available funds on the dates on which
such dividends are payable (and the Securities Depository shall have
so advised the Auction Agent) and (y) a Normal Dividend Payment Date
is not a Business Day, then dividends shall be payable on the first
Business Day following such Normal Dividend Payment Date.
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<PAGE>
(C) In the case of dividends payable with respect to shares of
Preferred Stock with a Long Dividend Period, if:
(I) (x) The Securities Depository shall continue to make
available to its Participants the amounts due as dividends on
such shares of Preferred Stock in next-day funds on the dates
on which such dividends are payable and (y) a Normal Dividend
Payment Date is not a Business Day, or the day next succeeding
such Normal Dividend Payment Date is not a Business Day, then
dividends shall be payable on the first Business Day following
such Normal Dividend Payment Date that is next succeeded by a
Business Day; or
(II) (x) The Securities Depository shall make available to its
Participants the amounts due as dividends on such shares of
Preferred Stock in immediately available funds on the dates on
which such dividends are payable (and the Securities
Depository shall have so advised the Auction Agent) and (y) a
Normal Dividend Payment Date is not a Business Day, then
dividends shall be payable on the first Business Day following
such Normal Dividend Payment Date.
(D) Notwithstanding the foregoing, in case of payment in
next-day funds, if the date on which dividends on shares of
Preferred Stock would be payable as determined as set forth in
clauses (A), (B) and (C) above is a day that would result, due to
such procedures, in the number of days between successive Auction
Dates or Remarketing Dates for such shares (determined by excluding
the first Auction Date or Remarketing Date, as the case may be, and
including the second Auction Date and the second Remarketing Date,
as the case may be), not being at least equal to the then-current
minimum holding period (currently set forth in Section 246(c) of the
Code) (the "Minimum Holding Period") required for corporate
taxpayers to be entitled to the dividends- received deduction on
preferred stock held by nonaffiliated corporations (currently set
forth in Section 243(a) of the Code) (the "Dividends-Received
Deduction"), then dividends on such shares shall be payable on the
first Business Day following such date on which dividends would be
so payable that is next succeeded by a Business Day that results in
the number of days between such successive Auction Dates or
Remarketing Dates, as the case may be (determined as set forth
above), being at least equal to the then current Minimum Holding
Period.
(E) In addition, notwithstanding the foregoing, in the event
of a change in law altering the Minimum Holding Period, the period
of time between Dividend Payment Dates shall automatically be
adjusted so that there shall be a uniform number of days in
subsequent Dividend Periods (such number of days without giving
effect to the adjustments referred to above being referred to herein
as "Subsequent Dividend Period Days") commencing after the date of
such change in law equal to or, to the extent necessary, in excess
of the then current Minimum Holding Period; provided that the number
of Subsequent Dividend Period Days shall not exceed by more than
nine days the length of such then-current Minimum Holding Period and
shall be evenly divisible by seven, and the maximum number of
Subsequent Dividend Period Days, as adjusted pursuant to this
provision, in no event shall exceed 119 days.
(F) If a Normal Dividend Payment Date for shares of
Remarketing Preferred with Dividend Periods of less than 7 days is
not a Business Day, then dividends shall be payable on the first
Business Day following such Normal Dividend Payment Date.
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<PAGE>
(g) (i) For the Initial Dividend Periods dividends will accumulate at a
rate per annum of 3.25% for Series G Preferred Stock, 3.25% for Series H
Preferred Stock, 3.25% for Series I Preferred Stock, and 3.25% for Series J
Preferred Stock (in each case, the "Initial Dividend Rate"). The dividend rate
for each share of Preferred Stock for each subsequent Dividend Period shall be
the Applicable Rate determined by either the Auction Method or the Remarketing
Method.
(ii) Notwithstanding the application of either the Auction Method or the
Remarketing Method, the dividend rate on each share of Preferred Stock
shall not exceed the Maximum Applicable Rate per annum for any Dividend
Period; provided, however, that the Chief Financial Officer of the
Corporation (the "Chief Financial Officer") based on certain factors may
increase the Percentage used to calculate the Maximum Applicable Rate at
any time up to certain amounts set forth below in Section 3(h)(ii). The
provisions of the immediately preceding sentence notwithstanding, at any
time that the application of the provisions with respect to a Failure to
Deposit would, but for the provisions of the immediately preceding
sentence, result in a dividend rate on a share of Preferred Stock being in
excess of the Maximum Applicable Rate per annum, the maximum dividend rate
applicable to such share of Preferred Stock shall be such higher dividend
rate as provided below.
(h) (i) Not later than 10:00 A.M., New York City time, on the related
Auction Date or Remarketing Date, as the case may be, and based on the criteria
set forth below, the Chief Financial Officer may, upon telephonic and written
notice, to the Auction Agent, each applicable Remarketing Agent, the Securities
Depository, the Remarketing Depository and any other record holder of shares of
Preferred Stock affected thereby, increase the percentage (the "Percentage")
used to calculate the Maximum Applicable Rate for any shares of Preferred Stock
(a "Notice of Percentage Increase"). Such Notice of Percentage Increase shall
specify the new Percentages to be used to calculate the Maximum Applicable Rate
and shall be in substantially the form of Exhibit G to the Auction Agent
Agreement.
The Chief Financial Officer may increase such Percentages if the Chief
Financial Officer determines that supervening considerations make the
Percentages then in effect inimical to the financial interests of the
Corporation and that such increase is necessary to enable the operation of the
then-applicable Method to provide the Corporation with the most favorable
financing alternatives based on then-current Marketing Conditions. The Chief
Financial Officer may not revoke a Notice of Percentage Increase and the
Percentages specified therein will be the applicable Percentages for the
determination of the Maximum Applicable Rate with respect to such shares for
subsequent Dividend Periods, except as described below, until a new Notice of
Percentage Increase shall be delivered in accordance with the terms thereof.
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<PAGE>
(ii) Except as described below, the Chief Financial Officer may not
increase the Percentage used to calculate the Maximum Applicable Rate to
above the Percentages set forth in the third column of the table below
corresponding to the applicable credit ratings set forth in the first two
columns of the table below.
<TABLE>
<CAPTION>
Credit Rating Maximum Percentage
Permitted to be
Used to Calculate
Maximum Applicable
Moody's Standard & Poor's Rate
------- ----------------- ------------------
<S> <C> <C>
"aa3" or Above AA- or Above 175%
"a3" to "a1" A- to A+ 225%
"baa3" to "baa1" +BBB- to BBB 250%
Below "baa3" Below BBB 275%
</TABLE>
The maximum percentages set forth in the third column of the above
table may be increased by the Chief Financial Officer, upon receipt
of an opinion of counsel addressed to the Corporation to the effect
that the use of such higher percentages to calculate the Maximum
Applicable Rate will not adversely affect the tax treatment of the
Preferred Stock.
(iii) The Chief Financial Officer may only raise the Percentage
applicable to a Series of Auction Preferred if the Chief Financial Officer
raises such Percentage for all the shares of such Series. The Chief
Financial Officer may, however, only raise the Percentage applicable to
shares of Remarketing Preferred with respect to those shares of
Remarketing Preferred being remarketed on the same date, and shall not be
required to raise the Percentage applicable to any other shares of
Remarketing Preferred. However, if the Percentage applicable to a share of
Remarketing Preferred is less than the Percentage applicable to any other
share of Remarketing Preferred of the same Series, the lower Percentage
applicable to such share shall, at the end of the current Dividend Period
for such share, automatically be increased to the highest Percentage then
applicable to any share of Remarketing Preferred of such Series, unless
the Chief Financial Officer elects to increase further the Percentage
applicable to such share.
(i) (A) In the event a Failure to Deposit occurs and any such Failure to
Deposit shall not have been cured within three Business Days after such
occurrence, then until such time as the full amount due shall have been
paid to the Paying Agent, the Auction Procedures and the Remarketing
Procedures will be suspended. The Applicable Rate for each Dividend Period
commencing on or after any such Dividend Payment Date (or redemption date,
as the case may be) on which there has been a Failure to Deposit and such
Failure to Deposit has not been cured within three Business Days shall be
equal to the Default Rate for such Dividend Period. In addition, if any
such Dividend Payment Date was not the last day of a Dividend Period, the
Applicable Rate for the portion of such Dividend Period commencing on such
Dividend Payment Date and ending on the day preceding the next succeeding
Dividend Payment Date shall be the Default Rate for such period, computed
as if such period were a "Dividend Period". If there has been a failure to
pay dividends on the last day of a Dividend Period, the Dividend Period to
which such Default Rate will apply shall be a Standard Dividend Period in
the case of Auction Preferred and successive one day periods in the case
of Remarketing Preferred. If there has been a failure to pay the
redemption price of shares of Preferred Stock called for redemption, the
Dividend Period
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to which such Default Rate will apply shall be the period commencing on,
and including, the redemption date and ending on, but excluding, the date
the redemption price is paid to the Paying Agent. The suspension of the
Auction Procedures and the Remarketing Procedures shall continue in effect
until there shall occur a Dividend Payment Date at least one Business Day
prior to which the full amount of any dividends (whether or not earned or
declared) payable on each Dividend Payment Date prior to and including
such Dividend Payment Date along with any Additional Payments then due,
and the full amount of any redemption price (including accumulated and
unpaid dividends) then due shall have been paid to the Paying Agent, and
thereupon application of the Auction Procedures and the Remarketing
Procedures shall resume for any Outstanding shares on the terms stated
herein for Dividend Periods commencing with such Dividend Payment Date. If
a Failure to Deposit is cured within three Business Days, then the
Applicable Rate will be the dividend rate established in connection with
any Auction or Remarketing relating to such shares of Preferred Stock
conducted immediately preceding the Failure to Deposit, provided that the
Applicable Rate shall be the Default Rate for each day (excluding the date
of deposit) until the Failure to Deposit is cured. Such Default Rate shall
be computed using the Dividend Period established in connection with any
Auction or Remarketing relating to such shares of Preferred Stock
conducted immediately preceding the Failure to Deposit.
(B) Any Failure to Deposit with respect to any share of Preferred
Stock shall be deemed to be cured if, with respect to a Failure to Deposit
relating to (a) the payment of dividends on such shares of Preferred
Stock, the Corporation deposits with the Paying Agent by 11:00 A.M., New
York City time, all accumulated and unpaid dividends on such shares of
Preferred Stock, including the full amount of any dividends to be paid
with respect to the Dividend Period or portion thereof with respect to
which the Failure to Deposit occurred, plus Additional Payments, and (b)
the redemption of such shares, the Corporation deposits with the Paying
Agent by 11:00 A.M., New York City time, funds sufficient for the
redemption of such shares (including accumulated and unpaid dividends) and
gives irrevocable instructions to apply such funds and, if applicable, the
income and proceeds therefrom, to the payment of the redemption price
(including accumulated and unpaid dividends) for such shares. If the
Corporation shall have cured such Failure to Deposit by making timely
payment to the Paying Agent, either the Auction Agent or the Remarketing
Agent, as the case may be, will give telephonic and written notice of such
cure to each Holder of shares of Preferred Stock at the telephone number
and address specified in such Holder's Master Purchaser's Letter and to
each Broker-Dealer, in the case of the Auction Agent, as promptly as
practicable after such cure is effected. Additional Payments paid to the
Paying Agent with respect to a Failure to Deposit will be payable to the
Holders of shares of Preferred Stock on the Record Date for the Dividend
Payment Date with respect to which such Failure to Deposit occurred.
(j) If an Auction or Remarketing for any shares of Preferred Stock is not
held on an Auction Date or Remarketing Date for any reason (other than because
of the suspension of Auctions or Remarketing due to a Failure to Deposit as
described above), the dividend rate for such shares shall be the Maximum
Applicable Rate (calculated assuming a Standard Dividend Period) determined as
of such Auction Date or Remarketing Date and the Dividend Period shall be a
Standard Dividend Period, in the case of Auction Preferred, and successive
Dividend Periods of one day, in the case of Remarketing Preferred, until such
shares of Remarketing Preferred are remarketed.
(k) The amount of dividends per share payable on any Dividend Payment Date
on a share of Preferred Stock having a Dividend Period of up to 364 days shall
be computed by multiplying the Applicable Rate for each Dividend Period by a
fraction the numerator of which shall be the number of days between Dividend
Payment Dates (calculated by counting the date of the preceding Dividend
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Payment Date as the first day and the day preceding the current Dividend Payment
Date as the last day) and the denominator of which shall be 360, and multiplying
the amount so obtained by $250,000. During any Dividend Period of 365 days or
longer, the amount of dividends accumulated on each share will be computed on
the basis of a 360-day year consisting of twelve 30-day months.
(l) (i) Holders of shares of each Series of Preferred Stock shall not be
entitled to any dividends, whether payable in cash, property or stock, in
excess of full cumulative dividends. So long as any shares of Preferred
Stock are Outstanding, the Corporation shall not declare or pay or set
apart for payment any dividends or make any other distributions on, or
payment on account of the purchase, redemption or other retirement of the
common stock of the Corporation or any other capital stock of the
Corporation ranking junior to the Preferred Stock as to dividends or as to
distributions upon liquidation, dissolution or winding-up of the
Corporation unless (i) full cumulative dividends on the Preferred Stock
have been paid (or declared and a sum sufficient for the payment thereof
set apart for such payment) for all Dividend Periods terminating on or
prior to the date of such payment, distribution, purchase, redemption or
other retirement with respect to such junior capital stock and (ii) the
Corporation is not in default with respect to any obligation to redeem or
retire shares of the Preferred Stock; provided, however, that the
foregoing shall not apply to (i) any dividend payable solely in any shares
of any stock ranking, as to dividends and as to distributions in the event
of a liquidation, dissolution or winding-up of the Corporation, junior to
the Preferred Stock or (ii) the acquisition of shares of any stock
ranking, as to dividends or as to distributions in the event of a
liquidation, dissolution or winding-up of the Corporation, junior to the
Preferred Stock in exchange solely for shares of any other stock ranking,
as to dividends and as to distributions in the event of a liquidation,
dissolution or winding-up of the Corporation, junior to the Preferred
Stock.
(ii) Each dividend will be payable to the holder or holders of record
of shares of Preferred stock as they appear on the Stock Books on the
Business Day next preceding the applicable Dividend Payment Date.
Dividends in arrears for any past Dividend Period (and for any past
Dividend Payment Date occurring prior to the end of a Long Dividend
Period or a Short Dividend Period) may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the record
holders of such shares. Any dividend payment made on any shares of
Preferred Stock shall first be credited against the dividends accumulated
with respect to the earliest Dividend Payment Date for which dividends
have not been paid with respect to such shares. So long as the shares of
Preferred stock are held of record by the nominee of the Securities
Depository or the Remarketing Depository, as the case may be, dividends
will be paid to the nominee of the Securities Depository or the
Remarketing Depository, on each Dividend Payment Date.
(iii) Unless otherwise provided for in the Restated Certificate of
Incorporation, as the same may be amended, of the Corporation, all
payments in the form of dividends made upon shares of Preferred Stock and
any other stock ranking on a parity with the Preferred Stock with respect
to such dividend shall be pro rata, so that amounts paid per share on the
Preferred Stock and such other stock shall in all cases bear to each other
the same ratio that the required dividends then payable per share on the
shares of Preferred Stock and such other stock bear to each other.
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SECTION 4. Optional Redemption.
(a) At the option of the Corporation, by resolution of the Board of
Directors, the shares of a Series of Preferred Stock may be redeemed, in whole
or in part, out of funds legally available therefor, on the Business Day
immediately preceding any Dividend Payment Date for such shares, upon at least
15 but not more than 45 days notice, at a redemption price per share equal to
the sum of $250,000 plus premium thereon, if any, and an amount equal to accrued
and unpaid dividends thereon (whether or not earned or declared) to the date
that the Corporation pays the full amount payable upon redemption of such
shares; provided that such redemption date shall be the Dividend Payment Date
for such shares if the payment on the Business Day preceding such date would
reduce the holding period for such shares since the Auction Date or Remarketing
Date preceding such payment below the Minimum Holding Period. Pursuant to such
right of optional redemption, the Corporation may elect to redeem some or all of
the shares of Preferred Stock of any Series without redeeming shares of any
other Series.
(b) (i) Notwithstanding the foregoing, if any dividends on shares of any
Series of Preferred Stock are in arrears, (i) no shares of such Series of
Preferred Stock or of any other Series of Preferred Stock shall be
redeemed unless all outstanding shares of each Series of Preferred Stock
are simultaneously redeemed and (ii) the Corporation shall not purchase or
otherwise acquire any shares of Preferred Stock; provided, however, that
the foregoing shall not prevent the purchase or acquisition of shares of
Preferred Stock pursuant to an otherwise lawful purchase or exchange offer
made on the same terms to all Holders of Outstanding shares of Preferred
Stock.
(ii) In connection with the selection of a Long Dividend Period, the
Term Selection Agent or the applicable Remarketing Agent, as the case may
be, may restrict the Corporation's ability to redeem shares of Preferred
Stock by providing for the payment of a redemption premium or fixing a
period of time during which such shares of Preferred Stock may not be
redeemed if the Term Selection Agent or the applicable Remarketing Agent,
as the case be, determines, based on the then-current Marketing
Conditions, that adding such terms will result in the most favorable
financing alternative for the Corporation.
(c) (i) If shares of Preferred Stock are to be redeemed, the Redemption
Agent will, at the direction of the Corporation, cause to be sent, by
first-class or air mail, postage prepaid, telex or facsimile, a notice of
redemption to each holder of record (initially Cede & Co., as nominee of
the Securities Depository) of shares of Preferred Stock to be redeemed.
Such notice of redemption shall be sent not fewer than fifteen nor more
than 45 days prior to the redemption date. Each notice of redemption will
identify the Preferred Stock to be redeemed by CUSIP number and will state
(a) the redemption date, (b) the redemption price, (c) the place where the
redemption price is to be paid and (d) the number of shares of Preferred
Stock and the Series thereof to be redeemed. The notice will also be
published in The Wall Street Journal.
(ii) No defect in the notice of redemption or in the mailing or
publication thereof will affect the validity of the redemption
proceedings, except as required by applicable law. A notice of redemption
will be deemed given on the day that it is mailed in accordance with the
foregoing description.
(iii) The Corporation may elect to redeem some or all of the shares
of each Series of Preferred Stock.
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(iv) In the case of shares of a Series of Auction Preferred, so long
as the Securities Depository's nominee is the record holder of such
shares, the Redemption Agent will give notice to the Securities
Depository, and the Securities Depository will determine the number of
shares of each such Series to be redeemed from the accounts of each of its
Participants. A Participant may determine to redeem shares from certain of
the beneficial holders holding through such Participant (which may include
a Participant holding shares for its own account) without redeeming shares
from the accounts of other beneficial owners.
Any such redemption will be made in accordance with applicable laws and
rules.
(v) In the case of shares of Remarketing Preferred, notice of such
redemption shall be given to the Securities Depository or the Remarketing
Depository, as the case may be, and any other record holders of the
Remarketing Preferred to be redeemed. The Corporation shall identify by
CUSIP number the shares of Remarketing Preferred to be redeemed. To the
extent less than all of the shares of Remarketing Preferred represented by
a certificate with a particular CUSIP number are to be redeemed, the
applicable Depository shall determine the shares represented by such
certificate to be redeemed. In the case of the Securities Depository, the
shares to be redeemed shall be determined as described in the preceding
paragraph, and in the case of the Remarketing Depository, the Remarketing
Depository shall determine the number of shares represented by such
certificate to be redeemed from each Holder thereof.
(vi) If any shares of Preferred Stock to be redeemed are not held
of record by a nominee for the Securities Depository or the Remarketing
Depository, the particular shares of Preferred Stock to be redeemed shall
be selected by the Corporation by lot or by such other method as the
Corporation shall deem fair and equitable.
(vii) Upon any date fixed for redemption (unless a Failure to
Deposit occurs), all rights of the Holders of shares of Preferred Stock
called for redemption will cease and terminate, except the right of such
Holders to receive the amounts payable in respect of such redemption
therefor, but without interest, and such shares of Preferred Stock will be
deemed no longer outstanding and, upon the taking of any action required
by applicable law, shall have the status of authorized and unissued shares
of preferred stock and may be reissued by the Corporation at any time as
shares of any series of preferred stock other than as shares of Preferred
Stock.
SECTION 5. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, after payment or
provision for payment of the debts and other liabilities of the Corporation, the
holders of the shares of the Preferred Stock shall be entitled to receive, out
of the assets of the Corporation, whether such assets are capital or surplus and
whether or not any dividends as such are declared but before any payment or
distribution of assets is made to holders of common stock of the Corporation or
any other class of stock or series thereof ranking junior to the Preferred Stock
with respect to the distribution of assets, a preferential liquidation
distribution in the amount of $250,000 per share of Preferred Stock plus an
amount equal to accumulated and unpaid dividends on each such share (whether or
not declared) to and including the date of such distribution and no more.
Neither the merger or consolidation of the Corporation with or into any other
corporation, nor the merger or consolidation of any other corporation with or
into the Corporation, nor the sale, lease, exchange or other transfer of all or
any portion of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 5.
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(b) If upon any liquidation, dissolution or winding up of the affairs of
the Corporation, whether voluntary or involuntary, the assets of the Corporation
available for distribution to the holders of Preferred Stock and any other
series of capital stock of the Corporation ranking on a parity with the
Preferred Stock are insufficient to pay the holders of the Preferred Stock the
full amount of the preferential liquidation distributions to which they are
entitled, then such assets of the Corporation shall be distributed ratably among
the holders of Preferred Stock and any other series of capital stock of the
Corporation ranking on a parity with the Preferred Stock based upon the ratio of
(x) the aggregate amount available for distribution on all shares of Preferred
Stock and such parity stock to (y) the total amount distributable on all shares
of Preferred Stock and such parity stock upon liquidation.
SECTION 6. Voting Rights.
(a) Holders of the Preferred Stock will have no voting rights except as
hereinafter described or as otherwise provided by the General Corporation Law of
the State of Delaware; provided, however, that the affirmative vote of the
holders of record of at least 66 2/3% of the Outstanding shares of Preferred
Stock, voting separately as one class, shall be necessary to adopt any
alteration, amendment or repeal of any provision of the Articles of
Incorporation or this Certificate of Designations (including any such
alteration, amendment or repeal effected by any merger or consolidation), if
such alteration, amendment or repeal would alter or change the powers,
preferences or special rights of the shares of Preferred Stock so as to affect
them adversely.
(b) (i) If at any time the equivalent of six or more full quarterly
dividends (whether or not consecutive) payable on the Preferred Stock
shall be in arrears (to any extent) (a "Default Period"), the number of
directors constituting the Board of Directors of the Corporation shall be
increased by two (2), and the holders of record of the Preferred Stock
shall have the exclusive right, voting as a class with any other shares of
preferred stock of the Corporation so entitled to vote thereon, to elect
the directors to fill such newly created directorships. This right shall
remain vested until all dividends in arrears on the Preferred Stock have
been paid or declared and set apart for payment, at which time (A) the
right shall terminate (subject to revesting), (B) the term of the
directors then in office elected in accordance with the foregoing shall
terminate, and (C) the number of directors constituting the Board of
Directors of the Corporation shall be reduced by the number of directors
whose term has been terminated pursuant to clause (B) above. For purposes
of the foregoing, default in the payment of dividends for the equivalent
of six quarterly dividends means, in the case of Preferred Stock which
pays dividends either more or less frequently than every quarter, default
in the payment of dividends in respect of one or more Dividend Periods
containing not less than 540 days.
(ii) Whenever such right shall vest, it may be exercised initially
by the vote of the holders of record of a majority of the shares of
Preferred Stock present and voting, in person or by proxy, at a special
meeting of holders of record of the Preferred Stock or at the next annual
meeting of stockholders. A special meeting for the exercise of such right
shall be called by the Secretary of the Corporation as promptly as
possible, and in any event within 10 days after receipt of a written
request signed by the holders of record of at least 25% of the Outstanding
shares of the Preferred Stock, subject to any applicable notice
requirements imposed by law. Notwithstanding the provisions of this
paragraph, no such special meeting shall be held during the 30-day period
preceding the date fixed for the annual meeting of stockholders of the
Corporation.
(iii) So long as a Default Period continues, any director who shall
have been elected by holders of record of Preferred Stock entitled to vote
in accordance herewith shall hold office for a
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term expiring at the next annual meeting of stockholders and during such
term may be removed at any time, without cause by, and only by, the
affirmative vote of the holders of record of a majority of the shares of
Preferred Stock present and voting, in person or by proxy, at a special
meeting of such stockholders of record called for such purpose, and any
vacancy created by such removal may also be filled at such meeting. A
meeting for the removal of a director elected by the holders of record of
Preferred Stock and the filling of the vacancy created thereby shall be
called by the Secretary of the Corporation as promptly as possible and in
any event within 10 days after receipt of request therefor signed by the
holders of record of not less than 25% of the Outstanding shares of
Preferred Stock, subject to any applicable notice requirements imposed by
law. Such meeting shall be held at the earliest practicable date
thereafter. Notwithstanding the provisions of this paragraph, no such
meeting shall be held during the 30-day period preceding the date fixed
for the annual meeting of stockholders of the Corporation.
(iv) Any vacancy caused by the death, resignation or expiration of
the term of office of a director who shall have been elected in accordance
with these provisions may be filled by the remaining director so elected
or, if not so filled, by a vote of holders of record of a majority of the
shares of Preferred Stock present and voting, in person or by proxy, at a
meeting called for such purpose (or, in the case of expiration of the term
of office of such director, at the annual meeting of stockholders of the
Corporation). Unless such vacancy shall have been filled by the remaining
director or by vote at the annual meeting of stockholders, such special
meeting shall be called by the Secretary of the Corporation at the
earliest practicable date after such death, resignation or expiration of
term of office, and in any event within 10 days after receipt of a written
request signed by the holders of record of at least 25% of the Outstanding
shares of Preferred Stock. Notwithstanding the provisions of this
paragraph, no such special meeting shall be held during the 30-day period
preceding the date fixed for the annual meeting of stockholders of the
Corporation.
(v) If any meeting of the holders of the Preferred Stock required
above to be called shall not have been called within 10 days after
personal service of a written request therefor upon the Secretary of the
Corporation or within 15 days after mailing the same by registered mail
addressed to the Secretary of the Corporation at his principal office,
subject to any applicable notice requirements imposed by law, then the
holders of record of at least 25% of the Outstanding shares of Preferred
Stock may designate in writing a holder of Preferred Stock to call such
meeting at the expense of the Corporation, and such meeting may be called
by such person so designated upon the notice required for annual meetings
of stockholders or such shorter notice (but in no event shorter than
permitted by law) as may be acceptable to the holders of a majority of the
total number of shares of Preferred Stock. Any holder of Preferred Stock
so designated shall have access to the stock books of the Corporation for
the purpose of causing such meeting to be called pursuant to these
provisions. Such meeting shall be held at the earliest practicable date
thereafter. Notwithstanding the provisions of this paragraph, no such
meeting shall be held during the 30-day period preceding the date fixed
for the annual meeting of stockholders of the Corporation.
(vi) At any meeting of the holders of record of the Preferred Stock
called in accordance with the above provisions for the election or removal
of directors, the presence in person or by proxy of the holders of record
of one-third of the total number of Outstanding shares of Preferred Stock
shall be required to constitute a quorum; in the absence of a quorum, a
majority of the holders of record present in person or by proxy shall have
power to adjourn the meeting from time to time without notice, other than
announcement at the meeting, until a quorum shall be present.
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SECTION 7. Auction Procedures.
(a) Certain Definitions. Capitalized terms not defined in this Section 7
shall have the respective meanings specified elsewhere in this part of Article
IV(B). As used in this Section 7, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "Available Shares of Auction Preferred" has the meaning set
forth in subsection (d)(i) below.
(ii) "Bid" has the meaning set forth in subsection (b)(i) below.
(iii) "Bidder" has the meaning set forth in subsection (b)(i) below.
(iv) "Broker-Dealer Agreement" means an agreement between the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer
agrees to follow the procedures specified in these Auction Procedures.
(v) "Hold Order" has the meaning set forth in subsection (b)(i)
below.
(vi) "Order" has the meaning set forth in subsection (b)(i) below.
(vii) "Potential Holder" means any Person, including any Existing
Holder, (A) who shall have executed a Purchaser's Letter and (B) who may
be interested in acquiring shares of Auction Preferred (or, in the case of
an Existing Holder, additional shares of Auction Preferred).
(viii) "Sell Order" has the meaning set forth in subsection (b)(i)
below.
(ix) "Submission Deadline" means 1:00 P.M., New York City time, on
any Auction Date, or such other time on any Auction Date as may be
specified from time to time by the Auction Agent as the time prior to
which each Broker-Dealer must submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction
Date.
(x) "Submitted Bid" has the meaning set forth in subsection (C)(i)
below.
(xi) "Submitted Hold Order" has the meaning set forth in subsection
(C)(i) below.
(xii) "Submitted Order" has the meaning set forth in subsection
(C)(i) below.
(xiii) "Submitted Sell Order" has the meaning set forth in
subsection (C)(i) below.
(xiv) "Sufficient Clearing Bids" has the meaning set forth in
subsection (d)(i) below.
(xv) "Winning Bid Rate" has the meaning set forth in subsection
(d)(i) below.
(b) Orders by Existing Holders and Potential Holders.
(i) Prior to the Submission Deadline on each Auction Date for any
Series of Auction Preferred:
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(A) each Existing Holder may submit to a Broker-Dealer
information as to:
(1) the number of Outstanding shares of Auction
Preferred, if any, held by such Existing Holder that such
Existing Holder desires to continue to hold without regard to
the Applicable Rate for the next succeeding Dividend Period;
(2) the number of Outstanding shares of Auction
Preferred, if any, held by such Existing Holder that such
Existing Holder desires to sell, provided that the Applicable
Rate for the next succeeding Dividend Period is less than the
rate per annum specified by such Existing Holder; and/or
(3) the number of Outstanding shares of Auction
Preferred, if any, held by such Existing Holder that such
Existing Holder desires to sell without regard to the
Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Holders that
shall be maintained in accordance with the provisions set forth in
the Broker-Dealer Agreement for the purpose of conducting a
competitive Auction, shall contact both Existing Holders and
Potential Holders, including Existing Holders with respect to an
offer by any such Existing Holder to purchase additional shares of
Auction Preferred, on such list to notify such Existing Holders and
Potential Holders as to the length of the next Dividend Period and
(i) with respect to any Short Dividend Period or Long Dividend
Period, the Dividend Payment Date(s) and (ii) with respect to any
Long Dividend Period, any dates before which shares of Auction
Preferred may not be redeemed and any redemption premium applicable
in an optional redemption and to determine the number of Outstanding
shares of Auction Preferred, if any, with respect to which each such
Existing Holder and each Potential Holder desires to submit an Order
and each such Potential Holder offers to purchase, provided that the
Applicable Rate for the next succeeding Dividend Period shall not be
less than the rate per annum specified by such Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of
information referred to in clause (A) or (B) of this Subsection (b)(i) is
hereinafter referred to as an "Order" and each Existing Holder and each
Potential Holder placing an Order is hereinafter referred to as a "Bidder;" an
Order containing the information referred to in clause (A)(1) of this Subsection
(b)(i) is hereinafter referred to as a "Hold Order;" an Order containing the
information referred to in clause (A)(2) or (B) of this Subsection (b)(i) is
hereinafter referred to as a "Bid;" and an Order containing the information
referred to in clause (A)(3) of this Subsection (b)(i) is hereinafter referred
to as a "Sell Order".
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of Auction
Preferred specified in such Bid if the Applicable Rate
determined on such Auction Date shall be less than the rate
per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares
of Auction Preferred to be determined as set forth in
Subsections (e)(i)(D) and (e)(iii) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per
annum specified therein; or
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(3) a lesser number of Outstanding shares of Auction
Preferred to be determined as set forth in Subsections
(e)(ii)(C) and (e)(iii) if such specified rate per annum shall
be higher than the Maximum Applicable Rate and Sufficient
Clearing Bids do not exist.
(B) a Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding shares of Auction
Preferred specified in such Sell Order; or
(2) such number or a lesser number of Outstanding shares
of Auction Preferred to be determined as set forth in
Subsections (e)(ii)(C) and (e)(iii) if Sufficient Clearing
Bids do not exist.
(C) a Bid by a Potential Holder shall constitute an
irrevocable offer to purchase:
(1) the number of Outstanding shares of Auction
Preferred specified in such Bid if the Applicable Rate
determined on such Auction Date shall be higher than the rate
per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares
of Auction Preferred to be determined as set forth in
Subsections (e)(i)(E) and (e)(iv) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per
annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date for any Series of
Auction Preferred all Orders obtained by such Broker-Dealer specifying
with respect to each Order:
(A) the name of the Bidder placing such Order;
(B) the aggregate number of Outstanding shares of Auction
Preferred that are the subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares of Auction
Preferred, if any, subject to any Hold Order placed by such
Existing Holder;
(2) the number of Outstanding shares of Auction
Preferred, if any, subject to any Bid placed by such Existing
Holder and the rate per annum specified in such Bid; and
(3) the number of Outstanding shares of Auction
Preferred, if any, subject to any Sell Order placed by such
Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate
per annum specified in such Potential Holder's Bid.
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(Each "Hold Order", "Bid" or "Sell Order" as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to
individually as a "Submitted Hold Order", a "Submitted Bid" or a
"Submitted Sell Order", as the case may be, or as a "Submitted
Order".)
(ii) If any rate per annum specified in any Submitted Bid contains
more than three figures to the right of the decimal point, the Auction
Agent shall round such rate up to the next highest one-thousandth (.001)
of 1%.
(iii) If one or more Orders covering in the aggregate all of the
Outstanding shares of Auction Preferred held by an Existing Holder are not
submitted to the Auction Agent prior to the Submission Deadline for any
reason (including the failure of a Broker-Dealer to contact such Existing
Holder or to submit such Existing Holder's Order or Orders), such Existing
Holder shall be deemed to have submitted a Hold Order covering the number
of Outstanding shares of Auction Preferred held by such Existing Holder
that are not subject to Orders submitted to the Auction Agent.
(iv) A Submitted Order or Submitted Orders of an Existing Holder
that cover in the aggregate more than the number of Outstanding shares of
Auction Preferred held by such Existing Holder will be considered valid in
the following order of priority:
(A) any Submitted Hold Order of such Existing Holder will be
considered valid up to and including the number of Outstanding
shares of Auction Preferred held by such Existing Holder, provided
that, if there is more than one such Submitted Hold Order and the
aggregate number of shares of Auction Preferred subject to such
Submitted Hold Orders exceeds the number of Outstanding shares of
Auction Preferred held by such Existing Holder, the number of shares
of Auction Preferred subject to each of such Submitted Hold Orders
will be reduced pro rata so that such Submitted Hold Orders in the
aggregate will cover exactly the number of Outstanding shares of
Auction Preferred held by such Existing Holder;
(B) any Submitted Bids of such Existing Holder will be
considered valid (in the ascending order of their respective rates
per annum if there is more than one Submitted Bid of such Existing
Holder) for the number of Outstanding shares of Auction Preferred
held by such Existing Holder equal to the difference between (i) the
number of Outstanding shares of Auction Preferred held by such
Existing Holder and (ii) the number of Outstanding shares of Auction
Preferred subject to any Submitted Hold Order of such Existing
Holder referred to in clause (iv)(A) above (and, if more than one
Submitted Bid of such Existing Holder specifies the same rate per
annum and together they cover more than the remaining number of
shares of Auction Preferred that can be the subject of valid
Submitted Bids of such Existing Holder after application of clause
(iv)(A) above and of the foregoing portion of this clause (iv)(B) to
any Submitted Bid or Submitted Bids of such Existing Holder
specifying a lower rate or rates per annum, the number of shares of
Auction Preferred subject to each of such Submitted Bids specifying
the same rate per annum will be reduced pro rata so that such
Submitted Bids, in the aggregate, cover exactly such remaining
number of Outstanding shares of Auction Preferred of such Existing
Holder).
(C) any Submitted Sell Order of an Existing Holder will be
considered valid up to and including the excess of the number of
Outstanding shares of Auction Preferred held by such Existing Holder
over the sum of (a) the number of shares of Auction Preferred
subject to Submitted Hold Orders by such Existing Holder referred to
in clause (iv)(A) above and (b)
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the number of shares of Auction Preferred subject to valid Submitted
Bids by such Existing Holder referred to in clause (iv)(B) above;
provided that, if there is more than one Submitted Sell Order of
such Existing Holder and the number of shares of Auction Preferred
subject to such Submitted Sell Orders is greater than such excess,
the number of shares of Auction Preferred subject to each of such
Submitted Sell Orders will be reduced pro rata so that such
Submitted Sell Orders, in the aggregate, will cover exactly the
number of shares of Auction Preferred equal to such excess.
The number of Outstanding shares of Auction Preferred, if any, subject to
Submitted Bids of such Existing Holder not valid under clause (iv)(B) above
shall be treated as the subject of a Submitted Bid by a Potential Holder at the
rate per annum specified in such Submitted Bids.
(v) If there is more than one Submitted Bid by any Potential Holder
in any Auction, each such Submitted Bid shall be considered a separate
Submitted Bid with respect to the rate per annum and number of shares of
Auction Preferred specified therein.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date
for any Series of Auction Preferred, the Auction Agent shall assemble all
Orders submitted or deemed submitted to it by the Broker-Dealers and shall
determine:
(A) the excess of the total number of Outstanding shares of
Auction Preferred over the number of shares of Auction Preferred
that are the subject of Submitted Hold Orders (such excess being
hereinafter referred to as the "Available Shares of Auction
Preferred");
(B) from the Submitted Orders, whether the number of
Outstanding shares of Auction Preferred that are the subject of
Submitted Bids by Potential Holders specifying one or more rates per
annum equal to or lower than the Maximum Applicable Rate exceeds or
is equal to the sum of:
(1) the number of Outstanding shares of Auction Preferred
that are the subject of Submitted Bids by Existing Holders
specifying one or more rates per annum higher than the Maximum
Applicable Rate, and
(2) the number of Outstanding shares of Auction Preferred
that are subject to Submitted Sell Orders.
(if such excess or such equality exists (other than because
the number of Outstanding shares of Auction Preferred in
clauses (1) and (2) above are each zero because all of the
Outstanding shares of Auction Preferred are the subject of
Submitted Hold Orders), there shall exist "Sufficient Clearing
Bids" and such Submitted Bids by Potential Holders shall be
hereinafter referred to collectively as "Sufficient Clearing
Bids"); and
(C) if Sufficient Clearing Bids exist, the winning bid rate
(the "Winning Bid Rate"), which shall be the lowest rate per annum
specified in the Submitted Bids that if:
(1) each Submitted Bid from Existing Holders specifying
the Winning Bid Rate and all other Submitted Bids from
Existing Holders specifying lower rates per annum
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were accepted, thus entitling such Existing Holders to
continue to hold the shares of Auction Preferred that are the
subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying
the Winning Bid Rate and all other submitted Bids from
Potential Holders specifying lower rates per annum were
accepted, thus entitling such Potential Holders to purchase
the shares of Auction Preferred that are the subject of such
Submitted Bids, would result in such Existing Holders
described in subclause (C)(1) continuing to hold an aggregate
number of Outstanding shares of Auction Preferred that, when
added to the number of Outstanding shares of Auction Preferred
to be purchased by such Potential Holders described in
subclause (C)(2), would equal or exceed the number of
Available Shares of Auction Preferred.
(ii) In connection with any Auction and promptly after the Auction
Agent has made the determinations pursuant to Subsection (d)(i), the
Auction Agent shall advise the Corporation of the Maximum Applicable Rate
and, based on such determinations, the Applicable Rate for the next
succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable
Rate for the next succeeding Dividend Period shall be equal to the
Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than
because all of the Outstanding shares of Auction Preferred are the
subject of Submitted Hold Orders), that the next succeeding Dividend
Period will be a Standard Dividend Period and the Applicable Rate
for the next succeeding Dividend Period determined shall be equal to
the Maximum Applicable Rate for a Standard Dividend Period
determined on the Business Day immediately preceding such Auction;
or
(C) if all of the Outstanding shares of Auction Preferred are
the subject of Submitted Hold Orders, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to 58% of the
Applicable "AA" Composite Commercial Paper Rate, in the case of
Auction Preferred with a Dividend Period of 7 to 48 days, a Standard
Dividend Period or a Short Dividend Period of 183 days or less, 58%
of the Applicable Treasury Bill Rate in the case of Auction
Preferred with a Short Dividend Period of 184 to 364 days, or 58% of
the Applicable Treasury Note Rate, in the case of Auction Preferred
with a Long Dividend Period, in effect on the Auction Date.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares of Auction Preferred. Based on the determinations made
pursuant to Subsection (d)(i), the Submitted Bids and Submitted Sell Orders
shall be accepted or rejected and the Auction Agent shall take such other action
as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of Subsections (e)(iii) and (e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order
of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be
accepted and the Submitted Bid of each of the Existing Holders
specifying any rate per annum that is higher than the Winning Bid
Rate shall be rejected, thus requiring each such Existing Holder to
sell the
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Outstanding shares of Auction Preferred that are the subject of such
Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders
specifying any rate per annum that is lower than the Winning Bid
Rate shall be accepted, thus entitling each such Existing Holder to
continue to hold the Outstanding shares of Auction Preferred that
are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders
specifying any rate per annum that is lower than the Winning Bid
Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders
specifying a rate per annum that is equal to the Winning Bid Rate
shall be accepted, thus entitling each such Existing Holder to
continue to hold the Outstanding shares of Auction Preferred that
are the subject of such Submitted Bid, unless the number of
Outstanding shares of Auction Preferred subject to all such
Submitted Bids shall be greater than the number of Outstanding
shares of Auction Preferred ("Remaining Shares of Auction
Preferred") equal to the excess of the Available Shares of Auction
Preferred over the number of Outstanding shares of Auction Preferred
subject to Submitted Bids described in Subsections (e)(i)(B) and
(e)(i)(C), in which event the Submitted Bids of each such Existing
Holder shall be rejected, and each such Existing Holder shall be
required to sell Outstanding shares of Auction Preferred, but only
in an amount equal to the difference between (1) the number of
Outstanding shares of Auction Preferred then held by such Existing
Holder subject to such Submitted Bid and (2) the number of shares of
Auction Preferred obtained by multiplying (x) the number of
Remaining Shares of Auction Preferred by (y) a fraction, the
numerator of which shall be the number of Outstanding shares of
Auction Preferred held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding shares of Auction Preferred subject to such
Submitted Bids made by all such Existing Holders that specified a
rate per annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders
specifying a rate per annum that is equal to the Winning Bid Rate
shall be accepted, but only in an amount equal to the number of
Outstanding shares of Auction Preferred obtained by multiplying (x)
the difference between the Available Shares of Auction Preferred and
the number of Outstanding shares of Auction Preferred subject to
Submitted Bids described in Subsections (e)(i)(B), (e)(i)(C) and
(e)(i)(D) by (y) a fraction, the numerator of which shall be the
number of Outstanding shares of Auction Preferred subject to such
Submitted Bid and the denominator of which shall be the sum of the
number of Outstanding shares of Auction Preferred subject to such
Submitted Bids made by all such Potential Holders that specified
rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than
because all of the Outstanding shares of Auction Preferred are subject to
Submitted Hold Orders), subject to the provisions of Subsection (e)(iii),
Submitted Orders shall be accepted or rejected as follows in the following
order of priority and all other Submitted Bids of Potential Holders shall
be rejected:
(A) the Submitted Bid of each Existing Holder specifying any
rate per annum that is equal to or lower than the Maximum Applicable
Rate shall be accepted, thus entitling such
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Existing Holder to continue to hold the Outstanding shares of
Auction Preferred that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any
rate per annum that is equal to or lower than the Maximum Applicable
Rate shall be accepted, thus requiring such Potential Holder to
purchase the Outstanding shares of Auction Preferred that are the
subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any
rate per annum that is higher than the Maximum Applicable Rate shall
be rejected, thus requiring each such Existing Holder to sell the
Outstanding shares of Auction Preferred that are the subject of such
Submitted Bid, and the Submitted Sell Orders of each Existing Holder
shall be accepted, in both cases only in an amount equal to the
difference between (1) the number of Outstanding shares of Auction
Preferred then held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and (2) the number of shares
of Auction Preferred obtained by multiplying (x) the difference
between the Available Shares of Auction Preferred and the aggregate
number of Outstanding shares of Auction Preferred subject to
Submitted Bids described in Subsections (e)(ii)(A) and (e)(ii)(B) by
(y) a fraction, the numerator of which shall be the number of
Outstanding shares of Auction Preferred held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the aggregate number of Outstanding
shares of Auction Preferred subject to all such Submitted Bids and
Submitted Sell Orders
(iii) If, as a result of the procedures described in Subsections
(e)(i) or (e)(ii), any Existing Holder would be entitled or required to
sell or any Potential Holder would be entitled or required to purchase, a
fraction of a share of Auction Preferred on any Auction Date, the Auction
Agent shall, in such manner as in its sole discretion it shall determine,
round up or down the number of shares of Auction Preferred to be purchased
or sold by any Existing Holder or Potential Holder on such Auction Date so
that only whole shares of Auction Preferred will be entitled or required
to be sold or purchased.
(iv) If, as a result of the procedures described in Subsection
(e)(i), any Potential Holder would be entitled or required to purchase
less than a whole share of Auction Preferred on any Auction Date, the
Auction Agent shall, in such manner as in its sole discretion it shall
determine, allocate shares of Auction Preferred for purchase among
Potential Holders so that only whole shares of Auction Preferred are
purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
any shares of Auction Preferred on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of Outstanding shares of Auction Preferred to be purchased and the
aggregate number of Outstanding shares of Auction Preferred to be sold by
such Potential Holders and Existing Holders and, to the extent that such
aggregate number of Outstanding shares of Auction Preferred to be
purchased and such aggregate number of Outstanding shares of Auction
Preferred to be sold differ, the Auction Agent shall determine to which
other Broker-Dealer or Broker-Dealers acting for one or more purchasers
such Broker-Dealer shall deliver, or from which other Broker-Dealer or
Broker-Dealers acting for one or more
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sellers such Broker-Dealer shall receive, as the case may be, Outstanding
shares of Auction Preferred.
SECTION 8. Auction Agent.
The Corporation shall use its best efforts to maintain, pursuant to a
written agreement (the "Auction Agent Agreement"), an Auction Agent with respect
to each Series of Auction Preferred, to act in accordance with the provisions
set forth herein with respect to such Series.
SECTION 9. Remarketing Procedures.
(a) Determination of Dividend Periods and Dividend Rates for Remarketing
MAPS. Subject to Section 3 hereof, the duration of each subsequent Dividend
Period and the dividend rate for each subsequent Dividend Period with respect to
any share of Remarketing Preferred will be established by a Remarketing Agent
and will be conclusive and binding on the Corporation and the Holder of such
share of Remarketing Preferred. Each Remarketing Agent will establish dividend
rates, not in excess of the Maximum Applicable Rate, for each Dividend Period
which it determines will be the lowest rate at which tendered Shares of
Remarketing Preferred would be remarketed at $250,000 per share. In establishing
each Dividend Period and dividend rate, each Remarketing Agent will establish
Dividend Periods and dividend rates which it determines will result in the most
favorable financing alternative for the Corporation based on the then-current
Marketing Conditions.
(b) Remarketing; Tender for Remarketing. The following procedures shall be
applicable to each share of Remarketing Preferred:
(i) The Remarketing Agent. Each Remarketing Agent shall use its best
efforts, on behalf of the Holders thereof, to remarket all shares of
Remarketing Preferred tendered for sale by Remarketing for which it is
acting as Remarketing Agent without charge to such Holder, only at
$250,000 per share, provided that no such Remarketing Agent shall be
obligated to remarket such Remarketing Preferred if there shall be a
material misstatement or omission in any disclosure document provided by
the Corporation and used in connection with the Remarketing of such
Remarketing Preferred or at any time such Remarketing Agent shall have
determined that it is not advisable to remarket Remarketing Preferred by
reason of: (i) a pending or proposed change in applicable tax laws, (ii) a
material adverse change in the financial condition of the Corporation,
(iii) a banking moratorium, (iv) domestic or international hostilities,
(v) an amendment of the provisions hereof which materially and adversely
changes the nature of the shares of Remarketing Preferred or the
Remarketing Procedures or (vi) a Failure to Deposit. Any Remarketing Agent
may, but shall not be obligated to, purchase tendered Remarketing
Preferred for its own account. Should the Remarketing Agent for any share
of Remarketing Preferred not succeed in Remarketing all such shares of
Remarketing Preferred so tendered for Remarketing on any date, such
Remarketing Agent shall select the shares of such Remarketing Preferred to
be sold from those tendered pro rata. Payments in the amount of $250,000
per share of Remarketing Preferred remarketed shall be made by the Tender
Agent by crediting such payments to the accounts of the Holders thereof
maintained by the Tender Agent or, to the extent duly requested of the
Tender Agent by Holders, by wire or other transfer in immediately
available funds to their accounts with commercial banks in the United
States. If for any reason a share of Remarketing Preferred is not
remarketed on the date of tender, such share will be retained by its
Holder. Until remarketed, each such share of Remarketing Preferred will
have successive Dividend Periods of one day and will be entitled to
dividends, payable on each succeeding Business Day at the Maximum
Applicable Rate.
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(ii) Notice of Shares of Remarketing Preferred to be Retained. Each
share of Remarketing Preferred will be deemed to have been tendered for
sale by Remarketing on the last day of each Dividend Period, unless the
Holder thereof gives irrevocable notice to the contrary to the Remarketing
Agent for such share of Remarketing Preferred or if so instructed by such
Remarketing Agent, to the Tender Agent. Such notice, which may be
telephonic or written, must be delivered, prior to 3:00 P.M., New York
City time, on the Business Day immediately preceding the last day of a
Dividend Period or on the earlier day specified in a notice, if any,
mailed by the Tender Agent at the direction of such Remarketing Agent to
such record holder at its address as the same appears on the Stock Books
of the Corporation, which day will be a Business Day at least four
Business Days after the mailing of such notice. The notice from such
Holder of an election to retain shares of Remarketing Preferred shall
state:
(A) the number of shares of such Remarketing Preferred held by
the Securities Depository or the Remarketing Depository, and
(B) the number of such shares of Remarketing Preferred which
shall be deemed not to have been so tendered.
(iii) Shares Deemed to Have Been Tendered. The failure to give
notice of an election to retain any shares of Remarketing Preferred as
provided in (b)(ii) above will constitute the irrevocable tender for sale
by Remarketing of such shares of Remarketing Preferred. Certificates
representing shares of Remarketing Preferred remarketed will be issued to
the Securities Depository or the Remarketing Depository, as the case may
be, irrespective of whether the certificates formerly representing such
shares of Remarketing Preferred have been delivered to the Tender Agent. A
Holder which has not given notice that it will retain its shares of
Remarketing Preferred shall have no further rights with respect to such
shares of Remarketing Preferred upon the Remarketing of such shares of
Remarketing Preferred, except the right to receive any declared but unpaid
dividends thereon and the proceeds of the Remarketing of such shares.
(iv) Funds for Purchase of Shares. Payments to Holders of shares of
Remarketing Preferred remarketed will be made solely from the proceeds
received from the purchasers of such shares in a Remarketing. Neither the
Corporation, the Tender Agent nor any Remarketing Agent shall be obligated
to provide funds to make payment to the holders of shares of Remarketing
Preferred tendered for Remarketing.
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(c) The Remarketing Process. The Remarketing process will be
conducted on the following schedule and in the following manner (all times
are New York City time):
The Last Business Day of a Dividend Period:*
Beginning Not Later Than
1:00 P.M ..............The Remarketing Agent for the shares of Remarketing
Preferred will determine and, upon request, make
available to all interested persons non-binding
indications of Dividend Periods and dividend rates
based upon then current Marketing Conditions. Each
Holder may obtain a binding commitment as to the
specific Dividend Period or Dividend Periods and the
related Applicable Rate or Applicable Rates which will
be applicable to such Holder's shares should such
Holder elect to retain them.
At 3:00 P.M ...........Holders of shares of Remarketing Preferred will be
deemed to have tendered shares of Remarketing Preferred
for sale by Remarketing at $250,000 per share unless
they have given contrary instructions to the
Remarketing Agent for such shares of Remarketing
Preferred or, if so instructed by such Remarketing
Agent, to the Tender Agent.
After 3:00 P.M ........The applicable Remarketing Agent will solicit and
receive orders from prospective investors to purchase
tendered shares of Remarketing Preferred. A purchaser,
at the time of its agreement to purchase shares of
Remarketing Preferred, may obtain a binding commitment
as to the specific Dividend Period or Dividend Periods
and the related Applicable Rate or Applicable Rates for
such shares of Remarketing Preferred based upon
then-current Marketing Conditions.
- --------
* Or such other time and day as may have been specified in a notice mailed
to the holders of Remarketing Preferred.
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First Business Day of Next Dividend Period:
Opening of Business The applicable Remarketing Agent will continue, if
necessary, remarketing shares of Remarketing Preferred
as described above.
By 1:00 P.M ...........The applicable Remarketing Agent will have completed
Remarketing and will advise the Tender Agent as to the
Applicable Rate and Dividend Period applicable to each
share of Remarketing Preferred commencing a Dividend
Period on that day and of any failure to remarket.
By 2:30 P.M ...........New Holders must deliver the purchase price as
instructed by the applicable Remarketing Agent. Former
Holders will be paid the proceeds of the Remarketing of
their shares by the Tender Agent (upon surrender of
their certificates, if applicable).
SECTION 10. The Remarketing Agent.
The Corporation will take all reasonable action necessary so that, at all
times, at least one investment bank, broker, dealer or other organization
qualified to remarket shares of Remarketing Preferred and to establish Dividend
Periods and Applicable Rates is acting as Remarketing Agent for each share of
Remarketing Preferred.
SECTION 11. Book Entry System.
(a) Shares of Preferred Stock with Dividend Periods of 7 days or longer
shall be represented by a global certificate or certificates registered in the
name of a nominee of the Securities Depository, as depository for such shares of
Preferred Stock. Shares of Remarketing Preferred with Dividend Periods of less
than 7 days shall be represented by a global certificate or certificates
registered in the name of a nominee of the Remarketing Depository, as depository
for such shares of Remarketing Preferred.
(b) All of the Outstanding shares of Auction Preferred of each Series
shall be represented by a single certificate for each Series registered in the
name of the nominee of the Securities Depository unless otherwise required by
law or unless there is no Securities Depository. If there is no Securities
Depository, shares of Auction Preferred shall be registered in the Stock Books
in the name of the Existing Holder thereof and such Existing Holder thereupon
will be entitled to receive a certificate therefor and be required to deliver a
certificate therefor upon transfer or exchange thereof.
(c) Each Series of Remarketing Preferred shall be represented by a
separate global security or global securities and shares of Remarketing
Preferred having different Dividend Payment Dates, dividend rates, redemption
provisions or Percentages, if any, shall be represented by a separate global
security.
(d) Interests in shares of Preferred Stock represented by a global
security will be shown on, and transfers thereof will be effected only through,
records maintained by the respective depository.
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(e) If the Securities Depository should resign and the Corporation not
select a substitute securities depository, physical delivery of certificates
shall be made in the names of designated transferees in exchange for the global
security or securities held for the account of the Securities Depository.
SECTION 12. Miscellaneous.
(a) So long as the dividend rate is based on the results of an Auction or
Remarketing, a Holder (i) may sell, transfer or otherwise dispose of shares of
Auction Preferred only pursuant to a Bid or Sell Order in accordance with the
Auction Procedures or to or through a Broker-Dealer or to a Person that has
delivered a signed copy of a Purchaser's Letter to a Broker-Dealer, and in the
case of all transfers other than pursuant to Auctions, such Existing Holder of
the shares of Auction Preferred, its Broker-Dealer or its Participant advises
the Auction Agent of such transfer, (ii) may transfer shares of Remarketing
Preferred only pursuant to a tender of such shares to the Tender Agent or to a
person that has delivered a signed copy of a Purchaser's Letter to a Remarketing
Agent, and in the case of all transfers of shares of Remarketing Preferred other
than pursuant to a tender of such shares, the holder of the shares so
transferred advises a Remarketing Agent of such transfer and (iii) unless
otherwise required by law, shall have its ownership of shares of Preferred Stock
maintained in book entry form by the Securities Depository or, in the case of
shares of Remarketing Preferred with a Dividend Period of less than 7 days, the
Remarketing Depository.
(b) Each Remarketing Agent will be required to register on a list
maintained pursuant to a Remarketing Agreement a transfer of shares of
Remarketing Preferred for which it is the Remarketing Agent from a holder to
another person only if such transfer is made to a person that has delivered a
signed copy of a Purchaser's Letter to such Remarketing Agent and if (i) such
transfer is pursuant to a Remarketing or (ii) such Remarketing Agent has been
notified in writing (A) by such holder of such transfer or (B) by any person
that purchased or sold such Remarketing Preferred in a Remarketing of the
failure of such Remarketing Preferred to be delivered or paid for, as the case
may be, in connection with such Remarketing. A Remarketing Agent is not required
to register a transfer of Remarketing Preferred pursuant to clause (ii) above on
or prior to the Business Day immediately preceding the first day of a subsequent
Dividend Period for such Remarketing Preferred unless it receives the written
notice required by such clause (ii) by 3:00 P.M., New York City time, on the
second Business Day preceding the first day of such subsequent Dividend Period.
Such Remarketing Agent will rescind a transfer registered on such list as a
result of a Remarketing if the Remarketing Agent is notified in writing of the
failure of shares of Remarketing Preferred to be delivered or paid for as
required. Any transfer of shares of Remarketing Preferred made in violation of
the terms of a Purchaser's Letter may affect the right of the Person acquiring
such shares to participate in Remarketings.
(c) (i) If the Method of determining the Dividend Rate for some or all of
the Series of Preferred Stock is the Auction Method, the Corporation or
any Affiliate of the Corporation may not submit for its own account a Bid
or Hold Order in an Auction. If the Corporation or any Affiliate holds
shares of Auction Preferred for its own account, it must submit a Sell
Order in the next auction with respect to such shares. Any Broker-Dealer
that is an Affiliate of the Corporation may not submit for its own account
Bid Orders or Hold Orders in Auctions. If such affiliated Broker-Dealer
holds shares of Auction Preferred for its own account, it must submit a
Sell Order in the next Auction with respect to such shares of Auction
Preferred.
(ii) The Corporation or any Affiliate of the Corporation may acquire,
hold or dispose of shares of Remarketing Preferred. Subject to such
limitations as the Corporation and the
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Remarketing Agent may agree, it and its Affiliates will purchase shares of
Remarketing Preferred, if any, during Remarketings only after 3:00 P.M. on
the Business Day immediately preceding the first day of each subsequent
Dividend Period and only at Applicable Rates and for Dividend Periods
established by the Remarketing Agents without regard to such offers by the
Corporation or its Affiliates and will tender shares of Remarketing
Preferred for Remarketing only upon at least 10 days' prior notice to the
Remarketing Agents; provided, however, that if the then current Dividend
Period is less than 10 days, the Corporation will give notice to the
Remarketing Agent on the day such Dividend Period of less than 10 days
commences. In the event that the Corporation or its Affiliates purchase
shares of Remarketing Preferred for their respective accounts, all shares
of Remarketing Preferred tendered by other holders, including any such
Remarketing Preferred owned by a Remarketing Agent, will be remarketed
before the Remarketing of any such Remarketing Preferred owned by the
Corporation or its Affiliates. If any shares of Remarketing Preferred
tendered for Remarketing are not sold, any shares of Remarketing Preferred
tendered for Remarketing by the Corporation or an Affiliate of the
Corporation, up to the number of such shares not so sold, will be deemed
not to have been so tendered.
(d) The purchase price of each share of Preferred Stock which is sold
either through the Auction Procedures or the Remarketing Procedures shall be
$250,000.
(e) If a holder of Converted Auction Preferred fails to give irrevocable
notice otherwise to the Remarketing Agent for such Remarketing Preferred (or, if
so instructed by such Remarketing Agent, to the Tender Agent) by no later than
3:00 P.M., New York City time, on the Business Day immediately preceding the
first day of the subsequent Dividend Period applicable thereto, or such other
day as is specified in a notice delivered in the manner set forth in Section
9(b)(ii), such holder will be deemed to have tendered such Converted Auction
Preferred for sale by Remarketing on such Business Day.
(f) An Auction will be held in respect of each Series of Converted
Remarketing Preferred on the Initial Auction Date. If a holder of Converted
Remarketing Preferred does not submit an Order in such Auction, such holder will
be deemed to have submitted a Sell Order in such Auction.
SECTION 13. Exclusive Remedy.
In the event that dividends are not timely declared on the shares of
Preferred Stock, the exclusive remedy of Holders against the Corporation shall
be as set forth in this part of Article IV (B) and in no event shall Holders of
such shares have a specifically enforceable right to the declaration of
dividends.
SECTION 14. Additional Terms.
(a) The Board of Directors may interpret the provisions of this part of
Article IV (B) to resolve any inconsistency or ambiguity or remedy any formal
defect.
(b) The headings of the various subdivisions of this part of Article IV
(B) are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
----------
(C) Except as otherwise provided by the General Corporation Law of the
State of Delaware or by any resolution heretofore or hereafter adopted by the
Board of Directors fixing the relative powers,
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preferences and rights and the qualifications, limitations or restrictions of
any additional series of Preferred Stock, the entire voting power of the shares
of the Company for the election of directors and for all other purposes, as well
as all other rights appertaining to shares of the Company, shall be vested
exclusively in the Common Stock. Each share of Common Stock shall have one vote
upon all matters to be voted on by the holders of the Common Stock, and shall be
entitled to participate equally in all dividends payable with respect to the
Common Stock and to share ratably, subject to the rights and preferences of any
Preferred Stock, in all assets of the Company in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, or upon any distribution of the assets of the Company.
(D) The Company shall not, without either the prior approval of a majority
of the total number of shares then issued and outstanding and entitled to vote
or the receipt by the Company of a favorable opinion issued by a nationally
recognized investment banking firm designated by the Committee of Equity
Security Holders of Texaco Inc. appointed in the Company's jointly administered
Chapter 11 case in the United States Bankruptcy Court for the Southern District
of New York or its last chairman (or his designee) to the effect that the
proposed issuance is fair from a finance point of view to the stockholders of
the Company issue to its stockholders generally (i) any warrant or other right
to purchase any security of the Company, any successor thereto or any other
person or entity or (ii) any security of the Company containing any such right
to purchase, which warrant, right or security (a) is exercisable, exchangeable
or convertible, based or conditioned in whole or in part on (I) a change of
control of the Company or (II) the owning or holding of any number or percentage
of outstanding shares or voting power or any offer to acquire any number of
shares or percentage of voting power by any entity, individual or group of
entities and/or individuals or (b) discriminates among holders of the same class
of securities (or the class of securities for which such warrant or right is
exercisable or exchangeable) of the Company or any successor thereto.
V.
The Company is to have perpetual existence.
VI.
The private property of the stockholders is not to be subject to the
payment of corporate debts to any extent whatever.
VII.
No holder of stock of the Company shall have any preferential right of
subscription to any share of any class of stock of the Company issued or sold,
or to any obligations convertible into stock of the Company, or any right of
subscription to any thereof other than such, if any, as the Board of Directors
in its discretion may determine, and at such prices as the Board of Directors
may fix.
VIII.
The Company may use its surplus earnings or accumulated profits in the
purchase or acquisition of its own capital stock from time to time as its Board
of Directors shall determine, and such capital stock so purchased may, if the
directors so determine, be held in the treasury of the Company as treasury
stock, to be thereafter disposed of in such manner as the directors shall deem
proper.
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IX.
(A) Number, Election and Terms of Directors. Except as otherwise fixed by
or pursuant to the provisions of Article IV hereof relating to the rights of the
holders of any class or series of stock having preference over the Common Stock
as to dividends or upon liquidation to elect additional directors under
specified circumstances, the number of the directors of the Company shall be
fixed from time to time by or pursuant to the by-laws. The directors, other than
those who may be elected by the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, shall be
classified, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible, as shall be provided in
the manner specified in the by-laws, one class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 1985, another
class to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1986, and another class to be originally elected for
a term expiring at the annual meeting of stockholders to be held in 1987, with
each class to hold office until its successor is elected and qualified. At each
annual meeting of the stockholders of the Company, the successors of the class
of directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
(B) Stockholder Nomination of Director Candidates. Advance notice of
stockholder nominations for the election of directors shall be given in the
manner provided in the by-laws.
(C) Newly Created Directorships and Vacancies. Except as otherwise
provided for or fixed by or pursuant to the provisions of Article IV hereof
relating to the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation to elect
directors under specified circumstances, newly created directorships resulting
from any increase in the number of directors and any vacancies on the Board of
Directors resulting from death, resignation or disqualification, or other cause
shall be filled by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors. Any
director so elected shall stand for election (for the balance of his term) at
the next annual meeting of stockholders, unless his term expires at such annual
meeting. Any vacancy on the Board of Directors resulting from removal by
stockholder vote shall be filled only by the vote of a majority of the voting
power of all shares of the Company entitled to vote generally in the election of
directors, voting together as a single class.
(D) Removal. Subject to the rights of any class or series of stock having
a preference over the Common Stock as to dividends or upon liquidation to elect
directors under specified circumstances, any director may be removed from
office, with or without cause, only by the affirmative vote of the holders of 66
2/3% of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of directors, voting together as a
single class.
(E) Amendment, Repeal, Etc. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 66 2/3% of the voting power of all shares of the Company
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to alter, amend, adopt any provision
inconsistent with or repeal this Article IX.
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X.
In furtherance, and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized:
(A) to fix in the by-laws from time to time the number of directors of the
Company, none of whom need be stockholders;
(B) to fix the amount to be reserved as working capital over and above its
capital stock paid in;
(C) to borrow money and to make and issue notes, bonds, debentures,
obligations and evidence of indebtedness of all kinds, with or without the
privilege of conversion into stock of the Company; and also to authorize and
cause to be executed mortgages and liens upon the real and personal property of
the Company and conveyances of its real estate;
(D) from time to time to determine whether and to what extent, and at what
times and places, and under what conditions and regulations, the accounts and
books of the Company (other than the stock ledger), or any of them, shall be
open to inspection of stockholders; and no stockholder shall have any right of
inspecting any account book or document of the Company except as conferred by
statute, unless authorized by a resolution of the stockholders or directors; and
(E) if the by-laws so provide, to designate by resolution three or more of
its number to constitute an executive committee, which committee shall, for the
time being, have and exercise such of the powers of the Board of Directors in
the management of the business and affairs of the Company, and have power to
authorize the seal of the Company to be affixed to all papers which may require
it.
The Company may in its by-laws confer powers upon its directors in
addition to the foregoing and in addition to the powers and authorities
expressly conferred upon them by statute.
Both stockholders and directors shall have power, if the by-laws so
provide, to hold their meeting and to have one or more offices within or without
the State of Delaware, and to keep the books of the Company (subject to the
provisions of applicable laws), outside of the State of Delaware at such places
as may be from time to time designated by the Board of Directors.
XI.
Any action required or permitted to be taken by the stockholders of the
Company must be effected at a duly called annual or special meeting of such
holders and may not be effected by any consent in writing by such holders.
Except as otherwise required by law and subject to the rights of the holders of
any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, special meetings of stockholders of the Company
may be called only by the Board of Directors pursuant to a resolution approved
by a majority of the entire Board of Directors. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 66 2/3% of the voting power of all shares of the
Company entitled to vote generally in the election of directors, voting together
as a single class, shall be required to alter, amend, adopt any provision
inconsistent with or repeal this Article XI.
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XII.
The Board of Directors shall have power to make, alter, amend and repeal
the by-laws (except so far as the by-laws adopted by the stockholders shall
otherwise provide). Any by-laws made by the directors under the powers conferred
hereby may be altered, amended or repealed by the directors or by the
stockholders. Notwithstanding the foregoing and anything contained in this
Certificate of Incorporation to the contrary, Section 2 of Article I and
Sections 1,2,3 and 4 of Article II of the by-laws shall not be altered, amended
or repealed and no provision inconsistent therewith shall be adopted without the
affirmative vote of the holders of at least 66 2/3% of the voting power of all
the shares of the Company entitled to vote generally in the election of
directors, voting together as a single class. Notwithstanding anything contained
in this Certificate of Incorporation to the contrary, the affirmative vote of
the holders of at least 66 2/3% of the voting power of all shares of the Company
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to alter, amend, adopt any provision
inconsistent with or repeal this Article XII.
XIII.
(A) Vote Required for Certain Business Combinations.
(1) Higher Vote for Certain Business Combinations. In addition to
any affirmative vote required by law or this Certificate of Incorporation,
and except as otherwise expressly provided in Section B of this Article
XIII:
(a) any merger or consolidation of the Company or any
Subsidiary (as hereinafter defined) with (i) any Interested
Stockholder (as hereinafter defined) or (ii) any other Company
(whether or not itself an Interested Stockholder) which is, or after
such merger or consolidation would be, an Affiliate (as hereinafter
defined) of an Interested Stockholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions)
to or with any Interested Stockholder or any Affiliate of any
Interested Stockholder of any assets of the Company or any
Subsidiary having an aggregate Fair Market Value of $100 million or
more; or
(c) the issuance or transfer by the Company or any Subsidiary
(in one transaction or a series of transactions) of any securities
of the Company or any Subsidiary to any Interested Stockholder or
any Affiliate of any Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $100 million or more or;
(d) the adoption of any plan or proposal for the liquidation
or dissolution of the Company proposed by or on behalf of an
Interested Stockholder or any Affiliate of any Interested
Stockholder; or
(e) any reclassification of securities (including any reverse
stock split), or recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect, directly
or indirectly, of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities
of the Company or any Subsidiary which is directly or indirectly
owned by any Interested
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Stockholder or any Affiliate of any Interested Stockholder; shall
require the affirmative vote of the holders of at least 80% of the
voting power of the then outstanding shares of capital stock of the
Company entitled to vote generally in the election of directors (the
"Voting Stock"), voting together as a single class (it being
understood that for purposes of this Article XIII, each share of the
Voting Stock shall have the number of votes granted to it pursuant
to Article IV of this Certificate of Incorporation). Such
affirmative vote shall be required notwithstanding the fact that no
vote may be required, or that a lesser percentage may be specified,
by law or in any agreement with any national securities exchange or
otherwise.
(2) Definition of "Business Combination." The term "Business
Combination" as used in this Article XIII shall mean any transaction which
is referred to in any one or more of clauses (a) through (e) of paragraph
(1) of this Section (A).
(B) When Higher Vote is Not Required. The provisions of Section A of this
Article XIII shall not be applicable to any particular Business Combination, and
such Business Combination shall require only such affirmative vote as is
required by law and any other provision of this Certificate of Incorporation, if
all of the conditions specified in either of the following paragraphs (1) and
(2) are met:
(1) Approval by Disinterested Directors. The Business Combination
shall have been approved by a majority of the Disinterested Directors (as
hereinafter defined).
(2) Price and Procedure Requirements. All of the following
conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value
(as hereinafter defined) as of the date of the consummation of the
Business Combination of consideration other than cash to be received
per share by holders of Common Stock in such Business Combination
shall be at least equal to the higher of the following:
(i)(if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by the Interested Stockholder
for any shares of Common Stock acquired by it (a) within the
two-year period immediately prior to the first publication
announcement of the proposal of the Business Combination (the
"Announcement Date") or (b) in the transaction in which it
became an Interested Stockholder, whichever is higher; and
(ii) the Fair Market Value per share of Common Stock on
the Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter date
is referred to in this Article XIII as the "Determination
Date"), whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value
as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of
shares of any other class of outstanding Voting Stock shall be at
least equal to the highest of the following (it being intended that
the requirements of this paragraph 2(b) shall be required to be met
with respect to every class of outstanding Voting Stock, whether or
not the Interested Stockholder has previously acquired any shares of
a particular class of Voting Stock):
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(i)(if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by the Interested Stockholder
for any shares of such class of Voting Stock acquired by it
(a) within the two-year period immediately prior to the
Announcement Date or (b) in the transaction in which it became
an Interested Stockholder, whichever is higher;
(ii) (if applicable) the highest preferential amount per
share to which the holders of shares of such class of Voting
Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Company; and
(iii) the Fair Market Value per share of such class of
Voting Stock on the Announcement Date or on the Determination
Date, whichever is higher.
(c) The consideration to be received by holders of a
particular class of outstanding Voting Stock (including Common
Stock) shall be in cash or in the same form as the Interested
Stockholder has previously paid for shares of such class of Voting
Stock. If the Interested Stockholder has paid for shares of any
class of Voting Stock with varying forms of consideration, the form
of consideration for such class of Voting Stock shall be either cash
or the form used to acquire the largest number of shares of such
class of Voting Stock previously acquired by it. The price
determined in accordance with paragraph 2(a) and 2(b) of this
Section B shall be subject to appropriate adjustment in the event of
any stock dividend, stock split, combination of shares or similar
event.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination: (i) except as approved by a majority of the
Disinterested Directors, there shall have been no failure to declare
and pay at the regular date therefor any full quarterly dividends
(whether or not cumulative) on the outstanding Preferred Stock; (ii)
there shall have been (A) no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary to reflect
any subdivision of the Common Stock), except as approved by a
majority of the Disinterested Directors, and (B) an increase in such
annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which
has the effect of reducing the number of outstanding shares of the
Common Stock unless the failure so to increase such annual rate is
approved by a majority of the Disinterested Directors; and (iii)
such Interested Stockholder shall have not become the beneficial
owner of any additional shares of Voting Stock except as part of the
transaction which results in such Interested Stockholder becoming an
Interested Stockholder.
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the Company, whether in anticipation of or in connection
with such Business Combination or otherwise.
(f) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules
or regulations) shall be mailed to public stockholders of the
Company at least 30 days prior to
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the consummation of such Business Combination (whether or not such
proxy or information statement is required to be mailed pursuant to
such Act or subsequent provisions).
(C) Vote Required for Certain Stock Repurchases. In addition to any other
requirement of this Certificate of Incorporation, the affirmative vote of the
holders of at least 50% of the Voting Stock (other than Voting Stock
beneficially owned by a Selling Stockholder (as hereinafter defined)), shall be
required before the Company purchases any outstanding shares of Common Stock at
a price above the Market Price (as hereinafter defined) from a person actually
known by the Company to be a Selling Stockholder, unless the purchase is made by
the Company (i) on the same terms and as a result of an offer made generally to
all holders of Common Stock or (ii) pursuant to statutory appraisal right.
(D) Certain Definitions. For the purposes of this Article XIII:
(1) A "person" shall mean any individual, firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean any person (other than the
Company or any Subsidiary) who or which:
(a) is the beneficial owner, directly or indirectly, of more
than 20% of the voting power of the outstanding Voting Stock; or
(b) is an Affiliate of the Company and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 20% or more of the
voting power of the then outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares
of Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions
not involving a public offering within the meaning of the Securities
Act of 1933.
(3) A person shall be a "beneficial owner" of any Voting Stock:
(a) which such person or any of its Affiliates or Associates
(as hereinafter defined) beneficially owns directly or indirectly;
or
(b) which such person or any of its Affiliates or Associates
has (i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any agreement,
arrangement or understanding; or
(c) which are beneficially owned, directly or indirectly, by
any other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.
(4) For the purposes of determining whether a person is an
Interested Stockholder pursuant to paragraph 2 of this Section C, the
number of shares of Voting Stock deemed to be outstanding shall include
shares deemed owned through application of paragraph 3 of this Section C
but shall
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not include any other shares which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
(5) "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on March 1, 1984.
(6) "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the Company;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph 2 of this Section C, the term
"Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the Company.
(7) "Disinterested Director" means any member of the Board of
Directors who is unaffiliated with the Interested Stockholder and was a
member of the Board of Directors prior to the time that the Interested
Stockholder became an Interested Stockholder, and any successor of a
Disinterested Director who is unaffiliated with the Interested Stockholder
and is recommended to succeed a Disinterested Director by a majority of
Disinterested Directors then on the Board of Directors.
(8) "Fair Market Value" means: (a) in the case of the stock, the
highest closing sale price during the 30-day period immediately preceding
the date in question of a share of such stock on the Composite Tape for
New York Stock Exchange-Listed Stocks, or, if such stock is not listed on
such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock
is listed, or, if such stock is not listed on any such exchange, the
highest closing bid quotation with respect to a share of such stock during
the 30-day period preceding the date in question on the National
Association of Securities Dealers, Inc. Automated Quotations System or any
system then in use, or if no such quotations are available, the fair
market value on the date in question of a share of such stock as
determined by the Board of Directors in good faith; and (b) in the case of
property other than cash or stock, the fair market value of such property
on the date in question as determined by the Board of Directors in good
faith.
(9) "Selling Stockholder" means any person who or which is the
beneficial owner of in the aggregate more than 1% of the outstanding
shares of Common Stock and who or which has purchased or agreed to
purchase any of such shares within the most recent two-year period and who
sells or proposes to sell Common Stock in a transaction requiring the
affirmative vote provided for in Section C of this Article XIII.
(10) "Market Price" means the highest sale price on or during the
period of five trading days immediately preceding the date in question of
a share of such stock on the Composite Tape for New York Stock
Exchange-Listed Stocks, or if such stock is not quoted on the Composite
Tape on the New York Stock Exchange, or, if such stock is not listed on
such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock
is listed, or, if such stock is not listed on any such exchange, the
highest closing bid quotation with respect to a share of stock on or
during the period of five trading days immediately preceding the date in
question on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or if no such quotations are
available, the fair
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market value on the date in question of a share of such stock as
determined by a majority of the Disinterested Directors.
(E) Powers of the Board of Directors. A majority of the directors shall
have the power and duty to determine for the purposes of this Article XIII, on
the basis of information known to them after reasonable inquiry, (1) whether a
person is an Interested Stockholder, (2) the number of shares of Voting Stock
beneficially owned by any person, (3) whether a person is an Affiliate or
Associate of another, (4) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the issuance
or transfer of securities by the Company or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $100 million or more. A
majority of the directors shall have the further power to interpret all of the
terms and provisions of this Article XIII.
(F) No Effect on Fiduciary Obligations of Interested Stockholders. Nothing
contained in this Article XIII shall be construed to relieve any Interested
Stockholder from any fiduciary obligation imposed by law.
(G) Amendment, Repeal, etc. Notwithstanding any other provisions of this
Certificate of Incorporation or the by-laws (and notwithstanding the fact that a
lesser percentage may be specified by law, this Certificate of Incorporation or
the by-laws) the affirmative vote of the holders of 80% or more of the
outstanding Voting Stock, voting together as a single class, shall be required
to amend or repeal, or adopt any provisions inconsistent with this Article XIII.
XIV.
A director of the Company shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the Delaware General Corporation Law as the same exists or may
hereafter be amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Company shall not adversely affect any right or protection of a director
of the Company existing at the time of such repeal or modification.
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XV.
The Company reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by this Certificate of Incorporation or statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
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EXHIBIT 3.2
BY-LAWS OF TEXACO INC.
A Delaware Corporation
ARTICLE I.
Stockholders.
SECTION 1. Annual Meeting. The annual meeting of stockholders shall be held
on the fourth Tuesday in April of each year at 2:00 P.M., or at such time of day
or on such other date in each calendar year as may be fixed by the Board of
Directors, for the election of directors and the transaction of any other
business as may properly come before the meeting.
SECTION 2. Stockholder Action; Special Meetings. Any action required or
permitted to be taken by the stockholders of the Company must be effected at a
duly called annual or special meeting of such holders and may not be effected by
any consent in writing by such holders. Except as otherwise required by law and
subject to the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, special
meetings of stockholders of the Company may be called only by the Board of
Directors pursuant to a resolution approved by a majority of the entire Board of
Directors.
SECTION 3. Notice of Meetings. Notice of each meeting of stockholders,
annual or special, stating the time and place, and, if a special meeting, the
purpose or purposes in general terms, shall be mailed no earlier than 60 days
and no later than 10 days prior to the meeting to each stockholder at the
stockholder's address as the same appears on the books of the Company.
SECTION 4. Place. Meetings of the stockholders shall be held at such place
or places as the Board of Directors may direct, the place to be specified in the
notice.
Section 5. Quorum. At any meeting of stockholders, the holders of a
majority of the voting shares issued and outstanding, being present in person or
represented by proxy, shall be a quorum for all purposes, except where otherwise
provided by statute.
SECTION 6. Adjournments. Any annual or special meeting of stockholders duly
and regularly called in accordance with these by-laws may adjourn one or more
times and no further notice of such adjourned meeting or meetings shall be
necessary. If at any annual or special meeting of stockholders a quorum shall
fail to attend in person or by proxy, a majority in interest of the stockholders
attending in person or by proxy may adjourn the meeting to another time, or to
another time and place, and there may be successive adjournments for like cause
and in like manner without further notice until a quorum shall attend. Any
business may be transacted at any such adjourned meeting or meetings which might
have been transacted at the meeting as originally called.
SECTION 7. Organization. The Chairman of the Board, or, in his absence, the
Vice Chairman, or, in their absence, the President, or, in their absence, one of
the Executive Vice Presidents, or, in their absence, one of the Senior Vice
Presidents, or, in their absence, a Vice President appointed by the
stockholders, shall call meetings of the stockholders to order and shall act as
chairman thereof. The Secretary of the Company, if present, shall act as
secretary of all meetings of the stockholders; and, in his absence, the
presiding officer may appoint a secretary.
SECTION 8. Voting. At each meeting of the stockholders, every stockholder
of record (at the closing of the transfer books if closed) shall be entitled to
vote in person or by proxy appointed by an instrument in writing subscribed by
such stockholder or by his duly authorized attorney and delivered to and filed
with the Secretary at the meeting; and each stockholder shall have one vote for
each share of stock standing in his name. Voting for directors, and upon any
question at any meeting, shall be by ballot, if demanded by any stockholder.
SECTION 9. Stockholder Proposals. Stockholders may present proper business
for stockholder action at an annual meeting by giving timely notice in writing
to the Secretary of their intention to bring such business before the meeting.
To be timely, a stockholder's notice must be delivered to, or mailed and
received at, the office of the Company in Harrison, New York, addressed to the
attention of the Secretary, not less than 60 days nor more than 90 days prior to
the first anniversary of the preceding year's annual meeting of stockholders;
provided, however, that if the date of the annual meeting is advanced more than
30 days prior to or delayed by more than 60 days after such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
90th day prior to such annual meeting and not later than the close of business
on the later of the 60th day prior to such annual meeting or the 10th day
following the day on which public announcement of the date of such meeting is
first made. The stockholder's notice shall set forth (a) the name and address of
the stockholder proposing such business, (b) a brief description of the business
desired to be brought before the meeting and any material interest in such
business of such stockholder, and (c) the number of shares of the Company which
are beneficially owned by the stockholder. The chairman of the meeting may
refuse to permit any business to be brought before an annual meeting by a
stockholder without compliance with the procedure set forth in this Section 9.
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For purposes of this section, "public announcement" shall mean disclosure
in a press release reported by the Dow Jones News Service, Associated Press or a
comparable national news service or in a document publicly filed by the Company
with the Securities and Exchange Commission.
Notwithstanding the foregoing provisions of this by-law, a stockholder
shall also comply with all applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules and regulations
thereunder with respect to matters set forth in this by-law. Nothing in this
by-law shall be deemed to affect any rights of stockholders to request inclusion
of proposals in the company's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
SECTION 10. List of Stockholders. The Secretary shall keep records from
which a list of stockholders can be compiled, and shall furnish such list upon
order of the Board of Directors.
ARTICLE II.
The Board of Directors.
SECTION 1. Number, Election and Terms. Except as otherwise fixed by or
pursuant to the provisions of Article IV of the Certificate of Incorporation
relating to the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation to elect
additional directors under specified circumstances, the number of the directors
of the Company shall be fixed from time to time by the Board of Directors but
shall not be less than three. The directors, other than those who may be elected
by the holders of any class or series of stock having a preference over the
Common Stock as to dividends or upon liquidation, shall be classified, with
respect to the time for which they severally hold office, into three classes, as
nearly equal in number as possible, as determined by the Board of Directors, one
class to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1985, another class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 1986, and
another class to be originally elected for a term expiring at the annual meeting
of stockholders to be held in 1987, with each class to hold office until its
successor is elected and qualified. At each annual meeting of the stockholders
of the Company, the successors of the class of directors whose term expires at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election.
SECTION 2. Newly Created Directorships and Vacancies. Except as otherwise
provided for or fixed by or pursuant to the provisions of Article IV of the
Certificate of Incorporation relating to the rights of the holders of any class
or series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect directors under specified circumstances, newly created
directorships resulting from any increases in the number of directors or any
vacancies on the Board of Directors resulting from death, resignation or
disqualification, or other cause shall be filled by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors. Any director so elected shall stand for
election (for the balance of his term) at the next annual meeting of
stockholders, unless his term expires at such Annual Meeting. Any vacancy on the
Board of Directors resulting from removal by stockholder vote shall be filled
only by the vote of a majority of the voting power of all shares of the Company
entitled to vote generally in the election of Directors, voting together as a
single class. The affirmative vote of the holders of at least a majority of the
then outstanding shares of capital stock of the Company voting generally in the
election of Directors, voting together as a single class, shall be required to
repeal the foregoing provisions.
SECTION 3. Removal. Subject to the rights of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation to
elect Directors under specified circumstances, any director may be removed from
office, with or without cause, only by the affirmative vote of the holders of
662/3% of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of Directors, voting together as a
single class.
SECTION 4. Nominations. Subject to the rights of holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation, nominations for the election of Directors may be made by the
Board of Directors or a proxy committee appointed by the Board of Directors or
by any stockholder entitled to vote in the election of Directors generally.
However, any stockholder entitled to vote in the election of Directors generally
may nominate one or more persons for election as Directors at a meeting only if
written notice of such stockholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Company not later than (i) with
respect to an election to be held at an annual meeting of stockholders, 90 days
in advance of such meeting, and (ii) with respect to an election to be held at a
special meeting of stockholders for the election of Directors, the close of
business on the seventh day following the date on which notice of such meeting
is first given to stockholders. Each such notice shall set forth: (a) the name
and address of the stockholder who intends to make the nomination and of the
person or persons to be nominated; (b) a representation that the stockholder is
a holder of record of stock of the Company entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (c) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such
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other information regarding each nominee proposed by such stockholder as would
be required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission, had the nominee been nominated,
or intended to be nominated, by the Board of Directors; and (e) the consent of
each nominee to serve as a director of the Company if so elected. The chairman
of the meeting may refuse to acknowledge the nomination of any person not made
in compliance with the foregoing procedure.
SECTION 5. Organization Meeting of the Board. At the last regular meeting
of the Board of Directors prior to each annual meeting of stockholders, the
Board of Directors shall establish its organization, elect and appoint officers
and appoint committee members. Such action may also be taken at another place
and time fixed by written consent of the Directors.
SECTION 6. Regular Meetings. Regular meetings of the Board are fixed and
may be held without notice at the office of the Company in Harrison, New York on
the fourth Friday in each month at 9:00 A.M., or at such other time and place,
either within or without the State of Delaware, as the Board may provide by
resolution, without other notice than such resolution. If less than a quorum is
present at any meeting time and place, those present may adjourn from time to
time until a quorum shall be present, but if there shall be no quorum prior to
another regular meeting time, then such meetings of less than a quorum need not
be recorded.
SECTION 7. Special Meetings. Special meetings of the Board shall be held
whenever called by the Chairman of the Board, or, in his absence, by the Vice
Chairman of the Board, or, in their absence, by the President, or by one-third
of the Directors then in office. The person or persons authorized to call
special meetings of the Board may fix any place, either within or without the
State of Delaware, as the place for holding any special meeting. Unless
otherwise specified in the notice thereof, any business may be transacted at a
special meeting.
SECTION 8. Notice of Special Meetings. The Secretary shall mail to each
director notice of any special meeting at least two days before the meeting, or
shall telegraph or telephone such notice not later than the day before the
meeting. When all Directors are present, any business may be transacted without
any previous notice. Any director may waive notice of any meeting.
SECTION 9. Quorum. A majority of the total number of Directors, or half of
the total number when the number of Directors then in office is even, shall
constitute a quorum for the transaction of business, and a majority of those
present at the time and place of any regular or special meeting, although less
than a quorum, may adjourn the same from time to time, as provided in these
by-laws.
SECTION 10. Chairman. At all meetings of the Board, the Chairman of the
Board, or, in his absence, the Vice Chairman of the Board, or, in their absence,
the President, or, in their absence, a chairman chosen by the Directors present,
shall preside.
SECTION 11. Action without Meeting. A statement in writing, signed by all
members of the Board of Directors or the Executive Committee, shall be deemed to
be action by the Board or Committee, as the case may be, to the effect therein
expressed, and it shall be the duty of the Secretary to record such statement in
the minute books of the Company under its proper date.
ARTICLE III.
Executive Committee and Other Committees.
SECTION 1. Executive Committee. The Board of Directors shall appoint an
Executive Committee of seven or more members to serve during the pleasure of the
Board to consist of the Chairman of the Executive Committee, the Chairman of the
Board, the Vice Chairman of the Board, the President, and such additional
Directors as the Board may from time to time designate.
SECTION 2. The Chairman of the Executive Committee. The Chairman of the
Executive Committee shall be designated by the Board of Directors and shall be a
member of the Board and of the Executive Committee. He shall preside at meetings
of the Executive Committee, and shall do and perform such other things as may
from time to time by assigned to him by the Board of Directors.
SECTION 3. Vacancies. Vacancies in the Executive Committee shall be filled
by the Board.
SECTION 4. Executive Committee to Report. All action by the Executive
Committee shall be reported promptly to the Board and such action shall be
subject to review by the Board, provided that no rights of third parties shall
be affected by such review.
SECTION 5. Procedure. The Executive Committee, by a vote of a majority of
all of its members, shall fix its own times and places of meeting, shall
determine the number of its members constituting a quorum for the transaction of
business, and shall prescribe its own rules of procedure, no change in which
shall be made save by a majority vote of all of its members.
SECTION 6. Powers. During the intervals between the meetings of the Board,
the Executive Committee shall possess and may exercise all the powers of the
Board in the management and direction of the business and affairs of the
Company, except those which by applicable statute are reserved to the Board of
Directors.
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SECTION 7. Other Committees. From time to time the Board may appoint other
committees, and they shall have such powers as shall be specified in the
resolution of appointment.
ARTICLE IV.
Officers.
SECTION 1. Number. The Board of Directors shall elect the executive
officers of the Company which may include a Chairman of the Board, one or more
Vice Chairmen of the Board, a President, one or more Vice Presidents (one or
more of whom may be designated as Executive Vice Presidents or as Senior Vice
Presidents or by other designations), a General Counsel, a Secretary, a
Treasurer, a Comptroller, and a General Tax Counsel. A person may at the same
time hold, exercise and perform the powers and duties of more than one executive
officer position. In addition to the executive officers, the Board may appoint
one or more Assistant Secretaries, Assistant Treasurers and Assistant
Comptrollers and such other officers or agents as the Board may from time to
time deem necessary or desirable. All officers and agents shall perform the
duties and exercise the powers usually incident to the offices or positions held
by them, those prescribed by these by-laws, and those assigned to them from time
to time by the Board or by the Chief Executive Officer.
SECTION 2. The Chairman of the Board. The Chairman of the Board shall be a
member of the Board of Directors and of the Executive Committee. He shall
preside at meetings of the stockholders and of the Directors, and shall keep in
close touch with the administration of the affairs of the Company, shall advise
and counsel with the Vice Chairman of the Board and the President, and with
other executives of the Company and shall do and perform such other duties as
may from time to time be assigned to him by the Board of Directors or by the
Executive Committee.
SECTION 3. The Vice Chairman of the Board. The Vice Chairman of the Board
shall be a member of the Board of Directors and the Executive Committee. He
shall keep in close touch with the administration of the affairs of the Company,
shall advise and counsel with the Chairman of the Board and the President, and
with other executives of the Company, and shall do and perform such other duties
as may from time to time be assigned to him by the Board of Directors or the
Executive Committee.
SECTION 4. The President. The President shall be a member of the Board of
Directors and of the Executive Committee. He shall keep in close touch with the
administration of the affairs of the Company, shall advise and counsel with the
Chairman of the Board and the Vice Chairman of the Board and with other
executives of the Company, and shall do and perform such other duties as may
from time to time be assigned to him by the Board of Directors or the Executive
Committee. In the absence of the Chairman of the Board, he shall preside at
meetings of the stockholders and of the Directors.
SECTION 5. The Chief Executive Officer. Either the Chairman of the Board,
or the President, as the Board of Directors may designate, shall be the Chief
Executive Officer of the Company. The officer so designated shall have, in
addition to the powers and duties applicable to the office set forth in either
Section 2 or 4 of this Article IV, general active supervision over the business
and affairs of the Company and over its several officers, agents, and employees,
subject, however, to the direction and control of the Board or the Executive
Committee. The Chief Executive Officer shall see that all orders and resolutions
of the Board or the Executive Committee are carried into effect, and, in
general, shall perform all duties incident to the position of Chief Executive
Officer and such other duties as may from time to time be assigned by the Board
or the Executive Committee.
SECTION 6. The Executive Vice Presidents. The Executive Vice Presidents
shall keep in touch with the administration of the affairs of the Company, shall
advise and counsel with the Chairman of the Board, the Vice Chairman of the
Board and with the President and with other executives of the Company, and shall
do and perform such other duties as from time to time may be assigned to them by
the Board of Directors, the Executive Committee, the Chairman of the Board, the
Vice Chairman of the Board, or the President. In the absence of the Chairman of
the Board, the Vice Chairman of the Board and the President, the senior
Executive Vice President shall preside at meetings of the stockholders.
SECTION 7. The Senior Vice Presidents. Each Senior Vice President shall
have such powers as may be conferred upon him by the Board of Directors, and
shall perform such duties as from time to time may be assigned to him by the
Board of Directors, the Executive Committee, the Chairman of the Board, the Vice
Chairman of the Board, or the President.
SECTION 8. The Vice Presidents. Each Vice President shall have such powers
as may be conferred upon him by the Board of Directors, and shall perform such
duties as from time to time may be assigned to him by the Board of Directors,
the Executive Committee, the Chairman of the Board, the Vice Chairman of the
Board, or the President.
SECTION 9. The General Counsel. The General Counsel shall have charge of
all the legal affairs of the Company and shall exercise supervision over its
contract relations.
SECTION 10. The Secretary. The Secretary shall keep the minutes of all
meetings of the stockholders and the Board of Directors in books provided for
the purpose. He shall attend to the giving and serving of all notices for the
Company. He shall sign with the Chairman of the Board, the Vice Chairman of the
Board, the President, and Executive Vice
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<PAGE>
President, a Senior Vice President, or a Vice President, such contracts as may
require his signature, and shall in proper cases affix the seal of the Company
thereto. He shall have charge of the certificate books and such other books and
papers as the Board of Directors may direct. He shall sign with the Chairman of
the Board, the President, or a Vice President certificates of stock, and he
shall in general perform all the duties incident to the Office of Secretary,
subject to the control of the Board, and shall perform such other duties as from
time to time may be assigned to him by the Board of Directors, the Executive
Committee, the Chairman of the Board, the Vice Chairman of the Board, or the
President. Any Assistant Secretary may, in his own name, perform any duty of the
Secretary, when so requested by the Secretary or in the absence of that officer,
and may perform such duties as may be prescribed by the Board. In the absence of
the Secretary and of all Assistant Secretaries, minutes of any meetings may be
kept by a Secretary pro tem, appointed for that purpose by the presiding
officer.
SECTION 11. The Treasurer. The Treasurer shall have charge and custody of
and be responsible for all the funds and securities of the Company, and may
invest the same in any securities as may be permitted by law; designate
depositories in which all monies and other valuables to the credit of the
Company may be deposited; render to the Board, or any committee designated by
the Board, whenever the Board or such committee may require, an account of all
transactions as Treasurer; and in general perform all the duties of the office
of Treasurer and such other duties as from time to time may be assigned by the
Chairman of the Board, the Vice Chairman of the Board, the President, the
officer of the Company who may be designated Chief Financial Officer, and the
Board of Directors. In case one or more Assistant Treasurers be appointed, the
Treasurer may delegate to them the authority to perform such duties as the
Treasurer may determine.
SECTION 12. The Comptroller. The Comptroller shall be the principal
accounting officer of the corporation; shall have charge of the Company's books
of accounts, records and auditing, shall ensure that the necessary internal
controls exist within the Company to provide reasonable assurance that the
Company's assets are safeguarded and that financial records are maintained and
publicly disclosed in accordance with generally accepted accounting principles;
and in general perform all the duties incident to the office of Comptroller and
such other duties as from time to time may be assigned by the Chairman of the
Board, the Vice Chairman of the Board, the President, the officer of the Company
who may be designated Chief Financial Officer, and the Board of Directors. In
case one or more Assistant Comptrollers be appointed, the Comptroller may
delegate to them such duties as the Comptroller may determine.
SECTION 13. The General Tax Counsel. The General Tax Counsel shall have
charge of all the tax affairs of the Company.
SECTION 14. Tenure of Officers: Removal. All officers elected or appointed
by the Board shall hold office until their successor is elected or appointed and
qualified, or until their earlier resignation or removal. All such officers
shall be subject to removal, with or without cause, at any time by the
affirmative vote of a majority of the whole Board.
ARTICLE V.
Indemnification.
SECTION 1. Right to Indemnification. The Company shall indemnify, defend
and hold harmless any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, investigative or other, including
appeals, by reason of the fact that he is or was a director, officer or employee
of the Company, or is or was serving at the request of the Company as a
director, officer or employee of any corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action in an official
capacity as a director, officer or employee or in any other capacity while
serving as a director, officer or employee, to the fullest extent authorized by
the Delaware General Corporation Law, as the same exists or may hereafter be
amended, (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
said Law permitted the Company to provide prior to such amendment) against all
expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith;
provided, however, that except as provided in Section 2 hereof with respect to
proceedings seeking to enforce rights to indemnification, the Company shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if the proceeding (or
part thereof) was authorized by the Board of Directors of the Company.
The right to indemnification conferred in this Article shall be a contract
right and shall include the right to be paid by the Company expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that if required by law at the time of such payment, the payment of
such expenses incurred by a director or officer in his capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of such
proceeding, shall be made only upon delivery to the Company of an undertaking,
by or on behalf of such director or officer to repay all amounts so advanced if
it should be determined ultimately that such director or officer is not entitled
to be indemnified under this Section or otherwise.
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"Employee." as used herein, includes both an active employee in the
Company's service as well as a retired employee who is or has been a party to a
written agreement under which he might be, or might have been obligated to
render services to the Company.
SECTION 2. Right of Claimant to Bring Suit. If a claim under Section 1 is
not paid in full by the Company within sixty days or, in cases of advances of
expenses, twenty days, after a written claim has been received by the Company,
the claimant may at any time thereafter bring suit against the Company to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking has been tendered to the
Company) that the claimant has not met the standards of conduct which make it
permissible under the Delaware General Corporation Law for the Company to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Company. Neither the failure of the Company (including
its Board of Directors, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Company (including its Board
of Directors, independent legal counsel or its stockholders) that the claimant
had not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that claimant had not met the applicable standard
of conduct. The Company shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Article that the procedures and
presumptions of this Article are not valid, binding and enforceable and shall
stipulate in any such proceeding that the Company is bound by all the provisions
of this Article.
SECTION 3. Non-Exclusivity and Survival. The right to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article (a) shall apply to acts or omissions
antedating the adoption of this by-law, (b) shall be severable, (c) shall not be
exclusive of other rights to which any director, officer or employee may now or
hereafter be entitled, (d) shall continue as to a person who has ceased to be
such director, officer or employee and (e) shall inure to the benefit of the
heirs, executors and administrators of such a person.
ARTICLE VI.
Capital Stock.
SECTION 1. Form and Execution of Certificates. The certificates of shares
of the capital stock of the Company shall be in such form as shall be approved
by the Board. The certificates shall be signed by the Chairman of the Board, the
President, or a Vice President, and the Secretary or an Assistant Secretary.
Section 2. Certificates to be Entered. Certificates shall be consecutively
numbered, and the names of the owners, the number of shares and the date of
issue, shall be entered in the books of the Company.
SECTION 3. Old Certificates to be Canceled. Except in the case of lost or
destroyed certificates, and in that case only upon performance of such
conditions as the Board may prescribe, no new certificate shall be issued in
lieu of a former certificate until such former certificate shall have been
surrendered and canceled.
Section 4. Transfer of Shares. Shares shall be transferred only on the
books of the Company by a holder thereof in person or by his attorney appointed
in writing, upon the surrender and cancellation of certificates for a like
number of shares.
SECTION 5. Regulations. The Board may make such rules and regulations as it
may deem expedient concerning the issue, transfer and registration of
certificates of stock of the Company.
Section 6. Registrar. The Board, the Chairman of the Board, the President,
and the Treasurer shall each have the authority to appoint a registrar of
transfers and may require all certificates to bear the signature of such
registrar.
SECTION 7. Closing of Transfer Books. If deemed expedient by the Board, the
stock books and transfer books may be closed for the meetings of the
stockholders, or for other purposes, during such periods as from time to time
may be fixed by the Board, and during such periods no stock shall be
transferable on said books.
SECTION 8. Dates of Record. If deemed expedient by the Board, the Directors
may fix in advance, a date, not exceeding 60 days preceding the date of any
meeting of stockholders or the date for the payment of any dividend, or the date
for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, as a record date for the
determination of the stockholders entitled to notice of, and to vote at, any
such meeting or entitled to receive payment of any such dividend, or to any such
allotment of rights, or to exercise the rights in respect of any such change,
conversion or exchange of capital stock, and in such case only such stockholders
as shall be stockholders of record on the date so fixed shall be entitled to
such notice of, and to vote at, such meeting, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights, as
the case may be, notwithstanding any transfer of any stock on the books of the
Company after any such record date fixed as aforesaid.
SECTION 9. Rights to Purchase Securities. The Company shall not, without
either the prior approval of a majority of the total number of shares then
issued and outstanding and entitled to vote or the receipt by the Company of a
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favorable opinion issued by a nationally recognized investment banking firm
designated by the Committee of Equity Security Holders of Texaco Inc. appointed
in the Company's jointly administered chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York or its last chairman (or
his designee) to the effect that the proposed issuance is fair from a finance
point of view to the stockholders of the Company issue to its stockholders
generally (i) any warrant or other right to purchase any security of the
Company, any successor thereto or any other person or entity or (ii) any
security of the Company containing any such right to purchase, which warrant,
right or security (a) is exercisable, exchangeable or convertible, based or
conditioned in whole or in part on (I) a change of control of the Company or
(II) the owning or holding of any number or percentage of outstanding shares or
voting power or any offer to acquire any number of shares or percentage of
voting power by any entity, individual or group of entities and/or individuals
or (b) discriminates among holders of the same class of securities (or the class
of securities for which such warrant or right is exercisable or exchangeable) of
the Company or any successor thereto. The affirmative vote of the holders of at
least a majority of the then outstanding shares of capital stock of the Company
voting generally in the election of Directors, voting together as a single
class, shall be required to repeal the foregoing provisions.
ARTICLE VII
Fair Price.
A. Vote Required for Certain Business Combinations.
1. Higher Vote for Certain Business Combinations. In addition to any
affirmative vote required by law or the Certificate of Incorporation, and
except as otherwise expressly provided in Section B of this Article VII:
a. any merger or consolidation of the Company or any Subsidiary
(as hereinafter defined) with (i) any Interested Stockholder (as
hereinafter defined) or (ii) any other person (whether or not itself an
Interested Stockholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an Interested
Stockholder; or
b. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with
any Interested Stockholder or any Affiliate of any Interested
Stockholder of any assets of the Company or any Subsidiary having an
aggregate Fair Market Value of $100 million or more; or
c. the issuance or transfer by the Company or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Company or any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $100 million or more; or
d. the adoption of any plan or proposal for the liquidation or
dissolution of the Company proposed by or on behalf of an Interested
Stockholder or any Affiliate of any Interested Stockholder; or
e. any reclassification of securities (including any reverse stock
split), or recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly,
of increasing the proportionate share of the outstanding shares of any
class of equity or convertible securities of the Company or any
Subsidiary which is directly or indirectly owned by any Interested
Stockholder or any Affiliate of any Interested Stockholder;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then outstanding shares of capital stock of the Company entitled to
vote generally in the election of Directors (the "Voting Stock"), voting
together as a single class (it being understood that for purposes of this
Article VII, each share of the Voting Stock shall have the number of votes
granted to it pursuant to Article IV of the Certificate of Incorporation). Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or in any
agreement with any national securities exchange or otherwise.
2. Definition of "Business Combination". The term "Business
Combination" as used in this Article VII shall mean any transaction which
is referred to in any one or more of clauses (a) through (e) of paragraph 1
of this Section A. B. When Higher Vote is Not Required. The provisions of
Section A of this Article VII shall not be applicable to any particular
Business Combination, and such Business Combination shall require only such
affirmative vote as is required by law and any provision of the Certificate of
Incorporation, if all of the conditions specified in either of the following
paragraphs 1 and 2 are met:
1. Approval by Disinterested Directors. The Business Combination shall
have been approved by a majority of the Disinterested Directors (as
hereinafter defined).
2. Price and Procedure Requirements. All of the following conditions
shall have been met:
a. The aggregate amount of the cash and the Fair Market Value (as
hereinafter defined) as of the date of the consummation of the Business
Combination of consideration other than cash to be received per share
by holders of Common Stock in such Business Combination shall be at
least equal to the higher of the following:
* 7 *
<PAGE>
(i) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Stockholder for any shares of Common
Stock acquired by it (a) within the two-year period immediately
prior to the first publication announcement of the proposal of the
Business Combination (the "Announcement Date") or (b) in the
transaction in which it became an Interested Stockholder,
whichever is higher; and
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter date is
referred to in this Article VII as the "Determination Date"),
whichever is higher.
b. The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of
shares of any other class of outstanding Voting Stock shall be at
least equal to the highest of the following (it being intended that
the requirements of this paragraph 2b shall be required to be met with
respect to every class of outstanding Voting Stock, whether or not the
Interested Stockholder has previously acquired any shares of a
particular class of Voting Stock):
(i) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Stockholder for any shares of such
class of Voting Stock acquired by it (a) within the two-year
period immediately prior to the Announcement Date or (b) in the
transaction in which it became an Interested Stockholder,
whichever is higher;
(ii) (if applicable) the highest preferential amount per share
to which the holders of shares of such class of Voting Stock are
entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company; and
(iii) the Fair Market Value per share of such class of Voting
Stock on the Announcement Date or on the Determination Date,
whichever is higher.
c. The consideration to be received by holders of a particular
class of outstanding Voting Stock (including Common Stock) shall be in
cash or in the same form as the Interested Stockholder has previously
paid for shares of any class of Voting Stock. If the Interested
Stockholder has paid for shares of any class of Voting Stock with
varying forms of consideration, the form of consideration for such
class of Voting Stock shall be either cash or the form used to acquire
the largest number of shares of such Class of Voting Stock previously
acquired by it. The price determined in accordance with paragraphs 2a
and 2b of this Section B shall be subject to appropriate adjustment in
the event of any stock dividend, stock split, combination of shares or
similar event.
d. After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination:
(i) except as approved by a majority of the Disinterested Directors,
there shall have been no failure to declare and pay at the regular date
therefor any full quarterly dividends (whether or not cumulative) on
the outstanding Preferred Stock; (ii) there shall have been (a) no
reduction in the annual rate of dividends paid on the Common Stock
(except as necessary to reflect any subdivision of the Common Stock),
except as approved by a majority of the Disinterested Directors, and
(b) an increase in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has
the effect of reducing the number of outstanding shares of the Common
Stock unless the failure so to increase such annual rate is approved by
a majority of the Disinterested Directors; and (iii) such Interested
Stockholder shall have not become the beneficial owner of any
additional shares of Voting Stock except as part of the transaction
which results in such Interested Stockholder becoming an Interested
Stockholder.
e. After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the Company, whether in anticipation of or in connection
with such Business Combination or otherwise.
f. A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to public stockholders of the Company at
least 30 days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be
mailed pursuant to such Act or subsequent provisions).
C. Vote Required for Certain Stock Repurchases. In addition to any other
requirement of the Certificate of Incorporation, the affirmative vote of the
holders of at least 50% of the Voting Stock (other than Voting Stock
beneficially owned by a Selling Stockholder (as hereinafter defined)), shall be
required before the Company purchases any outstanding shares of Common Stock at
a price above the Market Price (as hereinafter defined) from a person actually
known by the Company to be a Selling Stockholder, unless the purchase is made by
the Company (a) on the same terms and as a result of an offer made generally to
all holders of Common Stock or (b) pursuant to statutory appraisal rights.
* 8 *
<PAGE>
D. Certain Definitions. For the purpose of this Article VII:
1. A "person" shall mean any individual, firm, corporation or other
entity.
2. "Interested Stockholder" shall mean any person (other than the
Company or any Subsidiary) who or which:
a. is the beneficial owner, directly or indirectly, of more than
20% of the voting power of the outstanding Voting Stock; or
b. is an Affiliate of the Company and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 20% or more of the voting
power of the then outstanding Voting Stock; or
c. is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act
of 1933.
3. A person shall be a "beneficial owner" of any Voting Stock:
a. which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns directly or indirectly; or
b. which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
or (ii) the right to vote pursuant to any agreement, arrangement or
understanding; or
c. which are beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.
4. For the purposes of determining whether a person is an Interested
Stockholder pursuant to paragraph 2 of this Section D, the number of shares
of Voting Stock deemed to be outstanding shall include shares deemed owned
through application of paragraph 3 of this Section D but shall not include
any other shares which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
5. "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on January 1, 1988.
6. "Subsidiary" means any corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the Company;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph 2 of this Section D, the term
"Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the Company.
7. "Disinterested Director" means any member of the Board of Directors
who is unaffiliated with the Interested Stockholder and was a member of the
Board of Directors prior to the time that the Interested Stockholder became
an Interested Stockholder, and any successor of a Disinterested Director
who is unaffiliated with the Interested Stockholder and is recommended to
succeed a Disinterested Director by a majority of Disinterested Directors
then on the Board of Directors.
8. "Fair Market Value" means (a) in the case of the stock, the highest
closing sale price during the 30-day period immediately preceding the date
in question of a share of such stock on the Composite Tape for the New York
Stock Exchange-Listed Stocks, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered
under the Securities Exchange Act of 1934 on which such stock is listed,
or, if such stock is not listed on any such exchange, the highest closing
bid quotation with respect to a share of such stock during the 30-day
period preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system then in
use, or if no such quotations are available, the fair market value on the
date in question of a share of such stock as determined by the Board of
Directors in good faith; and (b) in the case of property other than cash or
stock, the fair market value of such property on the date in question as
determined by a majority of the Disinterested Directors.
9. "Selling Stockholder" means any person who or which is the
beneficial owner of in the aggregate more than 1% of the outstanding shares
of Common Stock and who or which has purchased or agreed to purchase any of
such shares within the most recent two-year period and who sells or
proposes to sell Common Stock in a transaction requiring the affirmative
vote provided for in Section C of this Article VII.
10. "Market Price" means the highest sale price on or during the
period of five trading days immediately preceding the date in question of a
share of such stock on the Composite Tape for New York Stock
Exchange-Listed Stock, or if such stock is not quoted on the Composite Tape
on the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered
under the Securities Exchange Act of 1934 on which such stock is listed,
or, if such stock is not listed on any such
* 9 *
<PAGE>
exchange, the highest closing bid quotation with respect to a share of
stock on or during the period of five trading days immediately preceding
the date in question on the National Association of Securities Dealers,
Inc. Automated Quotations System or any system then in use, or if no such
quotations are available, the fair market value on the date in question of
a share of such stock as determined by a majority of the Disinterested
Directors.
E. Powers of the Board of Directors. A majority of the Directors shall have
the power and duty to determine for the purposes of this Article VII, on the
basis of information known to them after reasonable inquiry, (1) whether a
person is an Interested Stockholder, (2) the number of shares of Voting Stock
beneficially owned by any person, (3) whether a person is an Affiliate or
Associate of another, (4) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the issuance
or transfer of securities by the Company or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $100 million or more. A
majority of the Directors shall have the further power to interpret all of the
terms and provisions of this Article VII.
F. No Effect on Fiduciary Obligations of Interested Stockholders. Nothing
contained in this Article VII shall be construed to relieve any Interested
Stockholder from any fiduciary obligation imposed by law.
G. Amendment, Repeal, etc. Notwithstanding any other provisions of the
Certificate of Incorporation or these by-laws (and notwithstanding the fact that
a lesser percentage may be specified by law, the Certificate of Incorporation or
these by-laws) the affirmative vote of the holders of at least a majority of
then outstanding shares of capital stock of the Company voting generally in the
election of Directors, voting together as a single class shall be required to
repeal the foregoing provisions of this Article VII.
ARTICLE VIII.
Seal.
The seal of the Company shall be in circular form containing the name of
the Company around the margin, with a five pointed star in the center embodying
a capital "T".
ARTICLE IX.
By-Law Amendments.
Subject to the provisions of the Certificate of Incorporation, these
by-laws may be altered, amended or repealed at any regular meeting of the
stockholders (or at any special meeting thereof duly called for that purpose) by
a majority vote of the shares represented and entitled to vote at such meeting;
provided that in the notice of such special meeting notice of such purpose shall
be given. Subject to the laws of the State of Delaware, the Certificate of
Incorporation and these by-laws, the Board of Directors may by majority vote of
those present at any meeting at which a quorum is present amend these by-laws,
or enact such other by-laws as in their judgment may be advisable for the
regulation of the conduct of the affairs of the Company.
* 10 *
EXHIBIT 10(iii)(a)
FORM OF
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") is entered into on December 17,
1998 by and between TEXACO INC. ("Company"), its subsidiaries and affiliates
(The Company, its subsidiaries and affiliates shall be referred to herein as
"Texaco"), and ______________________________________ ("Employee").
WHEREAS, the Company believes that it is in the best interest of the
Company and its stockholders to encourage the continuous employment of key
management;
WHEREAS, the Company believes that in the event of a Change of Control
of the Company, as defined herein, ("Change of Control") its executives should
remain free of personal financial and employment uncertainty and continue to
assess each business proposition on its merits based on what is best for the
Company's stockholders.
WHEREAS, although a change of control in the Company is not
contemplated, the Company has determined that appropriate steps should be taken
to encourage continued dedication of its key management employees.
NOW, THEREFORE, for good and valuable consideration the Employee and
the Company agree as follows:
1. Term of Agreement. The term of this Agreement shall commence
on the date first set forth above and shall continue in effect
through December 31, 2001; provided however, on January 1, 2000
and each January 1 thereafter the term of this Agreement shall
automatically be extended for an additional one-year term, unless
the Company's Board of Directors ("Board") agree by an
affirmative vote not to extend the agreement; provided further,
that if there is a Change of Control prior to the expiration of
any original or extended term, this Agreement may not be
terminated and shall remain in full force and effect for 36
months beyond the month in which such Change in Control of the
Company occurred; provided further that the term of this
Agreement shall automatically expire upon the first day of the
month immediately following the Employee's 65th birthday.
2. Change of Control. A Change of Control is considered to have
occurred if:
(a) At any time during the period of two consecutive years, at
least a majority of the entire Board does not consist of
Incumbent Directors; (Incumbent Directors is defined as
individuals who were directors of the Company at the beginning
of this two-year period or who subsequently become directors
of the Company and whose election or nomination for election
by the Company's stockholders was approved by a vote of the
majority of the "Incumbent Directors.")
(b) At any time during any 12-month period the individuals who are
directors of the Company at the beginning of the 12-month
period cease to
<PAGE>
2
constitute at least a majority of the Board other than due
to death, disability or mandatory retirement; or
(c) Any individual, firm, corporation, partnership, or other
entity, other than the Company, employee benefit plan of the
Company, or any entity organized, appointed or established by
the Company, becomes a Beneficial Owner of securities of the
Company representing 25% or more of the combined voting power
of the then outstanding securities of the Company; or
(d) The shareholders of the Company, determined prior to a merger
or corporate combination, do not own 55% or more of the merged
or combined entity.
3. Eligibility. The Employee will be entitled to the benefits set
forth in this Agreement from the date of first contact by a
party, or a party's representative, with Texaco which results
in a Change of Control involving that party or its affiliate,
as may be disclosed in Form 14d-1 filed with the Securities
Exchange Commission and up to 36 months after a Change of
Control of the Company, either of the following occurs:
(a) The Employee's employment is terminated without Just Cause.
Termination for Just Cause means that the Employee's
employment with Texaco is terminated due to the Employee's
engaging in willful and continued misconduct, or to the
Employee's willful and continued failure to substantially
perform his or her duties with Texaco (other than due to
physical or mental disability, illness, etc.), if such failure
or misconduct is materially damaging or materially detrimental
to the business and operations of Texaco, provided that the
Employee shall have received written notice of such failure or
misconduct and shall have continued to engage in such failure
or misconduct after thirty (30) days following receipt of such
notice from the Board, which notice specifically identifies
the manner in which the Board believes that the Employee has
engaged in such failure or misconduct. For purposes of this
subsection, no act, or failure to act, on the employee's part
shall be deemed willful unless done, or omitted to be done, by
the Employee not in good faith and without reasonable belief
that the Employee's action or omission was in the best
interest of Texaco. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Just
Cause under this Agreement unless and until there shall have
been delivered to the Employee a copy of a resolution duly
adopted by the affirmative vote of not less than
three-quarters (3/4) of the entire membership of the Board at
a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an opportunity for the
Employee, together with his or her counsel, to be heard before
the Board), finding that in the good faith opinion of the
Board the Employee failed to substantially perform his or her
duties or of misconduct in accordance with the first sentence
of this subsection, and of continuing such failure to
substantially perform the
<PAGE>
3
Employee's duties or misconduct as aforesaid after notice
from the Board, and specifying the particulars thereof in
detail; or
(b) The Employee resigns for Good Reason. The Employee will be
deemed to resign for Good Reason if he or she resigns within
60 days after:
(i) a reduction in the Employee's Base Pay (as defined in
Section 4);
(ii) a reduction in the Employee's cash bonus in excess of
20% of the prior year's award (unless the reduction
is due to Texaco's performance under the objective
measurements of the Company's Incentive Bonus Plan
effective immediately before the Change of Control or
under the objective measurements of an incentive
compensation program with target bonuses and
performance goals comparable to and not materially
less favorable to the Employee than the targets and
goals described in the Company's Incentive Bonus Plan
in existence prior to the Change in Control);
(iii) the assignment of any duties inconsistent with the
position in Texaco that the Employee held immediately
prior to the Change of Control or a significant
adverse alteration in the nature or status of the
Employee's responsibilities or condition of
employment from those in effect immediately prior to
such Change of Control;
(iv) the failure of Texaco to continue in effect any
material compensation or benefit plan in which the
Employee participated immediately prior to the Change
of Control, unless an equitable arrangement (embodied
in an ongoing substitute or alternate plan) has been
made with respect to such plan, or the failure by
Texaco to continue the Employee's participation
therein (or in such substitute or alternative plan)
on a basis not materially less favorable, both in
terms of the amount of benefits provided and the
level of the Employee's participation relative to
other participants, as that which existed at the time
of the Change of Control, unless any such change is
independently justified based on peer group
practices; or
(v) being required to relocate to a work location which
is 50 or more miles from the Employee's former work
location, without the Employee's consent.
4. Severance Benefits. If there is a Change of Control and the
Employee is terminated, within the period described in Section
3 above, without Just Cause or resigns for Good Reason, the
Employee shall receive a cash payment, except as otherwise
provided herein, equal to the following:
(a) Thirty-six months' Base Pay, which shall mean the monthly base
salary in effect immediately before the Change of Control or,
if greater, the base
<PAGE>
4
salary during the year immediately before the Employee's
termination without Just Cause or resignation for Good
Reason; plus
(b) three times the highest cash bonus earned by the Employee in
any of the five years preceding the Employee's termination
date (If the Employee has not yet earned a Company bonus prior
to the Change of Control, then the Employee's target bonus
shall be used in this regard); plus
(c) three times the annual value of benefits earned or accrued by
the Employee as a result of the Employee's participation in
the following plans immediately preceding the Change of
Control or immediately preceding the Employee's resignation,
whichever is greater:
(1) In lieu of additional service credit under the
Retirement and Supplemental Plans, a cash payment
equal to 10% of the amounts determined under 4(a) and
4(b) above; plus
(2) In lieu of additional contributions to the Thrift
and Supplemental Plans, a cash payment equal to 6%
of the amounts determined under 4(a) above; plus
(3) If Employee is not eligible to receive a full Company
contribution under (d) below, a cash payment equal to
the annual Company contribution that is not payable
by the Company under (d) to the Texaco Comprehensive
Medical Plan (or alternate sponsored medical plan or
HMO) for the Employee's elected coverage option.
(d) Retiree medical coverage under the Company-sponsored medical
plan pursuant to the terms and conditions of such plan
immediately prior to the Change of Control as you have
attained age 45 and have at least 10 years of service. The
full Company portion of the premium will be paid by the
Company, if the Employee has 20 or more years of service. The
Company contribution will be pro-rated downward by 5% per year
between 10 and 20 years at termination of employment. In order
to qualify for retiree coverage, the Employee must have been
covered under a Company-sponsored medical plan immediately
prior to the Change of Control or immediately prior to
termination of employment. If Employee is not eligible for
retiree medical, she can participate in the Company-sponsored
medical plan at her own expense for three years from the date
of termination (inclusive of COBRA coverage); and
(e) As Employee has reached age 45 and has at least 10 years of
service, Employee will receive retiree life insurance coverage
under the Company-sponsored life insurance plan pursuant to
the terms and conditions of such plan immediately prior to the
Change of Control. The full amount of insurance will be paid
by the Company if the Employee has 20 or more years of
service. Coverage will be reduced 5% per year for employees
who have between 10 and 20 years of service upon termination
of
<PAGE>
5
employment. In order to qualify for retiree life insurance
the Employee must have participated in contributory life
insurance coverage immediately prior to the date of the
Change of Control or immediately prior to termination of
employment.
(f) Outplacement services with a nationally recognized
outplacement firm, with a cost not to exceed $15,000, plus
(g) Continued participation under the terms and practices of the
Company's Tax Assistance Plan for the year of termination or
resignation and three calendar years immediately following.
Notwithstanding the above, if the Employee is within 36 months of
attaining age 65 at the time of termination of employment or
resignation, the benefits described in (a) through (c) above shall
be reduced by multiplying such benefit amounts by a fraction the
numerator of which shall be the number of full and partial months
from the date the Employee terminates employment to the last day
of the month he or she turns age 65, and the denominator of which
shall be 36 months.
5. Release. Employee will not be asked to sign a release in order to
receive the benefits provided under this Agreement.
6. Payment of Benefits. The Severance Benefits provided for under
Section 4(a), (b) and (c) of this Agreement, less applicable tax
withholding, shall be paid by the Company to the Employee in a
lump sum within 10 business days after termination or resignation.
7. Gross-up. This section will apply in the event that the Employee,
or any of his beneficiaries or designees, receives payments under
this Agreement or under any other plan, agreement, program, or
policy that is sponsored by the Company, which are determined (as
described below) to be subject to excise tax under Internal
Revenue Code (IRC) section 4999 ("excess parachute payments").
(a) If it is determined that the Employee would be subject to the
excise tax noted above on such excess parachute payments, the
Company shall pay to the Employee within 10 days following
such determination or date of payment, if later, an additional
amount ("Gross-up Payment") which may be necessary to
reimburse the Employee on an after-tax basis (including
income, FICA and excise taxes) for any excise tax that may be
imposed by the Internal Revenue Service or a court. Such
determination of the existence of excess parachute payments
must be made either pursuant to a written determination by the
public accounting firm designated by the Company to provide
tax assistance service under the Tax Assistance Plan prior to
the Change of Control or such other party as may be
specifically designated by the Company prior to the Change of
Control, pursuant to a closing agreement made under IRC
Section 7121 that is approved by the IRS and involves the
Employee, or pursuant to a decision involving the
<PAGE>
6
Employee by a court of competent jurisdiction. In
calculating the amount of the Gross-up Payment, it shall be
assumed that the Employee pays state and local income taxes
at the highest marginal rate of taxation imposed by the
state and locality in which the Employee resides or is
employed (or both) in the calendar year in which the
Gross-up Payment is to be made and pays FICA taxes on wages
earned. It also shall be assumed that the Employee's income
tax rate will be computed based upon the maximum effective
marginal federal, state, and local income tax rates
(including FICA taxes) on earned income, with such maximum
effective federal rate to be computed with regard to IRC
section 68, and applying any available deduction of state
and local income taxes for federal income tax purposes. All
such calculations shall be made by the public accounting
firm or party specified in this Section in an equitable
manner.
(b) Notwithstanding any other provision in this Agreement to the
contrary, if it is determined by the Company's independent
auditors, elected by the shareholders prior to the Change of
Control, that the tax gross-up provisions in this section as
they relate to the accelerated vesting of nonqualified stock
options or restricted stock issued by the Company would be the
sole reason precluding the use by the Company of the pooling
of interests method of accounting, then the tax gross-up
provisions of this section shall not apply to such
nonqualified stock options or restricted stock as the case may
be, unless the gross-up payment as described herein can be
altered, modified or delayed to allow it to be paid without
precluding the use of the pooling of interest method of
accounting. The Company will make best efforts to alter,
modify, or delay the payment so that the gross-up can be made.
8. Benefits under this Agreement and Similar Plans. Severance
Benefits under this Agreement are made in lieu of and shall
replace any benefit entitlements under the Separation Pay Plan of
Texaco Inc. but are not intended to replace benefits provided
under any other plan or arrangement.
9. Grantor Trust. Severance Benefits under this Agreement shall be
secured by the Grantor Trust established by the Company.
10. Successors. This Agreement will be binding upon both the
Company's and Employee's successors and assigns. The Company
shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business assets of the Company to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required
to perform it if no such succession had taken place. Failure of
the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be deemed to be a
material breach of this Agreement and shall entitle the Employee
to compensation from the Company in the same amount and on the
same terms as the Employee would be entitled to hereunder if he
or she terminates employment following a Change of Control. For
purposes of implementing the foregoing, the date on which any
such succession becomes
<PAGE>
7
effective shall be deemed the Date of Termination. As used in
this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
11. Enforceability. This Agreement shall inure to the benefit of and
be enforceable by the Employee's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die
while any amount is still payable hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to the Employee's devisee,
legatees or other designee or, if there is no such designee, to
his or her estate.
12. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or
mailed by United States registered or certified mail, return
receipt requested postage prepaid, addressed to the Company or the
Employee, as the case may be. All notices to the Company shall be
directed to the Assistant Secretary of the Company with
responsibility for executive compensation at:
Texaco Inc.
2000 Westchester Avenue
White Plains, New York 10650
Attn.: Executive Compensation Department
Notices to the Employee shall be directed to the Employee at:
Notices of address changes must be furnished to the other party in
writing in accordance herewith and shall be effective only upon
receipt by the other party.
13. Interpretation. Any issues with respect to the interpretation of
this Agreement upon the occurrence of a Change of Control,
including but not limited to the issue of eligibility, will be
determined by majority vote of the Change of Control Committee.
The Change of Control Committee is a committee composed of all
individuals who held the offices of Chief Executive Officer, Chief
Financial Officer and the Assistant Secretary of the Company with
responsibility for executive compensation at any time during the
12-month period immediately before the Change of Control. The
decisions reached by the Change of Control Committee with respect
to all issues and questions relative to this Agreement will be
final, conclusive and binding on all persons.
14. Miscellaneous. No provision of this Agreement may be modified,
waived, cancelled or discharged in any way unless such waiver,
modification,
<PAGE>
cancellation or discharge is agreed to in writing and signed by
the Employee and a duly authorized officer of the Company.
15. Indemnification. The Company shall pay any and all reasonable fees
and expenses incurred by the Employee in seeking to obtain or
enforce any rights or benefits provided by this Agreement,
including, all reasonable attorney's fees and expenses,
accountant's fees and expenses, and court costs that may be
incurred by the Employee in pursuing a claim for payment of
benefits under this Agreement, unless a Court of competent
jurisdiction determines that the participant's cause of action is
frivolous.
16. Severability. If any provision of this Agreement is adjudged by a
court of competent jurisdiction to be void or unenforceable, the
same shall in no way affect any other provision of this Agreement
or the validity or enforceability of this Agreement.
17. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by a duly authorized officer, and the Employee has signed this
Agreement, all as of the day and year first above written.
TEXACO INC.
-------------------------------------------------
Peter I. Bijur
Chairman of the Board and Chief Executive Officer
-------------------------------------------------
Employee
Attest:
Stephen Pennacchio
Assistant Secretary
EXHIBIT 10(iii)(b)
December 30, 1997
Mr. John J. O'Connor
Dear John:
We are delighted that you are joining us at Texaco Inc. ("Texaco"). This letter
sets forth terms and conditions which you and Texaco have agreed to in
connection with your employment by Texaco.
1. Term of Employment.
Your employment under this Agreement shall be effective January 1, 1998 and
shall continue until terminated in accordance with Section 4 below.
Notwithstanding the foregoing, your continuous service date for the following
Texaco benefit plans: Vacation, Short Term Disability, Long Term Disability and
Separation Pay will be January 1, 1978.
2. Duties and Responsibilities.
(a) Texaco will employ you initially as Senior Vice President & President
of Worldwide Exploration & Production. In such capacity, you shall
perform the customary duties and have the customary responsibilities of
such position in the employ of Texaco and such other duties as may be
assigned to you from time to time by the Chief Executive Officer or his
designee.
(b) You agree to faithfully serve Texaco, devote your full working time,
attention and energies to the business of Texaco, its subsidiaries and
affiliated entities, and perform the duties under this Agreement to the
best of your abilities. You may also perform inconsequential services
without direct compensation in connection with charitable or civic
organizations.
(c) You agree (i) to comply with all applicable laws, rules and
regulations, and all requirements of all applicable regulatory,
self-regulatory, and administrative bodies; (ii) to comply with
Texaco's rules, procedures, policies, requirements, and directions; and
(iii) not to engage in any other business or employment without the
written consent of Texaco except as otherwise specifically provided
herein.
3. Compensation and Benefits.
(a) Base Salary. Texaco will pay you a base salary at the initial annual
rate of $450,000 per year ("Base Salary"), which will be payable in
accordance with Texaco's standard practice for elected officers.
Thereafter, modifications, if any, to your Base Salary will be
determined by the
<PAGE>
Compensation Committee of the Board of Directors, or any body or
person authorized to do so, at such times and in such manner as is
consistent with Texaco's standard practice for elected officers.
(b) Benefit Plans and Fringe Benefits. Except as otherwise provided
herein, during your employment with Texaco, you shall participate in
each of Texaco's existing executive and employee benefit plans,
policies or arrangements pursuant to their terms, including the
Relocation Plan when you decide to move your family from Virginia, and
any such plans, policies or arrangements that Texaco may maintain or
establish during your period of employment (in addition to or in
substitution for any existing plan) and to receive all fringe benefits
for which your position grade makes you eligible in accordance with
Texaco's usual policies and in accordance with the terms and
provisions of each such plan, policy, or arrangement, including,
without limitation, those listed on Appendix A attached to this
Agreement. Any modifications, deletions or additions to any of these
plans will apply to you as they apply to all executives in the same
position grade as you.
(c) Expense Reimbursement. Texaco shall promptly pay, or reimburse you for,
all reasonable and necessary business expenses incurred by you in the
performance of your duties hereunder, provided that you properly
account for them in accordance with Texaco's standard policy for
officers.
(d) Stock Incentive Plan. Texaco believes that ownership of the common
stock by officers and other employees having substantial
responsibilities as to the conduct and development of Texaco's
business is important for the welfare of the stockholders. Texaco
common stock provides officers and other employees with: an alignment
with the interests of stockholders; and a significant incentive to use
their best efforts for Texaco's long-term success. Accordingly, on the
date of your employment, you will be granted 37,996 Stock Options and
5,428 Performance Restricted Shares. These options and shares will be
subject to the terms and conditions of the Stock Incentive Plan and an
agreement to that effect will be executed by you and Texaco to
evidence this grant.
4. Termination of Employment.
Your employment hereunder may be terminated under the following circumstances:
(a) Death or Total Disability. Your employment hereunder shall terminate
upon your death or your becoming Totally Disabled. For purposes of this
Agreement, you shall be "Totally Disabled" as of the date you become
entitled to receive disability benefits under Texaco's long-term
disability plan.
(b) Termination by Texaco for Cause. Texaco may terminate your employment
hereunder for "Cause" at any time by providing written notice to you.
(i) For purposes of this Agreement, the term "Cause" shall mean any of
the following:
(A) the transfer by you of confidential business
information of any type concerning Texaco to a
competitor of Texaco for compensation;
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<PAGE>
(B) commission of an act by you in the course of your
employment with Texaco which constitutes dishonesty,
or conduct adverse to the best interests of the
Company or its subsidiaries and affiliates, or
conduct in violation of Company policy and causes
material harm to Texaco;
(C) any conduct for which you are convicted of
intentionally and knowingly committing a crime
against Texaco under federal law or the law of the
state in which such action occurred;
(D) conviction of a crime (including conviction on a nolo
contendere plea) involving a felony;
(E) deliberate and continual refusal to perform
employment duties reasonably requested by Texaco or
an affiliate after thirty (30) days' written notice
by certified mail of such failure to perform,
specifying that the failure constitutes Cause (other
than as a result of vacation, sickness, illness or
injury);
(F) fraud or embezzlement determined in accordance with
Texaco's normal, internal audit procedures;
(G) gross misconduct or gross negligence in connection
with the business of Texaco or any affiliate which
has substantial effect on Texaco or the affiliate; or
(H) breach of any of the covenants set forth in Section
6 below.
(ii) You will be considered to have been terminated for Cause if
Texaco determines that you engaged in an act constituting
Cause. Any such determination shall be made by the Chief
Executive Officer.
(c) Termination by Texaco without Cause. Texaco may terminate your
employment hereunder without Cause at any time after providing thirty
(30) days written notice to you.
(d) Voluntary Termination by You. You may terminate employment hereunder at
any time after providing thirty (30) days written notice to Texaco.
5. Compensation Following Termination of Employment.
(a) Upon termination of employment for any reason, you (or your beneficiary
or estate, as the case may be) will be entitled to receive (i) any
accrued but unpaid Base Salary for services rendered to the date of
termination as determined pursuant to Section 3(a), (ii) any incurred
but unpaid expenses required to be reimbursed pursuant to Section 3(c),
and (iii) any vacation accrued but unused to the date of termination.
The benefits to which you may be entitled upon termination pursuant to
the plans, policies, and arrangements referred to in Section 3(b)
hereof shall be determined and paid in accordance with the terms of
such plans, policies, and arrangements.
- 3 -
<PAGE>
(b) Except as otherwise provided in this Agreement, or under the terms of
any incentive compensation, employee benefit, or fringe benefit plan
applicable to you at the time of your termination or resignation of
employment, you shall have no right to receive any other compensation,
or to participate in any other plan, arrangement or benefit, with
respect to future periods after such termination or resignation.
Texaco shall have the right to discontinue any or all remaining payment and/or
benefits if Texaco determines that there were actions on your part which would
have warranted termination for Cause under this Agreement.
6. Restrictive Covenants.
(a) Protected Information. You recognize and acknowledge that you will
have access to various confidential or proprietary information
concerning Texaco and entities affiliated with Texaco of a special and
unique value which may include, without limitation, (i) books and
records relating to operation, finance, accounting, sales, personnel
and management, (ii) policies and matters relating particularly to
operations such as exploration and producing, customer service
requirements, costs of providing service and equipment, operating
costs and pricing matters, and (iii) various trade or business
secrets, including business opportunities, marketing or business
diversification plans, business development and bidding techniques,
methods and processes, financial data and the like (collectively, the
"Protected Information"). You therefore covenant and agree that you
will not at any time, either while employed by Texaco or afterwards,
knowingly make any independent use of, or knowingly disclose to any
other person or organization (except as authorized by Texaco) any of
the Protected Information.
(b) Competitive Activity. You covenant and agree that at all times during
your period of employment with Texaco, you will not, directly or
indirectly, engage in, assist, or have any active interest or
involvement [whether as an employee, agent, consultant, creditor,
advisor, officer, director, stockholder (excluding holding of less than
1% of the stock of a public company), partner, proprietor or any type
of principal whatsoever] in any person, firm, or business entity which,
directly or indirectly, is engaged in the same business as that
conducted and carried on by Texaco, without Texaco's specific written
consent to do so.
(c) Non-Solicitation. You covenant and agree that for a period of one
year following termination of employment for any reason, you will not
directly or indirectly (i) induce any suppliers and/or customers of
Texaco or corporations affiliated with Texaco to provide services to
or patronize any similar business which competes with any material
business of Texaco; (ii) canvass, solicit or accept any similar
business from any supplier and/or customer of Texaco or corporations
affiliated with Texaco; (iii) directly or indirectly request or advise
any customers of Texaco or corporations affiliated with Texaco to
withdraw, curtail or cancel their business with Texaco; (iv) directly
or indirectly disclose to any other person, firm or corporation the
names or addresses of any of the suppliers and/or customers of Texaco
or corporations affiliated with Texaco; or (v) directly or indirectly
solicit or induce or assist others in soliciting or inducing any
employee of Texaco to terminate his/her employment with Texaco.
- 4 -
<PAGE>
(d) Non-Disparagement. You covenant and agree that during the course of
your employment by Texaco or at any time thereafter, you shall not,
directly or indirectly, in public or private, deprecate, impugn,
disparage, or make any remarks written or verbal that would tend to or
be construed to tend to defame Texaco or any of its officers or
employees, members of its board of directors or agents, nor shall you
assist any other person, firm or company in so doing.
(e) Return of Documents and Other Materials. You shall promptly deliver to
Texaco, upon termination of your employment, or at any other time as
Texaco may so request, all customer lists, leads and refunds, data
processing programs and documentation, employee information, memoranda,
notes, records, reports, tapes, manuals, drawings, blueprints,
programs, and any other documents and other materials (and all copies
thereof) relating to Texaco's business (including but not limited to
exploration or producing operations activities, etc.) or that of its
customers, and all property associated therewith, which you may then
possess or have under your control.
7. Enforcement of Covenants.
(a) Termination of Employment and Forfeiture of Compensation. You agree
that in the event that Texaco determines that you have breached any of
the covenants set forth in Section 6 hereof during your employment,
Texaco shall have the right to terminate your employment for Cause.
Such termination of employment or discontinuance of benefits shall be
in addition to and shall not limit any and all other rights and
remedies that Texaco may have against you.
(b) Right to Injunction. You acknowledge that a breach of the covenants
set forth in Section 6 thereof will cause irreparable damage to Texaco
with respect to which Texaco's remedy at law for damages will be
inadequate. Therefore, in the event of breach or anticipatory breach
of the covenants set forth in this section by you, you and Texaco
agree that Texaco shall be entitled to the following particular forms
of relief, in addition to remedies otherwise available to it at law or
equity: (i) injunctions, both preliminary and permanent, enjoining or
retraining such breach or anticipatory breach and you hereby consent
to the issuance thereof forthwith and without bond by any court of
competent jurisdiction; and (ii) recovery of all reasonable sums
expended and costs, including reasonable attorney's fees, incurred by
Texaco to enforce the covenants set forth in this section.
(c) Separability of Covenants. The covenants contained in Section 6 hereof
constitute a series of separate covenants, one for each applicable
State in the United States and the District of Columbia, and one for
each applicable foreign country. If in any judicial proceeding, a
court shall hold that any of the covenants set forth in Section 6
exceed the time, geographic, or occupational limitations permitted by
applicable laws, you and Texaco agree that such provisions shall and
are hereby reformed to the maximum time, geographic, or occupational
limitations permitted by such laws. Further, in the event a court
shall hold unenforceable any of the separate covenants deemed included
herein, then such unenforceable covenant or covenants shall be deemed
eliminated from the provisions of this Agreement for the purpose of
such proceeding to the extent necessary to permit the remaining
separate covenants to be enforced in such proceeding. You and Texaco
further agree that the covenants in Section 6 shall each be construed
as a separate agreement independent of any other provisions of this
Agreement, and
- 5 -
<PAGE>
the existence o any claim or cause of action by you against Texaco
whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Texaco of any of the
covenants of Section 6.
8. Arbitration of Disputes.
In the event of any dispute or disagreement arising out of or in connection with
this Agreement, you and Texaco agree to submit any such dispute or disagreement
or arbitration under the Employment Dispute Arbitration Rules of the American
Arbitration Association. The dispute or disagreement will be submitted to a
mutually agreed upon retired federal judge, or failing such agreement, to a
retired federal judge appointed by the Chief Judge of the United States District
Court for the Southern District of New York. The arbitration will be held in
White Plains, NY. Any decision or award of said arbitrator shall be final and
binding on you and Texaco. Each party will pay its own legal fees and expenses
for such arbitration and share the fees and expenses of the arbitrator unless
otherwise allocated by the arbitrator in the decision or award. The above shall
supercede and be in lieu of any other arbitration process provided by the
Company including "Solutions".
9. Waiver of Jury Trial.
In the event any controversy or claim arising out of your employment or the
termination of your employment is found by a court of competent jurisdiction not
to be subject to final and binding arbitration, you and Texaco agree to try such
claim or controversy to the Court, without use of a jury or advisory jury. Any
action shall be brought in the Supreme Court, State of New York, Westchester
County or in the United States District Court for the South District of New
York, White Plains Division.
10. Non-Disclosure of Agreement Terms.
You agree that you will not disclose the terms of this Agreement to any third
party other than your immediate family, attorney or accountants, except as may
be required by law. In the event disclosure is sought from you in response to
any subpoena, or other legal process, you shall give the company reasonable
notice under the circumstances in order to afford the company an opportunity to
evaluate its legal rights and take such action as may be appropriate to protect
the interests of the company.
11. Assignment.
Except as otherwise provided in this Section, this Agreement shall inure to the
benefit of and be binding upon Texaco, its successors and assigns, and to you
and your heirs, executors, administrators and legal representatives. This
Agreement shall not be assignable by you, and, without your consent, shall be
assignable by Texaco only to any corporation or other entity resulting from the
reorganization, merger or consolidation of Texaco with any other corporation or
entity or any corporation or entity to which Texaco may sell or otherwise
dispose or transfer all or substantially all of its business and/or assets.
Texaco will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of its business
and/or assets, by agreement in form and substance satisfactory to you to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that Texaco would be required to perform it if no such
succession had taken place. As used in this Agreement, "Texaco" shall mean
Texaco and any successor to its business and/or assets as
- 6 -
<PAGE>
aforesaid which executes and delivers the agreement provided for in this Section
or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
12. Entire Agreement; Amendment.
This Agreement shall supersede any and all existing agreements, understandings
and arrangements between you and Texaco relating to the terms and your
employment; provided, however, that this Agreement shall not supersede or in any
way reduce your right to receive (or Texaco's obligation to pay) benefits under
any employee benefit plan, program or arrangement maintained by Texaco,
including, without limitation, those plans, programs and arrangements described
in Section 3 hereof. This Agreement may not be amended except by a written
agreement signed by both parties.
13. Governing Law and Forum.
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York applicable to agreements made and to be performed in that
State, without regard to its conflict of laws provisions. Any action regarding
this Agreement or any term or condition of employment or employment action shall
be subject to arbitration as specified in paragraph 9 of this Agreement.
14. Notices.
Any notice, consent or other communication made or given in connection with this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered by United States registered or certified mail, return receipt
requested, to the parties at the following addresses or at such other address as
a party may specify by notice to the other:
To You:
John J. O'Connor
Texaco Inc.
2000 Westchester Avenue
White Plains, NY 10650
To Texaco:
Stephen Pennacchio
Texaco Inc.
2000 Westchester Avenue
White Plains, New York 10650
15. Miscellaneous.
(a) The failure of you or Texaco to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver
thereof or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Agreement.
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<PAGE>
(b) Section headings are used herein for convenience of reference only and
shall not affect the meanings of any provision of this Agreement.
(c) If any provision of this Agreement is invalid or unenforceable, the
balance of the Agreement shall remain in effect, and if any provision
is inapplicable to any circumstances, it shall nevertheless remain
applicable to all other circumstances.
Since your execution of this Agreement provides for mandatory arbitration of
issues arising from your employment or termination of employment and/or waiving
of the right to a trial by jury, you may have at least twenty-one (21) days to
consider its meaning and effect and to determine whether you wish to enter into
it. During that time, you are advised to consult with anyone of your choosing,
including an attorney, prior to executing this Agreement.
If you agree that this letter accurately sets forth your agreement with Texaco,
please sign and date each copy of this letter in the space provided below and
return one to me.
Once you have signed this Agreement, you may choose to revoke your execution
within seven (7) days. Any revocation of this Agreement must be in writing and
personally delivered to me, or if mailed, postmarked within seven (7) days of
the date upon which it was signed by you. Texaco will not employ you pursuant to
this Agreement until after the seven (7) day period expires without any
revocation by you.
Sincerely,
TEXACO INC.
By: /s/ Carl B. Davidson
------------------------------
Accepted and Agreed to this
5th day of January 1998.
/s/ John J. O'Connor
- ---------------------------
John J. O'Connor
- 8 -
<PAGE>
APPENDIX A
List of Executive Incentive Plans
Section 3(b) of the Agreement
1. Comprehensive Personal Liability Insurance Program
2. Tax Assistance Plan
3. Country Club Membership
4. Annual Executive Medical Examination
EXHIBIT 10(iii)(c)
July 18, 1997
Mr. William M. Wicker
Dear Mr. Wicker:
This letter sets forth certain terms and conditions which you and
Texaco Inc. ("Texaco" or "the Company") have agreed to in connection with your
employment by Texaco.
1. Employment Term. Your employment is expected to commence on or
about August 1,1997. You shall remain employed by Texaco for at least three
years, unless earlier terminated for cause as defined in paragraph 4, under the
terms and conditions set forth herein.
2. Employment and Duties. Texaco will employ you as Senior Vice
President initially with responsibility for corporate development and reporting
directly to the Chief Executive Officer. In this position, or any other position
to which you may be elected or appointed, you agree that you shall devote
substantially all of your business time and energies to the business of Texaco
and shall perform such services as from time to time are assigned to you by the
Board of Directors (the "Board") or the Executive Management of Texaco, i.e. the
Chief Executive Officer, the President or a Vice Chairman. You shall also be a
member of the Executive Council) for at least the first three years of service,
or so long as that body exists if shorter than three years.
3. Compensation and Benefits.
a. Your annual base salary is initially set at $400,000 and shall be
for no less during the first three years of your employment. It shall be payable
in accordance with Texaco's standard practice for elected officers, and shall be
determined by the Compensation Committee of the Board at such times and in such
manner as is consistent with Texaco's standard practice for elected officers.
b. You shall be eligible to participate in Texaco's Incentive Bonus
Plan (IBP) and Stock Incentive Plan (SIP) in accordance with their respective
terms. Your target bonus for each of the performance years 1997 through 1999
shall be no less
<PAGE>
2
than $280,032 the current target for Grade IV, the salary grade at your initial
employment. Actual bonus paid will be determined by the performance-based IBP.
Your awards under the SIP for 1998, 1999 and 2000 shall be for no less than the
target award for Grade IV in each year.
c. Except as otherwise provided herein, during your employment with
Texaco you shall be eligible to participate in each of Texaco's existing
employee benefit plans, policies or arrangements and any such plans, policies or
arrangements that Texaco may maintain or establish during your period of
employment (in addition to or in substitution for any existing plan) and to
receive all other benefits for which your position as a corporate officer makes
you eligible in accordance with Texaco's usual policies and with the then
current terms and provisions of each such plan, policy, or arrangement,
including those listed on Appendix A hereto.
d. Texaco shall promptly pay, or reimburse you for, all reasonable
and necessary business expenses incurred by you in the performance of your
duties hereunder, provided that you properly account for them in accordance with
Texaco's standard policy for elected officers.
4. The term "Cause" shall mean: "the transfer by you of confidential
business information of any type concerning Texaco to a competitor of Texaco for
compensation; or the commission of an act by you in the course of your
employment with Texaco which constitutes fraud, dishonesty, or conduct in
violation of Company policy and causes material harm to Texaco, or any conduct
for which you are convicted of intentionally and knowingly committing a crime
against Texaco under federal law or the law of the state in which such action
occurred".
5. Texaco shall not be required to fund or otherwise segregate assets
to be used for the payment of the benefits described in paragraph 3 or in any
other non-qualified benefit plan, except as otherwise required by law. Texaco's
obligation to pay such benefits may be satisfied only out of its general
corporate funds, and, therefore, satisfaction of such obligations will be
subject to any claims of Texaco's other creditors having priority as to Texaco's
assets.
6. Signing Bonus. The Company believes that ownership of the Common
Stock by officers and other employees having substantial responsibilities as to
the conduct and development of the Company's business is important for the
welfare of the stockholders. Texaco Common Stock provides officers and other
employees with: an opportunity to acquire a proprietary interest in the Company;
a strong mutuality of interest with stockholders; and a significant incentive to
use their best efforts for the Company's long-term success. Accordingly, on the
date of your employment, you will be granted, as a signing bonus, 15,834 Stock
Options and 2,262 Performance Restricted Shares. These options and shares will
be subject to the terms and conditions of awards under the SIP and an agreement
to that effect will be executed by you and Texaco to evidence this signing
bonus.
7. MD Account. Texaco recognizes that you may relinquish certain
benefits under the Credit Suisse/First Boston (CS) MD Account and Savings Plan
by accepting employment with Texaco. Texaco will make you whole in 1997 for all
MD Account and
<PAGE>
3
Savings Plan unvested amounts which CS does not pay to you, as determined
conclusively by MD Account and Savings Plan statements delivered by CS (as of
the date of your resignation from CS). The amounts shall be paid by Texaco by
crediting to your account as of your first day of employment, under Texaco's
existing plans, a number of fully vested deferred stock units with a value equal
to the amount so forfeited.
8. Miscellaneous.
a. This Agreement and the letter agreement (the "Letter Agreement")
of even date herewith between you and the Company shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in that State.
b. Any notice, consent or other communication made or given in
connection with this Agreement or the Letter Agreement shall be in writing and
shall be deemed to have been duly given when delivered by United States
registered or certified mail, return receipt requested, to the parties at the
following addresses or at such other address as a party may specify by written
notice to the other:
To You:
Mr. William M. Wicker
2000 Westchester Avenue
White Plains, NY 10650
To Texaco:
Corporate Secretary
Texaco Inc.
2000 Westchester Avenue
White Plains, NY 10650
c. This Agreement shall supersede any and all existing agreements,
understandings and arrangements between you and Texaco relating to the terms of
your employment; provided, however, that this Agreement shall not supersede the
Letter Agreement or supersede or in any way reduce your right to receive (or
Texaco's obligation to pay) benefits under any employee benefit plan, program or
arrangement maintained by Texaco, including, without limitation, those plans,
programs and arrangements described in paragraph 3 hereof. Neither this
Agreement nor the Letter Agreement may be amended except by a written agreement
signed by both parties.
d. The failure of you or Texaco to insist upon strict adherence to any
term of this Agreement or the Letter Agreement on any occasion shall not be
considered a waiver thereof or deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement or
the Letter Agreement.
e. Except as otherwise provided in this paragraph 8e., this Agreement
and the Letter Agreement shall inure to the benefit of and be binding upon
Texaco, its successors and assigns, and to you and your heirs, executors,
administrators and legal
<PAGE>
4
representatives. Neither this Agreement nor the Letter Agreement shall be
assignable by you, and, without your consent, shall be assignable by Texaco only
to any corporation or other entity resulting from the reorganization, merger or
consolidation of Texaco with any other corporation or entity or any corporation
or entity to which Texaco may sell all or substantially all of its business
and/or assets. Texaco will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of its
business and/or assets, by agreement in form and substance satisfactory to you,
to expressly assume and agree to perform this Agreement and the Letter Agreement
in the same manner and to the same extent that Texaco would be required to
perform them if no such succession had taken place. As used in this Agreement
and the Letter Agreement, "Texaco" shall mean Texaco as hereinbefore defined and
any successor to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this paragraph 8e. or which otherwise
becomes bound by all the terms and provisions of this Agreement and the Letter
Agreement by operation of law.
f. Paragraph headings are used for convenience of reference only and
shall not affect the meanings of any provision of this Agreement or the Letter
Agreement.
g. If any provision of this Agreement or the Letter Agreement is
invalid or unenforceable, the balance of the Agreement and the Letter Agreement
shall remain in effect, and if any provision is inapplicable to any
circumstance, it shall nevertheless remain applicable to all other
circumstances.
h. Texaco shall pay reasonable attorney's fees incurred by you in
negotiating the terms of this Agreement and the Letter Agreement with Texaco.
If you agree that this letter, together with the Letter Agreement,
accurately sets forth your agreement with Texaco, please sign and date each copy
of this letter below in the space provided and return one to me.
Sincerely,
TEXACO INC.
By: /s/ Carl B. Davidson
----------------------------
Carl B. Davidson
Vice President and Secretary
Accepted and Agreed to this
6th day of August, 1997.
/s/ William M. Wicker
- ------------------------
William M. Wicker
<PAGE>
Appendix A
List of Executive Incentive Plans
a. Comprehensive Personal Liability Insurance Program
b. Tax Assistance Plan
c. Country Club Membership
d. Executive Medical Examination
e. Home Computer
<PAGE>
July 18, 1997
Mr. William M. Wicker
Dear Mr. Wicker:
In connection with your employment by Texaco on or about August 1,1997:
1. Unless you are earlier terminated for cause or voluntarily leave the
Company, you shall be employed for no less the three years (the "Term") as a
Senior Vice President at a salary no less than your starting salary.
2. Your Continuous Service Date for any Texaco-sponsored qualified or
non-qualified plan for which service is a determinant for benefits shall be
August 1,1989. These plans, at the present time, are: Vacation; Short-Term
Disability; Long-Term Disability; Separation Pay; Retirement; and two
Supplemental Pension Benefits Plans. The eight years' service credit for the
Retirement Plan is to be provided by a non-qualified pension supplementation.
With reference to the Retirement and Supplemental Pension Benefits
Plans, the Texaco benefits for the period August 1,1989 through July 31,1997
shall be calculated on a non-contributory basis.
If your employment is terminated at any time for "Cause" as defined in
a separate letter agreement (the "Employment Letter") of this date, or if you
voluntarily leave Texaco within three years of your initial employment, the
eight years of service credit for the period August 1, 1989 - July 31,1997 shall
be immediately forfeited in their entirety.
3. Change of Control. If, before you have completed three years of
service there is a "Change of Control" ("COC"), as that term is defined in
Texaco's Separation Pay Plan, at Texaco resulting in
<PAGE>
- 2 -
termination of your employment or suspension/cancellation of the IBP and/or SIP,
or Texaco or its successor unilaterally terminates your employment without cause
or you terminate your employment following a material breach by Texaco of this
Agreement or the Employment Letter, (a) you shall be entitled to receive
immediately (1) a cash lump sum payment equal to the salary you would have
earned during the remainder of the three-year term, less required withholding
deduction for applicable taxes plus (2) IBP and SIP awards (Make-Up Awards)
sufficient to put you in the position of having the equivalent of Stock Options
and Performance Restricted Shares granted to you upon your initial employment
plus three annual IBP and SIP awards and (b) all SIP awards then held by you or
awarded pursuant to this paragraph shall become fully vested and nonforfeitable.
The strike price of the stock options in such Make-Up Awards shall be the price
at the date of grant used for the last SIP awards, adjusted if necessary, in
accordance with the terms of the SIP, prior to the COC or termination of
employment as described in this paragraph. The amount of each annual IBP award
to be made up will be the average of IBP award(s) previously received by you as
a Texaco employee (or, if no such awards have yet been determined, your then
target award).
Sincerely,
Texaco Inc.
By: /s/ Carl B. Davidson
-----------------------------
Carl B. Davidson
Vice President & Secretary
Accepted and Agreed to this
6th day of August,1997
/s/ William M. Wicker
- --------------------------
William M. Wicker
EXHIBIT 12.1
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
OF TEXACO ON A TOTAL ENTERPRISE BASIS (UNAUDITED)
FOR EACH OF THE FIVE YEARS ENDED DECEMBER 31, 1998
(In Millions of Dollars)
Years Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income from continuing operations, before provision or
benefit for income taxes and cumulative effect of
accounting changes effective 1-1-98 and 1-1-95........ $ 892 $3,514 $3,450 $1,201 $1,409
Dividends from less than 50% owned companies
more or (less) than equity in net income.............. -- (11) (4) 1 (1)
Minority interest in net income.......................... 56 68 72 54 44
Previously capitalized interest charged to
income during the period.............................. 22 25 27 33 29
------ ------ ------ ------ ------
Total earnings................................... 970 3,596 3,545 1,289 1,481
------ ------ ------ ------ ------
Fixed charges:
Items charged to income:
Interest charges.................................... 664 528 551 614 594
Interest factor attributable to operating
lease rentals.................................. 120 112 129 110 118
Preferred stock dividends of subsidiaries
guaranteed by Texaco Inc....................... 33 33 35 36 31
------ ------ ------ ------ ------
Total items charged to income.................... 817 673 715 760 743
Interest capitalized.................................. 26 27 16 28 21
Interest on ESOP debt guaranteed by Texaco Inc........ 3 7 10 14 14
------ ------ ------ ------ ------
Total fixed charges.............................. 846 707 741 802 778
------ ------ ------ ------ ------
Earnings available for payment of fixed charges.......... $1,787 $4,269 $4,260 $2,049 $2,224
(Total earnings + Total items charged to income) ====== ====== ====== ====== ======
Ratio of earnings to fixed charges of Texaco
on a total enterprise basis........................... 2.11 6.04 5.75 2.55 2.86
====== ====== ====== ====== ======
</TABLE>
EXHIBIT 12.2
DEFINITIONS OF SELECTED FINANCIAL RATIOS
CURRENT RATIO
- -------------
Current assets divided by current liabilities.
RETURN ON AVERAGE STOCKHOLDERS' EQUITY
- --------------------------------------
Net income divided by average stockholders' equity. Average
stockholders' equity is computed using the average of the monthly
stockholders' equity balances.
RETURN ON AVERAGE CAPITAL EMPLOYED
- ----------------------------------
Net income plus minority interest plus after-tax interest expense
divided by average capital employed. Capital employed consists of
stockholders' equity, total debt and minority interest. Average capital
employed is computed on a four-quarter average basis.
TOTAL DEBT TO TOTAL BORROWED AND INVESTED CAPITAL
- -------------------------------------------------
Total debt, including capital lease obligations, divided by total debt
plus minority interest liability and stockholders' equity.
<PAGE>
TEXACO 1998 ANNUAL REPORT 23
Financial Table of Contents
Management's Discussion and Analysis 24
Description of Significant Accounting Policies 41
Statement of Consolidated Income 43
Consolidated Balance Sheet 44
Statement of Consolidated Cash Flows 45
Statement of Consolidated Stockholders' Equity 46
Statement of Consolidated Nonowner Changes in Equity 48
Notes to Consolidated Financial Statements
Note 1 Segment Information 49
Note 2 Adoption of New Accounting Standards 51
Note 3 Income Per Common Share 51
Note 4 Acquisition of Monterey Resources 52
Note 5 Inventories 52
Note 6 Investments and Advances 52
Note 7 Properties, Plant and Equipment 55
Note 8 Foreign Currency 55
Note 9 Taxes 56
Note 10 Short-Term Debt, Long-Term Debt, Capital Lease Obligations
and Related Derivatives 57
Note 11 Lease Commitments and Rental Expense 59
Note 12 Employee Benefit Plans 60
Note 13 Stock Incentive Plan 63
Note 14 Preferred Stock and Rights 64
Note 15 Financial Instruments 65
Note 16 Other Financial Information, Commitments and Contingencies 67
Report of Management 69
Report of Independent Public Accountants 69
Supplemental Oil and Gas Information 70
Supplemental Market Risk Disclosures 76
Selected Financial Data
Selected Quarterly Financial Data 77
Five-Year Comparison of Selected Financial Data 78
Investor Information 81
<PAGE>
24 TEXACO 1998 ANNUAL REPORT
Management's Discussion and Analysis
Introduction
In 1996, the Securities and Exchange Commission (SEC) issued plain English
guidelines to improve shareholder communications. In 1997, we were the first
major energy company to begin writing our Management's Discussion and Analysis
(MD&A) in plain English. This year we continue to expand the use of plain
English.
We were the first major energy company to write our MD&A in plain English.
In the MD&A, we explain the operating results and general financial condition of
our company. The MD&A begins with a table of financial highlights that provides
a financial picture of the company. The remainder of our MD&A consists of four
main topics: Industry Review, Results of Operations, Analysis of Income by
Operating Segments and Other Items.
In the Industry Review, we discuss the economic factors that affected our
industry in 1998. We also provide our near-term outlook for the industry.
In the Results of Operations, we compare and describe changes in
consolidated revenues, costs, expenses and income taxes. Summary schedules,
showing results before and after special items, complete this section. Special
items are significant events that affect our results but are outside the scope
of normal current-year operations.
In the Analysis of Income by Operating Segments, we show and discuss our
operating segments: Exploration and Production (Upstream), Manufacturing,
Marketing and Distribution (Downstream) and Global Gas Marketing. We also show
and discuss Other Business Units and our Corporate/Non-operating results. Our
discussion focuses on major business factors affecting our results.
In the Other Items section, we discuss other important items:
o Liquidity and Capital Resources: Our program to manage cash, working
capital and debt and other actions that provide us financial flexibility
o Capital and Exploratory Expenditures: Our program to invest in our
business, especially in projects aimed at future growth
o Environmental Matters: A discussion about our expenditures relating to
protection of the environment
o New Accounting Standards: A description of new accounting standards to be
adopted
o Euro Conversion: The status of our program to convert to the new euro
currency
o Year 2000: The status of our program to identify and correct our computers,
software and related technologies to be year 2000 compliant
- --------------------------------------------------------------------------------
Our discussions in the MD&A and other sections of this Annual Report contain
forward-looking statements that are based upon our best estimate of the trends
we know about or anticipate. Actual results may be different from our estimates.
We have described in our 1998 Annual Report on Form 10-K the factors that could
change these forward-looking statements.
<PAGE>
TEXACO 1998 ANNUAL REPORT 25
Financial Highlights
<TABLE>
<CAPTION>
(Millions of dollars, except per share and ratio data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 31,707 $ 46,667 $ 45,500
Income before special items and cumulative effect of accounting change $ 894 $ 1,894 $ 1,665
Special items (291) 770 353
Cumulative effect of accounting change (25) -- --
---------------------------------------
Net income $ 578 $ 2,664 $ 2,018
Diluted income per common share (dollars)
Income before special items and cumulative effect
of accounting change $ 1.59 $ 3.45 $ 3.03
Special items (.55) 1.42 .65
Cumulative effect of accounting change (.05) -- --
---------------------------------------
Net income $ .99 $ 4.87 $ 3.68
Cash dividends per common share (dollars) $ 1.80 $ 1.75 $ 1.65
Total assets $ 28,570 $ 29,600 $ 26,963
Total debt $ 7,291 $ 6,392 $ 5,590
Stockholders' equity $ 11,833 $ 12,766 $ 10,372
Current ratio 1.07 1.07 1.24
Return on average stockholders' equity* 4.9% 23.5% 20.4%
Return on average capital employed before special items* 6.5% 13.0% 12.8%
Return on average capital employed* 5.0% 17.3% 14.9%
Total debt to total borrowed and invested capital 36.8% 32.3% 33.6%
============================================================================================================================
</TABLE>
*Returns for 1998 exclude the cumulative effect of accounting change (see Note 2
to the financial statements).
Industry Review
Introduction
Crude oil prices have a major effect on our financial performance. The price of
crude oil is determined in the international market by the often complex
interaction of worldwide petroleum demand and supply. In 1998, crude oil prices
were driven down by several factors which influenced demand and supply. These
included economic activity, weather patterns and actions of the Organization of
Petroleum Exporting Countries (OPEC). For 1998, WTI crude oil prices averaged
$14.39 per barrel, or about 30% below the 1997 average.
Review of 1998
In 1998, the world experienced a severe economic crisis. Global economic growth
averaged a meager 1.6%, significantly below the 4% growth recorded in 1997 and
1996.
Economic activity varied widely among regions, with many Asian countries
hit the hardest. Japan, the world's second-largest economy, experienced its
worst downturn in the post-war period, caused by a collapse in consumer and
investor confidence and severe banking problems. Several of developing Asia's
key economies, including Indonesia, Hong Kong, Korea, Malaysia, Singapore and
Thailand also plunged into recession, crippled by a regional financial crisis
which began in July 1997.
The financial turbulence eventually spread to Russia and Latin America.
Russia's economy registered a steep decline. In Latin America, the heightened
financial uncertainty ultimately pushed the large Brazilian economy into
recession, and slowed growth in other Latin American countries. Moreover, weak
commodity prices -- attributable in part to the slowdown in Asia -- curtailed
economic growth in other areas, particularly the oil producing countries of the
Middle East and Africa.
In sharp contrast to the areas experiencing economic recession or
stagnation, the U.S. and Western Europe enjoyed favorable economic conditions.
U.S. growth remained robust as the economy benefited from lower interest rates,
and Western Europe showed an improvement because of higher consumer spending.
<PAGE>
26 TEXACO 1998 ANNUAL REPORT
Economic activity has a major effect on petroleum consumption. The
deterioration in major portions of the global economy resulted in a substantial
reduction in oil demand growth, which increased by only about 400,000 barrels
per day (BPD) or 0.5% during 1998. This represents a dramatic slowing from the
roughly 2 million BPD growth which occurred in both 1997 and 1996. Demand in
Asia suffered the largest decline, about 500,000 BPD. This was a significant
development, since growth in Asia had accounted for about half of the total
worldwide increase in recent years. Moreover, warm weather at both the beginning
and end of 1998 constrained oil consumption in the U.S. and Western Europe.
Crude oil prices were further weakened by significant increases in
petroleum supplies early in 1998. Specifically:
o OPEC countries set new, higher production quotas in late 1997 and proceeded
to exceed them
o U.N.-sanctioned crude oil exports from Iraq increased sharply
o Production from non-OPEC countries also increased
These actions led to a large increase in worldwide petroleum inventories.
By mid-1998, OPEC, Mexico and a few other non-OPEC producers agreed to reduce
their combined oil production by about 3 million BPD. Yet, in the face of lower
demand, this attempt to improve the growing market imbalance did not prevent the
slide in world oil prices. The market price of West Texas Intermediate (WTI)
crude oil slipped from an average of about $16.70 per barrel in January to
$11.30 per barrel during December.
ITEM 1
TEXACO'S U.S. REALIZED CRUDE OIL PRICE PER BARREL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 1.]
- --------------------------------------------------------------------------------
In addition to lower worldwide crude oil prices, warmer than normal weather and
excess capacity caused natural gas prices in the U.S. to decline almost 20%.
Near-Term Outlook
We have begun to see signs of stabilization in the global economic crisis,
prompted by various steps taken by the U.S. and other industrialized countries,
including:
o The cutting of interest rates by the U.S. Federal Reserve and other central
banks
o An increase in the International Monetary Fund's loanable resources by more
than $90 billion
o A significant financial rescue package for Brazil
o Japanese banking reform legislation and implementation of fiscal measures
to stimulate the economy
Although there are some preliminary indications that the troubled economies of
Asia may be bottoming-out, improvements in the region could be partly offset by
slower expansions in the U.S., Western Europe and Latin America. In addition,
the Russian economy shows no signs of a near-term turnaround. Accordingly, we
anticipate only a 1.7% increase in world economic output in 1999.
These elements point to a continued weak oil market in 1999. OPEC's
production cuts are due to expire in June, and it is unsure if they will be
expanded, or even extended. In the absence of additional large-volume production
reductions, high worldwide petroleum inventories are likely to constrain any
significant recovery in oil prices through at least mid-1999.
Results of Operations
Revenues
Our consolidated worldwide revenues were $31.7 billion in 1998, $46.7 billion in
1997 and $45.5 billion in 1996. Approximately 80% of the decrease in 1998
resulted from the accounting for Equilon, a downstream joint venture in the
United States we formed in January 1998. Under accounting rules, the significant
revenues of the operations we contributed to this joint venture are no longer
included in our consolidated revenues. Revenues, costs and expenses of the joint
venture are reported net as "equity in income of affiliates" in our income
statement.
Sales Revenues -- Price/Volume Effects
Our sales revenues decreased in 1998 due to historically low commodity prices
throughout our global markets. Crude oil, natural gas and refined product prices
were all lower. Partly offsetting lower sales revenue due to declining prices
were higher volumes. We continue to expand our production and sales volumes
through successful capital investments and focused market expansion. Worldwide
production in
<PAGE>
TEXACO 1998 ANNUAL REPORT 27
1998 increased by 9% following an increase of 6% in 1997. These increases span
our global areas of operations including the United States, the U.K. and the
Partitioned Neutral Zone. Refined product sales growth included expanded
activities in Latin America and Europe. We also expanded our aviation, marine
and other refined product trading activities in the U.S., which are handled
outside the joint ventures. Natural gas sales also grew as we expanded our
marketing activities in the United States.
Other Revenues
Other revenues include our equity in the income of affiliates, income from asset
sales and interest income. Results for 1998 show a decrease in other revenues.
Equity in income of affiliates decreased in 1998, mostly due to a decline in
Caltex' results and special charges recorded by several of our affiliates. This
decline was partly offset by the inclusion of results for Equilon. Income from
asset sales was also lower in 1998. In 1997 we sold a 15% interest in the U.K.
North Sea Captain field and our upstream interests in Myanmar.
Costs and Expenses
Costs and expenses from operations were $30.5 billion in 1998, $42.9 billion in
1997 and $42.0 billion in 1996. Similar to the explanation of revenues, the
decrease for both costs and expenses for 1998 is largely due to the equity
accounting treatment for our joint venture company, Equilon. The impact of lower
prices, which reduced our cost of goods sold, was partly offset by higher
purchased volumes.
Special items recorded by our subsidiaries increased costs and operating
expenses in 1998 by $382 million. Principal charges were for inventory valuation
adjustments, asset write-downs and employee separation costs. Inventory
valuation adjustments to reflect lower market prices for crude oil and refined
products increased costs by $99 million.
Asset write-downs, which increased depreciation expense by $150 million,
resulted from impairments primarily in our upstream operations. These and other
asset impairments that we have recognized since initially applying the
provisions of SFAS 121 have been driven by specific events, such as the sale of
properties or downward revisions in underground reserve quantities, not changes
in prices used to calculate future revenues by year. In performing our
impairment reviews of assets not held for sale, we use our best judgment in
estimating future cash flows. This includes our outlook of commodity prices
based on our view of supply and demand forecasts and other economic indicators.
Our present outlook is that prices will recover from their low levels that
existed at the end of 1998. If in the future we change this view, asset
impairments may result.
Employee separation costs increased our other expenses by approximately
$133 million. In the fourth quarter of 1998, we announced reorganizations for
several of our operations and began implementing other cost-cutting initiatives
to reduce costs and improve focus in growth areas. As a result, we accrued for
employee severance costs. The principal units affected were our worldwide
upstream operations, our North America natural gas operations, our marketing
operations in the U.K. and Brazil, our manufacturing operations in Panama, and
our corporate center. We expect that the reorganizations and other initiatives
will be substantially completed by the end of the first quarter of 1999. For
additional information, see Note 12 to the financial statements.
Special charges in 1997 were $136 million principally for asset write-downs
and royalty litigation issues, and $152 million in 1996 for employee separation
and litigation matters.
Interest expense for 1998 increased due to higher average debt levels after
a slight decrease in 1997.
During 1998 we kept tight control over expenses as we continued to grow our
business. Our success is illustrated by the chart below.
ITEM 2
CASH EXPENSES PER BARREL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 2.]
In 1998, we targeted about $650 million in annual pre-tax cost savings through
the year 2000.
<PAGE>
28 TEXACO 1998 ANNUAL REPORT
Income Taxes
Income tax expense was $98 million in 1998, $663 million in 1997 and $965
million in 1996. The decrease in 1998 is mostly due to lower income. The year
1997 included a $488 million benefit for an IRS settlement. The years 1998 and
1996 included benefits of $43 million and $188 million from the sales of
interests in a subsidiary.
Income Summary Schedules
The following schedules show results before and after special items and before
the cumulative effect of accounting change. A full discussion of special items
is included in our Analysis of Income by Operating Segments.
Income (loss)
<TABLE>
<CAPTION>
(Millions of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before special items
and cumulative effect of accounting change $ 894 $ 1,894 $ 1,665
- -------------------------------------------------------------------------------------------
Special items:
Inventory valuation adjustments (142) -- --
Asset write-downs (93) (41) --
Employee separation costs (80) -- (65)
Caltex reorganization (43) -- --
U.S. joint venture formation issues (21) -- --
Gains on major asset sales 20 367 194
Tax benefits on asset sales 43 -- 188
Tax and other issues 25 444 36
-----------------------------
Total special items (291) 770 353
- -------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change $ 603 $ 2,664 $ 2,018
===========================================================================================
</TABLE>
The following schedule further details our results:
- --------------------------------------------------------------------------------
Income (loss)
<TABLE>
<CAPTION>
Before Special Items After Special Items
-------------------------- ---------------------------
(Millions of dollars) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exploration and production
U.S $ 381 $ 1,038 $ 1,074 $ 301 $ 990 $ 1,074
International 172 474 466 120 807 493
---------------------------------------------------------------
Total 553 1,512 1,540 421 1,797 1,567
- ------------------------------------------------------------------------------------------------------------------------------------
Manufacturing, marketing and distribution
U.S 278 311 236 223 324 210
International 503 524 249 332 508 447
---------------------------------------------------------------
Total 781 835 485 555 832 657
- ------------------------------------------------------------------------------------------------------------------------------------
Global gas marketing (35) (43) 34 (18) (43) 34
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,299 2,304 2,059 958 2,586 2,258
- ------------------------------------------------------------------------------------------------------------------------------------
Other business units 7 5 10 7 5 10
Corporate/Non-operating (412) (415) (404) (362) 73 (250)
---------------------------------------------------------------
Income before cumulative effect of accounting change $ 894 $ 1,894 $ 1,665 $ 603 $ 2,664 $ 2,018
====================================================================================================================================
</TABLE>
Analysis of Income by Operating Segments
Upstream
In our upstream business, we explore for, find, produce and sell crude oil,
natural gas liquids and natural gas.
Our upstream operations were significantly challenged in 1998, due to lower
crude oil and natural gas prices. The following discussion will focus on how the
low-price environment and other business factors affected our earnings. We will
present our U.S. and international results and conclude our discussion with some
forward-looking comments. The U.S. results include some minor Canadian
operations which were sold in December 1998.
<PAGE>
TEXACO 1998 ANNUAL REPORT 29
United States Upstream
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income before special items $ 381 $ 1,038 $ 1,074
- ------------------------------------------------------------------------------------------------------------------------------------
Special items:
Asset write-downs (51) (31) --
Employee separation costs (29) -- --
Gains on major asset sales -- 26 --
Tax and other issues -- (43) --
----------------------------------------------
Total special items (80) (48) --
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income $ 301 $ 990 $ 1,074
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Net production
Crude oil and NGL (thousands of barrels a day) 433 396 388
Natural gas available for sale (millions of cubic feet a day) 1,679 1,706 1,675
Average realized crude price (dollars per barrel) $ 10.60 $ 17.34 $ 17.93
Average realized natural gas price (dollars per MCF) $ 2.00 $ 2.37 $ 2.19
Exploratory expenses (millions of dollars) $ 257 $ 189 $ 153
Production costs (dollars per barrel) $ 4.07 $ 3.94 $ 3.82
Return on average capital employed before special items 6.0% 21.2% 23.7%
Return on average capital employed 4.8% 20.2% 23.7%
====================================================================================================================================
</TABLE>
What happened in the United States?
Business Factors
PRICES Lower prices in 1998 reduced earnings by $647 million. Our average
realized crude oil price decreased 39% to $10.60 per barrel. This follows a 3%
decrease in 1997. In 1998, crude oil prices plummeted to over 20 year lows in
the fourth quarter. Our average realized natural gas price decreased 16% in 1998
to $2.00 per MCF. This follows an 8% increase in 1997.
PRODUCTION Our production increased 5% in 1998. This follows a 2% increase in
1997. The increases are due to the acquisition of heavy oil producer Monterey
Resources in November 1997. We also had new production in the Gulf of Mexico and
higher production from our Kern River field in California. These production
increases more than offset natural field declines. Our production increased 5%
in 1998 while the U.S. industry average decreased 3%.
ITEM 3
U.S. PRODUCTION
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 3.]
- --------------------------------------------------------------------------------
EXPLORATORY EXPENSES We expensed $257 million on exploratory activity in 1998,
an increase of 36%. In 1998, we continued to focus our exploration efforts in
Texas, Louisiana, California and offshore opportunities in the Gulf of Mexico.
In 1997, we began spending more money in these areas, contributing to the
increase over 1996.
<PAGE>
30 TEXACO 1998 ANNUAL REPORT
Other Factors
Our production costs per barrel have increased over the last two years. This
increase is due to higher depreciation expenses and production costs associated
with the acquired Monterey properties. However, applying our enhanced oil
recovery techniques to the acquired Monterey fields has reduced cash lifting
costs for these properties by over $1 per barrel.
ITEM 4
U.S. PRODUCTION COSTS PER BARREL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 4.]
Special Items
Results for 1998 included asset write-downs of $51 million for impaired
properties in Louisiana and Canada and $29 million for employee separation
costs.
The employee separation costs result from our announced worldwide
restructuring which should be completed by the end of the first quarter of 1999.
This restructuring is expected to yield significant annual cost savings.
The impaired Louisiana property represents an unsuccessful enhanced
recovery project. We determined in the fourth quarter of 1998 that the carrying
value of this property exceeded future undiscounted cash flows. Fair value was
determined by discounting expected future cash flows. The Canadian properties
were impaired following our decision in October 1998 to exit the upstream
business in Canada. These properties were written down to their sales price with
the sale closing in December 1998.
Results for 1997 included a charge of $31 million for asset write-downs, a
gain of $26 million from the sale of gas properties in Canada and a $43 million
charge for expense accruals associated with royalty and tax issues.
- --------------------------------------------------------------------------------
International Upstream
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income before special items $ 172 $ 474 $ 466
- ------------------------------------------------------------------------------------------------------------------------------------
Special items:
Asset write-downs (42) (10) --
Employee separation costs (10) -- --
Gains on major asset sales -- 328 --
Tax and other issues -- 15 27
------------------------------------------
Total special items (52) 333 27
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income $ 120 $ 807 $ 493
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Net production
Crude oil and NGL (thousands of barrels a day) 497 437 399
Natural gas available for sale (millions of cubic feet a day) 548 471 382
Average realized crude price (dollars per barrel) $ 11.20 $ 17.64 $ 19.55
Average realized natural gas price (dollars per MCF) $ 1.62 $ 1.66 $ 1.79
Exploratory expenses (millions of dollars) $ 204 $ 282 $ 226
Production costs (dollars per barrel) $ 3.74 $ 4.30 $ 4.47
Return on average capital employed before special items 5.5% 17.9% 19.1%
Return on average capital employed 3.9% 30.5% 20.2%
====================================================================================================================================
</TABLE>
<PAGE>
TEXACO 1998 ANNUAL REPORT 31
WHAT HAPPENED IN THE INTERNATIONAL AREAS?
Business Factors
PRICES Lower prices reduced 1998 earnings by $503 million. Our average realized
crude oil price decreased 37% to $11.20 per barrel. This follows a 10% decrease
in 1997. This trend of lower prices began in late 1997 and continued throughout
1998 with prices dropping to over 20 year lows in the fourth quarter. Our
average realized natural gas price decreased 2% in 1998 to $1.62 per MCF. This
follows a 7% decrease in 1997.
PRODUCTION Our production had double-digit growth over the last two years. The
1998 increase is attributable to a full year's production in the U.K. North Sea
from the Captain and Erskine fields and new production from the Galley field.
Combined production from these fields averaged 78 thousand
barrels-of-oil-equivalent per day in 1998. Production also grew in the
Partitioned Neutral Zone and Indonesia. Our natural gas production at the
Dolphin field in Trinidad and from the Chuchupa field offshore Colombia also
contributed to our production growth over the last two years. Our 1998
production increased 14% following an 11% increase in 1997.
ITEM 5
INTERNATIONAL PRODUCTION
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 5.]
- --------------------------------------------------------------------------------
EXPLORATORY EXPENSES We expensed $204 million on exploration activity in 1998, a
decrease of 28%. During the last half of 1998 we slowed activities in the Far
East. However, we continued our initiatives to increase future production as we
focused on new prospects in the U.K. North Sea and West Africa.
ITEM 6
INTERNATIONAL EXPLORATORY EXPENSES
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 6.]
- --------------------------------------------------------------------------------
Other Factors
Our production costs per barrel for 1998 were $3.74, down 13%. As we raised
production and maintained control of expenses, our costs per barrel decreased.
Operating results included non-cash currency translation effects. Years
1998 and 1996 included charges of $2 million and $38 million while 1997 included
a benefit of $21 million. These effects are derived from our British pound
deferred income tax liability. When the pound strengthens against the U.S.
dollar, we recognize a charge and when the pound weakens we experience a
benefit.
ITEM 7
INTERNATIONAL PRODUCTION COSTS PER BARREL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 7.]
- --------------------------------------------------------------------------------
Special Items
Results for 1998 included a write-down of $42 million for the impairment of our
investment in the Strathspey field in the U.K. North Sea and employee separation
costs of $10 million from an announced restructuring which is expected to yield
annual cost savings.
The Strathspey impairment was caused by a downward revision in the fourth
quarter of 1998 of the estimated volume of the field's proved reserves. Fair
value was determined by discounting expected future cash flows.
<PAGE>
32 TEXACO 1998 ANNUAL REPORT
Results for 1997 included a $10 million charge for asset write-downs and
gains on asset sales of $328 million. These sales included a 15% interest in the
Captain field in the U.K. and investments in an Australian pipeline system and
the company's Myanmar operations. Also, 1997 included a $15 million prior period
tax benefit. Results for 1996 included a non-cash gain of $27 million for a
Danish deferred tax benefit.
LOOKING FORWARD IN THE WORLDWIDE UPSTREAM
We will continue to cost-effectively explore for, develop and produce crude oil
and natural gas reserves. Our areas of focus include:
o The Gulf of Mexico where we hold a significant inventory of valuable
exploration and development acreage
o Areas rich in heavy oil reserves, where we will apply our world class
enhanced oil recovery techniques
o In the U.K. North Sea, where several fields are slated to phase in
production in the years 1999 - 2001
o In Kazakhstan, where we have a 20% interest in the Karachaganak oil and gas
field
o In West Africa, where we recently announced a major oil discovery offshore
Nigeria, and in Latin America
We expect $200 million in annual pre-tax cost savings from our recent upstream
restructuring.
Downstream
In our downstream business, we refine, transport and sell crude oil and
products, such as gasoline, fuel oil and lubricants.
Our U.S. downstream includes operations in the Equilon area and the Motiva
area. The Equilon area includes western and midwestern refining and marketing
operations, and nationwide trading, transportation and lubricants activities.
Our 1998 results in this area are our share of the earnings of our joint venture
with Shell, named Equilon, which began operations on January 1, 1998. We have a
44% interest in Equilon. Results for 1997 and 1996 are for our subsidiary
operations in this same area. The Motiva area includes eastern and Gulf Coast
refining and marketing operations. Our 1998 results are, for the last half of
the year, our share of the earnings of our joint venture with Shell and Saudi
Refining, Inc., named Motiva, which began operations on July 1, 1998. We have a
32.5% interest in Motiva. Results for the first half of 1998 and the years 1997
and 1996 are for our share of our joint venture with Saudi Refining, Inc., named
Star. We had a 50% interest in Star.
Internationally, our downstream operations are reported separately as Latin
America and West Africa and Europe. We also have a 50% joint venture with
Chevron named Caltex which operates in Africa, Asia, Australia, the Middle East
and New Zealand.
In the U.S. and international operations, we also have other businesses,
which include aviation and marine product sales and other refined product
trading activity.
We will present our U.S. and international results and conclude our
discussion with some forward-looking comments.
- --------------------------------------------------------------------------------
United States Downstream
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income before special items $ 278 $ 311 $ 236
- ----------------------------------------------------------------------------------------
Special items:
Inventory valuation adjustments (34) -- --
Employee separation costs -- -- (1)
U.S. joint venture formation issues (21) -- --
Gains (losses) on major asset sales -- 13 (25)
-------------------------------
Total special items (55) 13 (26)
- ----------------------------------------------------------------------------------------
Operating income $ 223 $ 324 $ 210
- ----------------------------------------------------------------------------------------
Selected Operating Data:
Refinery input (thousands of barrels a day) 698 747 724
Refined product sales (thousands of barrels a day) 1,203 1,022 1,036
Return on average capital employed before special items 9.6% 9.8% 7.4%
Return on average capital employed 7.7% 10.2% 6.6%
========================================================================================
</TABLE>
<PAGE>
TEXACO 1998 ANNUAL REPORT 33
WHAT HAPPENED IN THE UNITED STATES?
Equilon Area These operations contributed 79% of our 1998 operating income
before special items. The 1998 earnings were flat when compared with 1997.
Strong transportation and lubricants earnings as well as cost and expense
reductions were offset by the effects of significant downtime at certain
refineries, lower margins and interest expense. Refined product sales volumes
increased. This includes a 4% growth in Texaco branded gasoline sales. We
achieved higher results for 1997 from improved refining margins, better
run-rates at our refineries and effective cost cutting. In 1996, increased crude
oil costs late in the year sent margins downward from a second quarter peak.
Motiva Area These operations contributed 21% of our 1998 operating income before
special items. The 1998 earnings were lower due to refinery downtime coupled
with lower refining margins. Refined product sales were higher as a result of
our new joint venture and an increase in Texaco branded gasoline sales of 2%.
The year 1997 benefited from improved Gulf Coast refining margins while 1996
earnings were adversely affected by refinery disruptions that lowered yields.
Special Items Results for 1998 included a charge for inventory valuation
adjustments of $34 million to reflect lower market prices for crude oil and
refined products and a net charge of $21 million for U.S. alliance formation
issues. This net charge includes charges of $52 million for employee separations
and $45 million for asset write-downs of closed facilities and surplus equipment
and other expenses. Also included in other net charges were gains of $76 million
for the Federal Trade Commission-mandated sales of the Anacortes refinery and
Plantation pipeline. Results for 1997 included a gain of $13 million from the
sale of our credit card business. Results for 1996 included charges of $26
million primarily related to the sale of a propylene oxide/methyl tertiary butyl
ether (PO/MTBE) manufacturing site in Texas.
- --------------------------------------------------------------------------------
International Downstream
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income before special items $ 503 $ 524 $ 249
- -----------------------------------------------------------------------------------------
Special items:
Inventory valuation adjustments (108) -- --
Employee separation costs (20) -- (21)
Caltex reorganization (43) -- --
Gains on major asset sales -- -- 219
Tax and other issues -- (16) --
-------------------------------
Total special items (171) (16) 198
- -----------------------------------------------------------------------------------------
Operating income $ 332 $ 508 $ 447
- -----------------------------------------------------------------------------------------
Selected Operating Data:
Refinery input (thousands of barrels a day) 832 804 762
Refined product sales (thousands of barrels a day) 1,685 1,563 1,552
Return on average capital employed before special items 8.1% 8.9% 4.5%
Return on average capital employed 5.3% 8.7% 8.0%
=========================================================================================
</TABLE>
WHAT HAPPENED IN THE INTERNATIONAL AREAS?
Latin America and West Africa Our operations in Latin America and West Africa
contributed 63% of 1998 operating income before special items. Refined product
sales volumes increased due to service station acquisitions and the expansion
of our industrial customer base. We also realized improved refinery operations
in Panama. In 1997, earnings increased due to higher refining margins and a
growth in product sales volumes.
Europe Our European operations contributed 25% of 1998 operating income before
special items. Earnings increased significantly from improved refining and
marketing margins. Additionally, we grew our refined product sales volumes by
increasing retail outlets and obtaining new commercial business. In 1997,
earnings increased as general industry conditions improved from the historically
low levels experienced in 1996.
<PAGE>
34 TEXACO 1998 ANNUAL REPORT
Results for 1998 and 1996 included non-cash currency charges of $3 million
and $20 million related to deferred income taxes that are denominated in British
pounds while 1997 had a $7 million benefit.
Caltex Our Caltex operations contributed 9% of 1998 operating income before
special items. In 1998, our share of Caltex' results was $163 million lower. The
dramatic earnings decline was due to currency-related losses in 1998 versus
gains in 1997. The year-to-year earnings decline due to currency effects was
$204 million. Excluding currency effects, Caltex' results in 1998 improved as
both margins and volumes were higher. This improvement was accomplished in spite
of the economic downturn experienced by many Asian economies. Our share of
Caltex' results in 1997, excluding currency-related gains of $101 million, was
basically unchanged from 1996. Strong operational results in the first nine
months of 1997 eroded in the fourth quarter due to the economic crisis in
Southeast Asia.
In the Caltex area, most of our operations have a net liability exposure
which creates currency losses when foreign currencies strengthen against the
U.S. dollar and currency gains when these currencies weaken against the U.S.
dollar. Effective October 1, 1997, Caltex changed the functional currency used
to account for operations in Korea and Japan to the U.S. dollar.
ITEM 8
INTERNATIONAL REFINERY INPUT
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 8.]
- --------------------------------------------------------------------------------
Special Items Results for 1998 included a charge for inventory valuation
adjustments of $108 million to reflect lower market prices for crude oil and
refined products, employee separation costs of $20 million associated with
various cost-cutting initiatives, mostly in the U.K., Panama and Brazil, and a
charge of $43 million for a reorganization program in Caltex.
The Caltex charge results from their decision to structure their
organization along functional lines and to reduce costs by establishing a shared
service center in the Philippines. In implementing this change, Caltex will
relocate its headquarters from Dallas to Singapore. About $35 million of the
charge relates to severance and other retirement benefits for about 200
employees not relocating, write-downs of surplus furniture and equipment and
other costs. The balance of the charge is for severance costs in other affected
areas and amounts spent in relocating employees to the new shared service
center.
Results for 1997 included a charge of $16 million primarily for a European
deferred tax adjustment. Results for 1996 included a charge for employee
separations of $21 million and a gain of $219 million related to the sale of
Caltex' interest in Nippon Petroleum Refining Company, Limited.
LOOKING FORWARD IN THE WORLDWIDE DOWNSTREAM
We anticipate that our joint ventures with Shell and Saudi Refining, Inc. will
continue to lower costs and capture synergies. Our share of these annual pre-tax
cost reductions is expected to be over $300 million. We will continue to expand
in Latin America. In addition, our share of the annual pre-tax cost savings from
the Caltex reorganization is expected to be $25 million.
Global Gas Marketing
<TABLE>
<CAPTION>
(Millions of dollars, except as indicated) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income (loss)
before special items $ (35) $ (43) $ 34
- -----------------------------------------------------------------------------------
Special items:
Employee separation costs (3) -- --
Gain on major asset sales 20 -- --
-----------------------------
Total special items 17 -- --
- -----------------------------------------------------------------------------------
Operating income (loss) $ (18) $ (43) $ 34
- -----------------------------------------------------------------------------------
Natural gas sales (millions
of cubic feet per day) 3,764 3,452 2,937
===================================================================================
</TABLE>
Global gas marketing purchases natural gas and natural gas products from our
upstream operations and others for resale, and operates natural gas processing
plants and pipelines in the United States.
<PAGE>
TEXACO 1998 ANNUAL REPORT 35
Our global gas marketing results in both 1998 and 1997 were adversely
affected by losses associated with our start-up wholesale and retail marketing
activities in the United Kingdom. We exited the U.K. wholesale gas marketing
business in October 1998. Weak natural gas and natural gas liquids margins in
the U.S. also contributed to the poor results. Milder than normal temperatures
reduced demand and squeezed margins. In 1996, natural gas marketing margins in
the U.S. were strong, especially in the first quarter.
Special Items Results for 1998 included employee separation costs of $3 million
associated with an announced restructuring and a gain of $20 million on the sale
of an interest in our Discovery pipeline affiliate. The restructuring is
expected to yield annual pre-tax cost savings of $20 million.
LOOKING FORWARD IN GLOBAL GAS MARKETING
Operations will focus on more profitable trading markets. We will also exit the
retail gas marketing business in the United Kingdom.
Other Business Units
(Millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Operating income $ 7 $ 5 $ 10
================================================================================
Our other business units include insurance activity and power generation and
gasification operations. There were no significant items in our three-year
results.
Corporate/Non-operating
(Millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Results before special items $(412) $(415) $(404)
- --------------------------------------------------------------------------------
Special items:
Employee separation costs (18) -- (43)
Tax benefits on asset sales 43 -- 188
Tax and other issues 25 488 9
--------------------------------
Total special items 50 488 154
- --------------------------------------------------------------------------------
Total Corporate/
Non-operating $(362) $ 73 $(250)
================================================================================
Corporate/Non-operating includes our corporate center and financing activities.
Over the last three years, our corporate and non-operating results before
special items have been relatively flat. The year 1998 includes lower overhead
and tax expense as well as higher interest income mostly offset by interest
expense from higher average debt levels.
Special Items Results for 1998 included a charge of $18 million for employee
separation costs associated with our corporate center reorganization and other
cost-cutting initiatives which are expected to reduce annual pre-tax costs by
$60 million. Also included in 1998 results are tax benefits of $43 million for
the sales of interests in a subsidiary and a benefit of $25 million to adjust
for prior years' federal tax liabilities. The year 1997 included a tax benefit
of $488 million for an IRS settlement. Results for 1996 included a charge of $43
million for employee separation costs, a tax benefit of $188 million from the
sale of an interest in a subsidiary, a tax benefit of $41 million from adjusting
prior years' state tax expenses, and a charge of $32 million for expense
accruals for litigation issues.
Other Items
Liquidity and Capital Resources
INTRODUCTION The Statement of Consolidated Cash Flows on page 45 reports the
changes in cash balances for the last three years, and summarizes the inflows
and outflows of cash between operating, investing and financing activities. Our
cash-requirement strategy is to rely on cash from operations, supplemented by
outside borrowings and the proceeds from the sale of non-strategic assets.
The main components of cash flows are:
INFLOWS Cash from operating activities represents net income adjusted for
non-cash charges or credits, such as depreciation, depletion and amortization,
and changes in working capital and other balances. Cash from operating
activities excludes exploratory expenses, which we show as an investing
activity. In 1998, cash from operating activities of $2,544 million is
significantly lower than the prior year primarily due to lower prices. For more
detailed insight into our financial and operational results, see Analysis of
Income by Operating Segments on the preceding pages.
Net new borrowings in 1998 were $1,052 million compared to $498 million in
1997. Our strong cash management policies have provided us with the resources to
obtain cash necessary to supplement our funding requirements when faced with
deteriorating market conditions such as lower crude oil and natural gas prices.
During the year, we borrowed $280 million associated with assets in the U.K.
North Sea, $691 million from our existing "shelf" registrations, including $191
million under our medium-term note program, and $94 million from the issuance of
Zero Coupon Notes in Brazil. We also increased the amount
<PAGE>
36 TEXACO 1998 ANNUAL REPORT
of our commercial paper by $725 million during the year, to a total of $1.6
billion at year-end. See Note 10 to the financial statements for total
outstanding debt, including 1998 borrowings.
After December 31, 1998, we issued an additional $500 million from our
existing "shelf" registration to refinance existing short-term debt.
We maintain strong credit ratings and access to global financial markets
providing us flexibility to borrow funds at low capital costs. Our senior debt
is rated A+ by Standard & Poor's Corporation and A1 by Moody's Investors
Service. Our U.S. commercial paper is rated A-1 by Standard & Poor's and Prime-1
by Moody's. These ratings denote high quality investment grade securities. Our
debt has an average maturity of 10 years and a weighted average interest rate of
7.0%. We also maintain $2.05 billion in revolving credit facilities, which
remain unused, to provide additional support for liquidity and our commercial
paper program.
Cash from affiliates of $612 million was received from Equilon,
representing formation payments. In February 1999, we received $101 million from
Equilon for the payment of notes receivable.
OUTFLOWS Capital and exploratory expenditures (Capex) were $3,101 million in
1998 -- The section on page 37 describes in more detail the uses of our Capex
dollars.
We continue our commitment to return value to our shareholders through a
sustained dividend policy.
Payments of dividends were $1,057 million in 1998 -- $952 million to common,
$53 million to preferred and $52 million to shareholders who hold a minority
interest in Texaco subsidiary companies.
Purchases of common stock were $579 million in 1998 -- In the first quarter of
1998, we purchased $105 million of our common stock. In March 1998, we announced
our intention to purchase up to an additional $1 billion of our common stock,
subject to market conditions, through open market purchases or privately
negotiated transactions. Under this program, we purchased $474 million in the
second and third quarters of 1998. Purchases under this program have been
suspended for an indefinite period.
The following table reflects our key financial indicators:
(Millions of dollars, except as indicated) 1998 1997 1996
- --------------------------------------------------------------------------------
Current ratio 1.07 1.07 1.24
Total debt $ 7,291 $ 6,392 $ 5,590
Average years debt maturity 10 11 12
Average interest rates 7.0% 7.2% 7.5%
Minority interest in
subsidiary companies $ 679 $ 645 $ 658
Stockholders' equity $11,833 $12,766 $10,372
Total debt to total borrowed
and invested capital 36.8% 32.3% 33.6%
OUTLOOK We consider our financial position to be sufficiently strong to meet our
anticipated future financial requirements. Our financial policies and procedures
afford us flexibility to meet the changing landscape of our financial
environment while assuring that the appropriate safeguards are in effect to
provide adequate internal controls for all transactions. Cash required to
service debt maturities in 1999 is projected to be about $500 million, which we
intend to refinance.
While projections for a low price scenario extend through 1999, we feel
that our cash from operating activities, coupled with our borrowing capacity,
will allow us to meet our Capex requirements and continue to provide substantial
return to our shareholders in the form of dividends.
MANAGING MARKET RISK We are exposed to the following types of market risks:
o The price of crude oil, natural gas and petroleum products
o The value of foreign currencies in relation to the U.S. dollar
o Interest rates
<PAGE>
TEXACO 1998 ANNUAL REPORT 37
We enter into arrangements such as futures contracts, swaps and options to
manage our exposure to these risks within established guidelines. Our written
policies for engaging in these transactions limit our exposure and do not allow
for speculation. These arrangements do not expose us to material adverse
effects. See Notes 10, 15 and 16 to the financial statements and Supplemental
Market Risk Disclosures on page 76 for additional information.
Capital and Exploratory Expenditures
1998 ACTIVITY Worldwide capital and exploratory expenditures, including our
share of affiliates, were $4.0 billion for the year 1998, $5.9 billion for 1997
and $3.4 billion in 1996. The year 1997 included the $1.4 billion acquisition of
Monterey Resources Inc., a producing company primarily in California. Excluding
this acquisition, Texaco's expenditures in 1998 reflect the deferral of certain
projects due to the low-price environment. Expenditures were geographically and
functionally split as follows:
ITEM 9
CAPITAL AND EXPLORATORY EXPENDITURES--GEOGRAPHICAL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 9.]
ITEM 10
CAPITAL AND EXPLORATORY EXPENDITURES--FUNCTIONAL
[GRAPHIC/IMAGE/ILLUSTRATION MATERIAL APPEARS HERE.
SEE APPENDIX, ITEM 10.]
- --------------------------------------------------------------------------------
EXPLORATION AND PRODUCTION Significant areas of investment included:
o High-impact development and exploratory projects in the deepwater Gulf of
Mexico
o Enhanced oil recovery spending in California and Indonesia
o Exploratory activity in promising international areas, including Nigeria,
the U.K., Angola and Trinidad
o Development work in the U.K. North Sea, Indonesia and other promising areas
o Continued investments, though at a slowed pace, in Eurasia
MANUFACTURING, MARKETING AND DISTRIBUTION AND OTHER Investments in downstream
facilities included:
o Refining and marketing investments by two newly formed alliances in the
United States
o Marketing expansion throughout promising areas of Latin America
o Investments associated with the Caltex refinery in Thailand
<PAGE>
38 TEXACO 1998 ANNUAL REPORT
The following table details our capital and exploratory expenditures:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
Inter- Inter- Inter-
(Millions of dollars) U.S. national Total U.S. national Total U.S. national Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
Exploratory expenses $ 257 $ 204 $ 461 $ 189 $ 282 $ 471 $ 153 $ 226 $ 379
Capital expenditures
Acquisition of Monterey
Resources Inc. -- -- -- 1,448 -- 1,448 -- -- --
Other 1,182 1,068 2,250 1,406 1,127 2,533 990 902 1,892
- ------------------------------------------------------------------------------------------------------------------------------------
Total exploration and
production 1,439 1,272 2,711 3,043 1,409 4,452 1,143 1,128 2,271
Manufacturing, marketing
and distribution 433 726 1,159 429 848 1,277 357 658 1,015
Global gas marketing 115 -- 115 142 2 144 103 7 110
Other 33 1 34 55 2 57 33 2 35
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2,020 $1,999 $4,019 $3,669 $2,261 $5,930 $1,636 $1,795 $3,431
- ------------------------------------------------------------------------------------------------------------------------------------
Total, excluding affiliates $1,528 $1,496 $3,024 $3,421 $1,718 $5,139 $1,535 $1,338 $2,873
====================================================================================================================================
</TABLE>
1999 AND BEYOND Spending for 1999 is expected to be $3.7 billion. We realize
that future profitability is in large part dependent upon successful investments
today. Even in the current low-price environment, we feel it is important to
continue to prudently allocate capital resources on projects which often have
long lead times and which will generate attractive returns in the future.
In the upstream, development spending will be directed toward projects in
the U.S. deepwater Gulf of Mexico, the U.K. North Sea and Denmark. Major
exploration projects will include Nigeria, Angola and Trinidad. In the
downstream, capital requirements funded by our affiliates Equilon, Motiva and
Caltex, will be slightly lower in 1999. In the European and Latin American
downstream areas, 80% of the expenditures relate to marketing operations. Most
of the manufacturing capital will be spent at the Pembroke plant in the U.K. We
will also increase our capital spending for power generation projects, mostly
through affiliates.
Environmental Matters
The cost of compliance with federal, state and local environmental laws in both
the U.S. and international continues to be substantial. Using definitions and
guidelines established by the American Petroleum Institute, our 1998
environmental spending was $807 million. This includes our equity share in the
environmental expenditures of our major affiliates, Equilon, Motiva and its
predecessor Star, and the Caltex Group of Companies. The following table
provides our environmental expenditures for the past three years:
(Millions of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------
Capital expenditures $175 $162 $185
Non-capital:
Ongoing operations 495 538 561
Remediation 93 79 111
Restoration and
abandonment 44 46 48
------------------------------
Total environmental
expenditures $807 $825 $905
================================================================================
CAPITAL EXPENDITURES
Our spending for capital projects in 1998 was $175 million. These expenditures
were made to comply with clean air and water regulations as well as waste
management requirements. In the United States, reformulated gasoline must meet
more stringent emission requirements in the year 2000. As a result, additional
investments will be made to meet these new standards. Worldwide capital
expenditures projected for 1999 and 2000 are $194 million and $183 million.
ONGOING OPERATIONS
In 1998, environmental expenses charged to current operations were $495 million.
These expenses related largely to the production of cleaner-burning gasoline and
the management of our environmental programs.
<PAGE>
TEXACO 1998 ANNUAL REPORT 39
REMEDIATION
Remediation Costs and Liabilities Our worldwide remediation expenditures in 1998
were $93 million. This included $14 million spent on the remediation of
Superfund waste sites. At the end of 1998, we had liabilities of $468 million
for the estimated cost of our known environmental liabilities. This includes $46
million for the cleanup of Superfund waste sites. We have accrued for these
remediation liabilities based on currently available facts, existing technology
and presently enacted laws and regulations. It is not possible to project
overall costs beyond amounts disclosed due to the uncertainty surrounding future
developments in regulations or until new information becomes available.
Superfund Sites Under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), the U.S. Environmental Protection Agency (EPA) and other
regulatory agencies have identified us as a potentially responsible party (PRP)
for cleanup of hazardous waste sites. We have determined that we may have
potential exposure, though limited in most cases, at 260 multi-party hazardous
waste sites. Of these sites, 73 are on the EPA's National Priority List. Under
Superfund, liability is joint and several, that is, each PRP at a site can be
held liable individually for the entire cleanup cost of the site. We are,
however, actively pursuing the sharing of Superfund costs with other identified
PRP's. The sharing of these costs is on the basis of weight, volume and toxicity
of the materials contributed by the PRP.
RESTORATION AND ABANDONMENT COSTS AND LIABILITIES Expenditures in 1998 for
restoration and abandonment amounted to $44 million. At year-end 1998, accruals
to cover the cost of restoration and abandonment or "closure" of our oil and gas
producing properties were $851 million.
- --------------------------------------------------------------------------------
We make every reasonable effort to fully comply with applicable governmental
regulations. Changes in these regulations as well as our continuous
re-evaluation of our environmental programs may result in additional future
costs. We believe that any mandated future costs would be recoverable in the
marketplace, since all companies within our industry would be facing similar
requirements. However, we do not believe that such future costs will be material
to our financial position or to our operating results over any reasonable period
of time.
New Accounting Standards
Note 2 to the financial statements discusses accounting standards adopted in
1998.
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 establishes new accounting rules and
disclosure requirements for most derivative instruments and for hedging related
to those instruments. We will adopt this Statement effective January 1, 2000 and
are currently assessing the initial effects of adoption.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing legacy currencies and
one common currency -- the euro. The euro began trading on world currency
exchanges and may be used in business transactions. On January 1, 2002, new
euro-denominated bills and coins will be issued, and legacy currencies will be
completely withdrawn from circulation by June 30 of that year.
Our operating subsidiaries affected by the euro conversion have been
actively addressing our computer systems and overall fiscal and operational
activities to ensure our euro readiness. We are adapting our computer, financial
and operating systems and equipment to accommodate euro-denominated
transactions. We are also reviewing our marketing and operational policies and
procedures to ensure our ability to continue to successfully conduct all aspects
of our business in this new, price-transparent market. We believe that the euro
conversion will not have a material adverse impact on our financial condition or
results of operations.
Year 2000
THE PROBLEM The Year 2000 (Y2K) problem concerns the inability of information
and technology based operating systems to properly recognize and process
date-sensitive information beyond December 31, 1999. This could result in
systems failures and miscalculations, which could cause business disruptions.
Equipment that uses a date, such as computers and operating control systems, may
be affected. This includes equipment used by our customers and suppliers, as
well as by utilities and governmental entities that provide critical services to
us.
<PAGE>
40 TEXACO 1998 ANNUAL REPORT
OUR STATE OF READINESS We started working on the Y2K problem in early 1995. By
early 1996, we formed a Business Unit Steering Team and a Corporate Year 2000
Office. Our progress is reported monthly to our Chief Executive Officer, and
quarterly to our Board of Directors. Additionally, we are actively performing
both internal audits and external reviews to ensure that we reach our
objectives.
We recognize that the Y2K issue affects every aspect of our business,
including computer software, computer hardware, telecommunications, industrial
automation and relationships with our suppliers and customers. Our Y2K effort
has included an extensive program to educate our employees, and development of
detailed guidelines for project management, testing and remediation. Each
business unit is periodically graded on their progress toward reaching their
project milestones. Our major affiliates have undertaken similar programs.
In our computers and computer software, most of the problems we have found
involve our corporate financial software applications. Approximately 95% of
these need some type of modification or upgrade. In our industrial automation
systems, which we use in our refinery, lubricant plant, gas plant and oil well
operations to monitor, control and log data about the processes, approximately
5% need modification or upgrade. The majority of these are auxiliary systems,
such as laboratory analyzers and alarm logging functions, but several of the
higher level supervisory data acquisition systems and flow metering systems also
require upgrades.
At the end of 1998, we were approximately 80% through our Y2K efforts of
inventorying, assessing and fixing our systems. Almost all systems should be
ready by the end of the first quarter of 1999, but a few will be delayed until
later in 1999 as we wait for vendor upgrades. If any of these late-scheduled
upgrades are delayed, we will seek alternate vendors or develop contingency
plans, as appropriate. We are also progressing in our reviews with critical
suppliers and customers as to their Y2K state of readiness.
COSTS Because we began early, we have been able to do most of the work
ourselves. This has kept our costs low, and we project that we will spend no
more than $75 million on making our systems Y2K ready. As of December 31, 1998,
we have incurred costs of approximately $37 million.
RISKS Certain Y2K risk factors which could have a material adverse effect on our
results of operations, liquidity and financial condition include, but are not
limited to: failure to identify critical systems which will experience failures,
errors in efforts to correct problems, unexpected failures by key business
suppliers and customers, extended failures by public and private utility
companies or common carriers supplying services to us and failures in global
banking systems and capital markets.
If we have missed a potential Y2K problem, it will most likely be in our
financial software, or in auxiliary systems in our operations, such as
laboratory analyzers and alarm logging functions, where we have found the
majority of the problems. We do not anticipate that a problem in these areas
will have a significant impact on our ability to pursue our primary business
objectives. We routinely analyze all of our production and automation systems
for potential failures and appropriate responses are identified and documented.
Any problems in our primary industrial automation systems can be dealt with
using our existing engineering procedures.
The worst case scenario would be that our failure or failures by our
important suppliers and customers to correct material Y2K problems could result
in serious disruptions in normal business activities and operations. Such
disruptions could prevent us from producing crude oil and natural gas, and
manufacturing and delivering refined products to customers. For example, failure
by a utility company to deliver electricity to our producing operations could
cause us to shut-in production leading to lost sales and income. We do not
expect a worst case scenario. However, if it occurs, Y2K failures, if not
corrected on a timely basis or otherwise mitigated by our contingency plans,
could have a material adverse effect on our results of operations, liquidity and
overall financial condition.
CONTINGENCY PLANS We are well into our program to identify and assess our Y2K
readiness and the Y2K readiness of our critical and important suppliers and
customers. We will either seek alternative suppliers and customers for those we
assess as risky, or we will develop and test contingency plans. We have begun to
develop these contingency plans. In addition, we are reviewing our existing
business resumption plans. We expect to arrange alternative suppliers or develop
and complete the testing of contingency plans no later than July 1, 1999.
<PAGE>
TEXACO 1998 ANNUAL REPORT 41
Description of Significant Accounting Policies
Principals of Consolidation
The consolidated financial statements consist of the accounts of Texaco Inc. and
subsidiary companies owned directly or indirectly more than 50% except when
voting control does not exist. Intercompany accounts and transactions are
eliminated.
The U.S. dollar is the functional currency of all our operations and
substantially all of the operations of affiliates accounted for on the equity
method. For these operations, translation effects and all gains and losses from
transactions not denominated in the functional currency are included in income
currently, except for certain hedging transactions. The cumulative translation
effects for the equity affiliates using functional currencies other than the
U.S. dollar are included in the currency translation adjustment in stockholders'
equity.
Use of Estimates
In preparing Texaco's consolidated financial statements in accordance with
generally accepted accounting principles, we are required to use estimates and
management's judgment. While we have considered all available information,
actual amounts could differ from those reported as assets and liabilities and
related revenues, costs and expenses and the disclosed amounts of contingencies.
Revenues
We recognize revenues for crude oil, natural gas and refined product sales at
the point of passage of title specified in the contract. We record revenues on
forward sales where cash has been received to deferred income until the passage
of title during delivery.
Cash Equivalents
We generally classify highly liquid investments with a maturity of three months
or less when purchased as cash equivalents.
Inventories
We value inventories at the lower of cost or market, after initial recording at
cost. For virtually all inventories of crude oil, petroleum products and
petrochemicals, cost is determined on the last-in, first-out (LIFO) method. For
other merchandise inventories, cost is on the first-in, first-out (FIFO) method.
For materials and supplies, cost is at average cost.
Investments and Advances
We use the equity method of accounting for investments in certain affiliates
owned 50% or less, including corporate joint ventures, limited liability
companies and partnerships. Under this method, we record equity in the pre-tax
income or losses of limited liability companies and partnerships, and in the net
income or losses of corporate joint-venture companies currently in Texaco's
revenues, rather than when realized through dividends or distributions.
We record the net income of affiliates accounted for at cost in net income
when realized through dividends.
We account for investments in debt securities and in equity securities with
readily determinable fair values at fair value if classified as
available-for-sale.
Properties, Plant and Equipment and Depreciation, Depletion and Amortization
We follow the "successful efforts" method of accounting for our oil and gas
exploration and producing operations.
We capitalize as incurred the lease acquisition costs of properties held
for oil, gas and mineral production. We expense as incurred exploratory costs
other than wells. We initially capitalize exploratory wells, including
stratigraphic test wells, pending further evaluation of whether economically
recoverable proved reserves have been found. If such reserves are not found, we
charge the well costs to exploratory expenses. For locations not requiring major
capital expenditures, we record the charge within one year of well completion.
We capitalize intangible drilling costs of productive wells and of development
dry holes, and tangible equipment costs. Also capitalized are costs of injected
carbon dioxide related to development of oil and gas reserves.
We base our evaluation of impairment for properties, plant and equipment
intended to be held on comparison of carrying value against undiscounted future
net pre-tax cash flows, generally based on proved developed reserves. If an
impairment is identified, we adjust the asset's carrying amount to fair value.
We generally account for assets to be disposed of at the lower of net book value
or fair value less cost to sell.
We amortize unproved oil and gas properties, when individually significant,
by property using a valuation assessment. We generally amortize other unproved
oil and gas properties on an aggregate basis over the average holding period,
for the portion expected to be nonproductive. We amortize productive properties
and other tangible and intangible costs of producing activities principally by
field. Amortization is based on the unit-of-production basis by applying the
ratio of produced oil and gas to
<PAGE>
42 TEXACO 1998 ANNUAL REPORT
estimated recoverable proved oil and gas reserves. We include estimated future
restoration and abandonment costs in determining amortization and depreciation
rates of productive properties.
We apply depreciation of facilities other than producing properties
generally on the group plan, using the straight-line method, with composite
rates reflecting the estimated useful life and cost of each class of property.
We depreciate facilities not on the group plan individually by estimated useful
life using the straight-line method. We exclude estimated salvage value from
amounts subject to depreciation. We amortize capitalized nonmineral leases over
the estimated useful life of the asset or the lease term, as appropriate, using
the straight-line method.
We record periodic maintenance and repairs at manufacturing facilities on
the accrual basis. We charge to expense normal maintenance and repairs of all
other properties, plant and equipment as incurred. We capitalize renewals,
betterments and major repairs that materially extend the useful life of
properties and record a retirement of the assets replaced, if any.
When capital assets representing complete units of property are disposed
of, we credit or charge to income the difference between the disposal proceeds
and net book value.
Environmental Expenditures
When remediation of a property is probable and the related costs can be
reasonably estimated, we expense environmentally-related remediation costs and
record them as liabilities. We expense or capitalize other environmental
expenditures, principally maintenance or preventive in nature, as appropriate.
Deferred Income Taxes
We determine deferred income taxes utilizing a liability approach. The income
statement effect is derived from changes in deferred income taxes on the balance
sheet. This approach gives consideration to the future tax consequences
associated with differences between financial accounting and tax bases of assets
and liabilities. These differences relate to items such as depreciable and
depletable properties, exploratory and intangible drilling costs, nonproductive
leases, merchandise inventories and certain liabilities. This approach gives
immediate effect to changes in income tax laws upon enactment.
We reduce deferred income tax assets by a valuation allowance when it is
more likely than not (more than 50%) that a portion will not be realized.
Deferred income tax assets are assessed individually by type for this purpose.
This process requires the use of estimates and judgment, as many deferred income
tax assets have a long potential realization period.
We do not make provision for possible income taxes payable upon
distribution of accumulated earnings of foreign subsidiary companies and
affiliated corporate joint-venture companies when such earnings are deemed to be
permanently reinvested.
Accounting for Contingencies
Certain conditions may exist as of the date financial statements are issued,
which may result in a loss to the company, but which will only be resolved when
one or more future events occur or fail to occur. Such contingent liabilities
are assessed by the company's management and legal counsel. The assessment of
loss contingencies necessarily involves an exercise of judgment and is a matter
of opinion. In assessing loss contingencies related to legal proceedings that
are pending against the company or unasserted claims that may result in such
proceedings, the company's legal counsel evaluates the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a
material liability had been incurred and the amount of the loss can be
estimated, then the estimated liability would be accrued in the company's
financial statements. If the assessment indicates that a potentially material
liability is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material, would be
disclosed.
Loss contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee would be
disclosed. However, in some instances in which disclosure is not otherwise
required, the company may disclose contingent liabilities of an unusual nature
which, in the judgment of management and its legal counsel, may be of interest
to stockholders or others.
Statement of Consolidated Cash Flows
We present cash flows from operating activities using the indirect method. We
exclude exploratory expenses from cash flows of operating activities and apply
them to cash flows of investing activities. On this basis, we reflect all
capital and exploratory expenditures as investing activities.
<PAGE>
TEXACO 1998 ANNUAL REPORT 43
Statement of Consolidated Income
<TABLE>
<CAPTION>
(Millions of dollars) For the years ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Sales and services (includes transactions with significant
affiliates of $4,169 million in 1998, $3,633 million
in 1997 and $3,867 million in 1996) $ 30,910 $ 45,187 $ 44,561
Equity in income of affiliates, interest, asset sales and other 797 1,480 939
--------------------------------------------
Total revenues 31,707 46,667 45,500
- ------------------------------------------------------------------------------------------------------------------------------------
Deductions
Purchases and other costs (includes transactions with significant
affiliates of $1,669 million in 1998, $2,178 million in 1997 and
$2,048 million in 1996) 24,179 35,230 34,643
Operating expenses 2,508 3,251 3,235
Selling, general and administrative expenses 1,224 1,755 1,803
Exploratory expenses 461 471 379
Depreciation, depletion and amortization 1,675 1,633 1,455
Interest expense 480 412 434
Taxes other than income taxes 423 520 496
Minority interest 56 68 72
--------------------------------------------
31,006 43,340 42,517
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change 701 3,327 2,983
Provision for income taxes 98 663 965
--------------------------------------------
Income before cumulative effect of accounting change 603 2,664 2,018
Cumulative effect of accounting change (25) -- --
--------------------------------------------
Net income $ 578 $ 2,664 $ 2,018
====================================================================================================================================
Net Income per Common Share (Dollars)
Basic:
Income before cumulative effect of accounting change $ 1.04 $ 4.99 $ 3.77
Cumulative effect of accounting change (.05) -- --
--------------------------------------------
Net income $ .99 $ 4.99 $ 3.77
====================================================================================================================================
Diluted:
Income before cumulative effect of accounting change $ 1.04 $ 4.87 $ 3.68
Cumulative effect of accounting change (.05) -- --
--------------------------------------------
Net income $ .99 $ 4.87 $ 3.68
====================================================================================================================================
Average Number of Common Shares Outstanding (for computation
of earnings per share) (thousands)
Basic 528,416 522,234 520,392
Diluted 528,965 542,570 541,824
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
44 TEXACO 1998 ANNUAL REPORT
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(Millions of dollars) As of December 31 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 249 $ 311
Short-term investments - at fair value 22 84
Accounts and notes receivable (includes receivables from significant affiliates
of $694 million in 1998 and $234 million in 1997), less allowance for
doubtful accounts of $28 million in 1998 and $22 million in 1997 3,955 4,230
Inventories 1,154 1,483
Deferred income taxes and other current assets 256 324
------------------------
Total current assets 5,636 6,432
Investments and advances 7,184 5,097
Net properties, plant and equipment 14,761 17,116
Deferred charges 989 955
------------------------
Total $ 28,570 $ 29,600
===================================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable, commercial paper and current portion of long-term debt $ 939 $ 885
Accounts payable and accrued liabilities (includes payables to significant affiliates
of $395 million in 1998 and $106 million in 1997)
Trade liabilities 2,302 2,669
Accrued liabilities 1,368 1,480
Estimated income and other taxes 655 960
------------------------
Total current liabilities 5,264 5,994
Long-term debt and capital lease obligations 6,352 5,507
Deferred income taxes 1,644 1,825
Employee retirement benefits 1,248 1,224
Deferred credits and other noncurrent liabilities 1,550 1,639
Minority interest in subsidiary companies 679 645
------------------------
Total 16,737 16,834
Stockholders' Equity
Market auction preferred shares 300 300
ESOP convertible preferred stock 428 457
Unearned employee compensation and benefit plan trust (334) (389)
Common stock - 567,606,290 shares issued 1,774 1,774
Paid-in capital in excess of par value 1,640 1,688
Retained earnings 9,561 9,987
Other accumulated nonowner changes in equity (101) (95)
------------------------
13,268 13,722
Less - Common stock held in treasury, at cost 1,435 956
------------------------
Total stockholders' equity 11,833 12,766
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 28,570 $ 29,600
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TEXACO 1998 ANNUAL REPORT 45
Statement of Consolidated Cash Flows
<TABLE>
<CAPTION>
(Millions of dollars) For the years ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 578 $ 2,664 $ 2,018
Reconciliation to net cash provided by (used in) operating activities
Cumulative effect of accounting change 25 -- --
Depreciation, depletion and amortization 1,675 1,633 1,455
Deferred income taxes (152) 451 (20)
Exploratory expenses 461 471 379
Minority interest in net income 56 68 72
Dividends from affiliates, greater than (less than) equity in income 224 (370) 167
Gains on asset sales (109) (558) (19)
Changes in operating working capital
Accounts and notes receivable 125 718 (1,072)
Inventories (51) (56) (104)
Accounts payable and accrued liabilities 16 (856) 716
Other - mainly estimated income and other taxes (205) (64) 97
Other - net (99) (186) 73
---------------------------------------
Net cash provided by operating activities 2,544 3,915 3,762
---------------------------------------
Investing Activities
Capital and exploratory expenditures (3,101) (3,628) (2,897)
Proceeds from asset sales 282 1,036 125
Proceeds from sale of discontinued operations -- -- 344
Sales (purchases) of leasehold interests 25 (503) 261
Purchases of investment instruments (947) (1,102) (1,668)
Sales/maturities of investment instruments 1,118 1,096 1,816
Formation payments from U.S. affiliate 612 -- --
Other - net -- (57) 70
---------------------------------------
Net cash used in investing activities (2,011) (3,158) (1,949)
---------------------------------------
Financing Activities
Borrowings having original terms in excess of three months
Proceeds 1,300 507 307
Repayments (741) (637) (802)
Net increase (decrease) in other borrowings 493 628 (143)
Purchases of common stock (579) (382) (159)
Dividends paid to the company's stockholders
Common (952) (918) (859)
Preferred (53) (55) (58)
Dividends paid to minority stockholders (52) (81) (87)
---------------------------------------
Net cash used in financing activities (584) (938) (1,801)
---------------------------------------
Cash and Cash Equivalents
Effect of exchange rate changes (11) (19) (2)
---------------------------------------
Increase (decrease) during year (62) (200) 10
Beginning of year 311 511 501
---------------------------------------
End of year $ 249 $ 311 $ 511
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
46 TEXACO 1998 ANNUAL REPORT
Statement of Consolidated Stockholders' Equity
<TABLE>
<CAPTION>
Shares Amount Shares Amount Shares Amount
-------------------- ---------------------- -----------------------
(Shares in thousands; amounts in millions of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock
par value $1; Shares authorized - 30,000,000
Market Auction Preferred Shares (Series G, H, I and J) -
liquidation preference of $250,000 per share
Beginning and end of year 1 $ 300 1 $ 300 1 $ 300
- -----------------------------------------------------------------------------------------------------------------------------------
Series B ESOP Convertible Preferred Stock -
liquidation value of $600 per share
Beginning of year 693 416 720 432 751 450
Retirements (44) (27) (27) (16) (31) (18)
--------------------------------------------------------------------
End of year 649 389 693 416 720 432
- -----------------------------------------------------------------------------------------------------------------------------------
Series F ESOP Convertible Preferred Stock -
liquidation value of $737.50 per share
Beginning of year 56 41 57 42 60 45
Retirements (3) (2) (1) (1) (3) (3)
--------------------------------------------------------------------
End of year 53 39 56 41 57 42
- -----------------------------------------------------------------------------------------------------------------------------------
Unearned Employee Compensation
(related to ESOP preferred stock and restricted
stock awards)
Beginning of year (149) (175) (234)
Awards (36) (16) (22)
Amortization and other 91 42 81
--------------------------------------------------------------------
End of year (94) (149) (175)
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit Plan Trust
(common stock)
Beginning of year 9,200 (240) 8,000 (203) 8,000 (203)
Additions -- -- 1,200 (37) -- --
--------------------------------------------------------------------
End of year 9,200 (240) 9,200 (240) 8,000 (203)
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
par value $3.125; Shares authorized - 700,000,000
Beginning of year 567,606 1,774 548,587 1,714 548,587 1,714
Issued for Monterey acquisition -- -- 19,019 60 -- --
--------------------------------------------------------------------
End of year 567,606 1,774 567,606 1,774 548,587 1,714
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Held in Treasury, at cost
Beginning of year 25,467 (956) 21,191 (628) 20,152 (517)
Purchases of common stock 9,572 (551) 7,423 (410) 3,515 (159)
Transfer to benefit plan trust -- -- (1,200) 37 -- --
Other - mainly employee benefit plans (2,063) 72 (1,947) 45 (2,476) 48
--------------------------------------------------------------------
End of year 32,976 $ (1,435) 25,467 $ (956) 21,191 $ (628)
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued on next page)
<PAGE>
TEXACO 1998 ANNUAL REPORT 47
Statement of Consolidated Stockholders' Equity
<TABLE>
<CAPTION>
(Millions of dollars) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Paid-in Capital in Excess of Par Value
Beginning of year $ 1,688 $ 630 $ 655
Monterey acquisition -- 1,091 --
Treasury stock transactions relating to investor services plan
and employee compensation plans (48) (33) (25)
--------------------------------------------
End of year 1,640 1,688 630
- -----------------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Balance at beginning of year 9,987 8,292 7,186
Add:
Net income 578 2,664 2,018
Tax benefit associated with dividends on unallocated ESOP
Convertible Preferred Stock 3 4 5
Deduct: Dividends declared on
Common stock ($1.80 per share in 1998, $1.75 per share in 1997
and $1.65 per share in 1996) 952 918 859
Preferred stock
Series B ESOP Convertible Preferred Stock 38 40 42
Series F ESOP Convertible Preferred Stock 4 4 4
Market Auction Preferred Shares (Series G, H, I and J) 13 11 12
--------------------------------------------
Balance at end of year 9,561 9,987 8,292
- -----------------------------------------------------------------------------------------------------------------------------------
Other Accumulated Nonowner Changes in Equity
Currency translation adjustment
Beginning of year (105) (65) 61
Change during year (2) (40) (126)
--------------------------------------------
End of year (107) (105) (65)
--------------------------------------------
Minimum pension liability adjustment
Beginning of year (16) -- --
Change during year (8) (16) --
--------------------------------------------
End of year (24) (16) --
--------------------------------------------
Unrealized net gain on investments
Beginning of year 26 33 62
Change during year 4 (7) (29)
--------------------------------------------
End of year 30 26 33
--------------------------------------------
Total other accumulated nonowner changes in equity (101) (95) (32)
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
End of year (including preceding page) $ 11,833 $ 12,766 $ 10,372
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
48 TEXACO 1998 ANNUAL REPORT
Statement of Consolidated Nonowner Changes in Equity
<TABLE>
<CAPTION>
(Millions of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 578 $ 2,664 $ 2,018
- -------------------------------------------------------------------------------------------------------
Other nonowner changes in equity:
Currency translation adjustment
Reclassification to net income of realized gain on sale of affiliate -- -- (60)
Other unrealized net change during period (2) (40) (66)
-----------------------------
Total (2) (40) (126)
-----------------------------
Minimum pension liability adjustment
Before income taxes (16) (21) --
Income taxes 8 5 --
-----------------------------
Total (8) (16) --
-----------------------------
Unrealized net gain on investments
Net gain (loss) arising during period
Before income taxes 35 22 9
Income taxes (11) (9) (7)
Reclassification to net income of net realized (gain) or loss
Before income taxes (31) (29) (43)
Income taxes 11 9 12
-----------------------------
Total 4 (7) (29)
- -------------------------------------------------------------------------------------------------------
Total other nonowner changes in equity (6) (63) (155)
- -------------------------------------------------------------------------------------------------------
Total nonowner changes in equity $ 572 $ 2,601 $ 1,863
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TEXACO 1998 ANNUAL REPORT 49
Notes to Consolidated Financial Statements
Note 1 Segment Information
We are presenting below information about our operating segments for the years
1998, 1997 and 1996, according to Statement of Financial Accounting Standards
131, Disclosures about Segments of an Enterprise and Related Information, which
we adopted this year.
We determined our operating segments based on differences in the nature of
their operations and geographic location. The composition of segments and
measure of segment profit is consistent with that used by our Executive Council
in making strategic decisions. The Executive Council is headed by the Chairman
and Chief Executive Officer and includes, among others, the Senior Vice
Presidents having oversight responsibility for our business units.
- --------------------------------------------------------------------------------
Operating Segments 1998
<TABLE>
<CAPTION>
Sales and Services After Income
-------------------------------- Tax Tax Other Capital Assets at
Inter- Profit Expense DD&A Non-cash Expen- Year-
(Millions of dollars) Outside segment Total (Loss) (Benefit) Expense Items ditures End
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
United States $ 1,712 $ 1,660 $ 3,372 $ 301 $ 34 $ 892 $ 1 $ 1,200 $ 8,699
International 2,028 1,358 3,386 120 127 513 20 951 4,352
Manufacturing, marketing
and distribution
United States 2,582 107 2,689 223 96 6 228 1 4,095
International 19,835 86 19,921 332 130 204 135 403 8,306
Global gas marketing 4,692 84 4,776 (18) 5 14 50 61 879
------------------------------------------------------------------------------------------------------
Segment totals $ 30,849 $ 3,295 34,144 958 392 1,629 434 2,616 26,331
====================
Other business units 91 7 4 2 (2) -- 506
Corporate/Non-operating 4 (362) (298) 44 (67) 33 1,945
Intersegment eliminations (3,329) -- -- -- -- -- (212)
------------------------------------------------------------------------------
Consolidated, before
cumulative effect of
accounting change $ 30,910 $ 603 $ 98 $ 1,675 $ 365 $ 2,649 $ 28,570
==============================================================================
<CAPTION>
Operating Segments 1997
Sales and Services After Income
-------------------------------- Tax Tax Other Capital Assets at
Inter- Profit Expense DD&A Non-cash Expen- Year-
(Millions of dollars) Outside segment Total (Loss) (Benefit) Expense Items ditures End
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
United States $ 365 $ 4,156 $ 4,521 $ 990 $ 487 $ 783 $ 281 $ 1,349 $ 8,769
International 2,575 1,751 4,326 807 566 442 105 934 4,036
Manufacturing, marketing
and distribution
United States 16,992 357 17,349 324 172 178 169 262 5,668
International 19,992 235 20,227 508 117 173 (166) 482 8,048
Global gas marketing 5,207 254 5,461 (43) (9) 14 61 75 1,012
------------------------------------------------------------------------------------------------------
Segment totals $ 45,131 $ 6,753 51,884 2,586 1,333 1,590 450 3,102 27,533
====================
Other business units 101 5 5 2 4 -- 544
Corporate/Non-operating 6 73 (675) 41 242 57 2,030
Intersegment eliminations (6,804) -- -- -- -- -- (507)
------------------------------------------------------------------------------
Consolidated $ 45,187 $ 2,664 $ 663 $ 1,633 $ 696 $ 3,159 $ 29,600
==============================================================================
</TABLE>
<PAGE>
50 TEXACO 1998 ANNUAL REPORT
Operating Segments 1996
<TABLE>
<CAPTION>
Sales and Services After Income
-------------------------------- Tax Tax Other Capital Assets at
Inter- Profit Expense DD&A Non-cash Expen- Year-
(Millions of dollars) Outside segment Total (Loss) (Benefit) Expense Items ditures End
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and production
United States $ 204 $ 4,146 $ 4,350 $ 1,074 $ 528 $ 670 $ 109 $ 990 $ 6,067
International 2,384 1,930 4,314 493 523 393 (21) 755 3,651
Manufacturing, marketing
and distribution
United States 18,424 493 18,917 210 143 176 92 271 6,310
International 18,750 363 19,113 447 127 161 201 356 7,751
Global gas marketing 4,754 342 5,096 34 19 13 (7) 110 1,152
------------------------------------------------------------------------------------------------------
Segment totals $ 44,516 $ 7,274 51,790 2,258 1,340 1,413 374 2,482 24,931
====================
Other business units 112 10 10 7 3 -- 530
Corporate/Non-operating 5 (250) (385) 35 332 35 2,216
Intersegment eliminations (7,346) -- -- -- -- -- (714)
------------------------------------------------------------------------------
Consolidated $ 44,561 $ 2,018 $ 965 $ 1,455 $ 709 $ 2,517 $ 26,963
==============================================================================
</TABLE>
Our exploration and production segments explore for, find, develop and produce
crude oil and natural gas. The U.S. segment includes minor operations in Canada.
Our manufacturing, marketing and distribution segments process crude oil and
other feedstock into refined products and purchase, sell and transport crude oil
and refined petroleum products. Global gas marketing purchases natural gas and
natural gas products from our exploration and production operations and others
for resale, and operates natural gas processing plants and pipelines in the
United States. This segment, which operates primarily in the U.S., sold its U.K.
wholesale gas business in 1998 and announced its intention to dispose of its
U.K. retail gas marketing business as well. Other business units include our
insurance, power generation and gasification operations and investments in
undeveloped mineral properties. None of these units is individually significant
in terms of revenue, income or assets.
You are encouraged to read Note 6 - Investments and Advances, beginning on
page 52, which includes information about our affiliates and the formation of
the Equilon and Motiva alliances in 1998.
Corporate and non-operating includes the assets, income and expenses
relating to cash management and financing activities, our corporate center and
other items not directly attributable to the operating segments.
We apply the same accounting policies to each of the segments as we do in
preparing the consolidated financial statements. Intersegment sales and services
are generally representative of market prices or arms-length negotiated
transactions. Intersegment receivables are representative of normal trade
balances. Other non-cash items principally include deferred income taxes, the
difference between cash distributions and equity in income of affiliates, and
non-cash charges and credits associated with asset sales. Capital expenditures
are presented on a cash basis, excluding exploratory expenses.
The countries in which we have significant sales and services and
long-lived assets are listed below. Sales and services are based on the origin
of the sale. Long-lived assets include properties, plant and equipment and
investments in foreign producing operations where the host governments own the
physical assets under terms of the operating agreements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales and Services Long-lived assets at December 31
--------------------------------- ---------------------------------
(Millions of dollars) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 8,184 $21,657 $22,643 $ 8,757 $11,437 $ 8,683
====================================================================================================================================
International - Total 22,726 23,530 21,918 6,250 5,876 4,914
Significant countries included above:
Brazil 3,175 3,175 2,670 301 266 235
Netherlands 1,636 1,901 2,129 257 250 212
United Kingdom 7,529 6,862 5,846 2,257 2,384 1,846
====================================================================================================================================
</TABLE>
<PAGE>
TEXACO 1998 ANNUAL REPORT 51
Note 2 Adoption of New Accounting Standards
SFAS 128 and 129 -- During 1997, we adopted SFAS 128, "Earnings per Share." Our
basic and diluted net income per common share under SFAS 128 were approximately
the same as under the comparable prior basis of reporting. In 1997, we also
adopted SFAS 129, "Disclosure of Information about Capital Structure." Our
existing disclosures complied with this standard.
SFAS 130, 131 and 132 -- In 1998, Texaco adopted SFAS 130, 131 and 132.
SFAS 130, "Reporting Comprehensive Income," requires that we report all items
classified as comprehensive income under its provisions as separate components
within a financial statement. SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," requires the reporting of certain income,
revenue, expense and asset data about operating segments of public enterprises.
Operating segments are based upon a company's internal management structure.
SFAS 131 also requires data for revenues and long-lived assets by major
countries of operation. SFAS 132, "Employer's Disclosures about Pensions and
Other Postretirement Benefits," requires disclosure of new information on
changes in plan benefit obligations and fair values of plan assets.
SOP 98-5 -- Effective January 1, 1998, Caltex, our affiliate, adopted
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
issued by the American Institute of Certified Public Accountants. This Statement
requires that the costs of start-up activities and organization costs, as
defined, be expensed as incurred. The cumulative effect of adoption on Texaco's
net income for 1998 was a net loss of $25 million. This Statement will be
adopted by Texaco and our other affiliates effective January 1, 1999. We do not
expect the effect to be material.
Note 3 Income Per Common Share
Basic net income per common share is based on net income less preferred stock
dividend requirements divided by the average number of common shares
outstanding. Diluted net income per common share assumes issuance of the net
incremental shares from stock options and full conversion of all dilutive
convertible securities at the later of the beginning of the year or date of
issuance. Common shares held by the benefit plan trust are not considered
outstanding for purposes of net income per common share.
In July 1997, the Board of Directors approved a two-for-one split of the
company's common stock, effective September 29, 1997. The par value was halved
and the number of authorized shares was doubled. We have restated prior years'
financial statements and all references to number of shares and per share
amounts for the stock split. Also, we have adjusted all agreements that include
exchange, conversion or other rights based on the company's common stock for the
stock split.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
(Millions, except per share amounts) ---------------------------- ----------------------------- ------------------------------
For the years ended December 31 Income Shares Per Share Income Shares Per Share Income Shares Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income:
Income before cumulative
effect of accounting change $ 603 $ 2,664 $ 2,018
Less: Preferred stock dividends (54) (56) (58)
----------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change,
for basic income per share $ 549 528.4 $ 1.04 $ 2,608 522.2 $ 4.99 $ 1,960 520.4 $ 3.77
Effect of dilutive securities:
ESOP Convertible preferred stock -- -- 34 19.3 34 20.0
Stock options and restricted stock -- .4 -- .8 -- 1.1
Convertible debentures 1 .2 -- .3 -- .3
----------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change, for
diluted income per share $ 550 529.0 $ 1.04 $ 2,642 542.6 $ 4.87 $ 1,994 541.8 $ 3.68
===================================================================================================================================
</TABLE>
<PAGE>
52 TEXACO 1998 ANNUAL REPORT
Note 4 Acquisition of Monterey Resources
In November 1997, we acquired all of the outstanding common stock of Monterey
Resources (Monterey) in exchange for approximately 19 million shares of our
common stock valued at $1.1 billion. We accounted for the transaction as a
purchase. The total purchase price was $1.4 billion, including existing Monterey
debt of $.3 billion; $2.2 billion was assigned to properties, plant and
equipment, and $.7 billion was assigned to deferred income tax liabilities.
Monterey was an oil and gas company with mostly crude oil properties in
California.
Our financial statements reflect the consolidation of Monterey assets and
liabilities at fair value effective from November 1, 1997. The pro forma effects
had Monterey been consolidated at the beginning of either 1997 or 1996 would not
have been material to Texaco's revenues, net income, and basic and diluted net
income per common share for those years.
Note 5 Inventories
(Millions of dollars)
As of December 31 1998 1997
- --------------------------------------------------------------------------------
Crude oil $ 116 $ 308
Petroleum products and petrochemicals 799 893
Other merchandise 40 59
Materials and supplies 199 223
----------------------
Total $ 1,154 $ 1,483
================================================================================
The book value of inventories at December 31, 1998 is net of a valuation
allowance of $99 million to adjust from cost to market. At December 31, 1997,
the excess of estimated market over the book value of inventories was $204
million.
Note 6 Investments and Advances
We account for our investments in affiliates, including corporate joint ventures
and partnerships owned 50% or less, on the equity method. Our total investments
and advances are summarized as follows:
(Millions of dollars)
As of December 31 1998 1997
- --------------------------------------------------------------------------------
Affiliates accounted for
on the equity method
Exploration and production
United States $ 230 $ 126
International
CPI 452 437
Other 24 15
----------------------
706 578
Manufacturing, marketing
and distribution
United States
Equilon 2,266 --
Motiva 896 --
Star -- 889
Other 29 178
International
Caltex 1,747 1,860
Other 215 191
----------------------
5,153 3,118
Global gas marketing 71 55
Other affiliates 86 70
----------------------
Total 6,016 3,821
----------------------
Miscellaneous investments,
long-term receivables, etc.,
accounted for at:
Fair value 470 537
Cost, less reserve 698 739
---------------------
Total $ 7,184 $ 5,097
================================================================================
<PAGE>
TEXACO 1998 ANNUAL REPORT 53
Our equity in the net income of affiliates is adjusted to reflect income taxes
for limited liability companies and partnerships whose income is directly
taxable to us:
(Millions of dollars)
For the years ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------
Equity in net income (loss)
Exploration and production
United States $ 37 $ 40 $ 36
International
CPI 107 171 188
Other (12) -- 1
-----------------------------
132 211 225
Manufacturing, marketing
and distribution
United States
Equilon 199 -- --
Motiva 22 -- --
Star (3) 95 14
Other 3 48 51
International
Caltex (36) 252 347
Other 15 20 22
-----------------------------
200 415 434
Global gas marketing (26) (20) (3)
Other affiliates 12 10 13
-----------------------------
Total $ 318 $ 616 $ 669
- -------------------------------------------------------------------------------
Dividends received $ 709 $ 332 $ 878
===============================================================================
The undistributed earnings of these affiliates included in our retained earnings
were $2,409 million, $2,658 million and $2,609 million as of December 31, 1998,
1997 and 1996.
Caltex Group
We have investments in the Caltex Group of Companies, owned 50% by Texaco and
50% by Chevron Corporation. The Caltex group consists of P.T. Caltex Pacific
Indonesia (CPI), American Overseas Petroleum Limited and subsidiary and Caltex
Corporation and subsidiaries (Caltex). This group of companies is engaged in the
exploration for and production, transportation, refining and marketing of crude
oil and products in Africa, Asia, Australia, the Middle East and New Zealand.
Results for the Caltex Group in 1998 include an after-tax charge of $50
million (Texaco's share $25 million) for the cumulative effect of accounting
change. See Note 2 for additional information.
In 1996, Caltex completed the sale of its 50% interest in Nippon Petroleum
Refining Company, Limited (NPRC) to its partner, Nippon Oil Company, for
approximately $2 billion. Caltex' net income for 1996 includes a gain of $621
million associated with this sale. Our results include a net gain of $219
million relating to this sale, comprised of our equity share of the gain, less
an adjustment in the carrying value of our investment and further reduced by a
tax on the dividend distributed to the shareholders.
Equilon Enterprises LLC
Effective January 1, 1998, Texaco and Shell Oil Company formed Equilon
Enterprises LLC (Equilon), a Delaware limited liability company. Equilon is a
joint venture that combined major elements of the companies' western and
midwestern U.S. refining and marketing businesses and their nationwide trading,
transportation and lubricants businesses. We own 44% and Shell Oil Company owns
56% of Equilon.
The carrying amounts at January 1, 1998, of the principal assets and
liabilities of the businesses we contributed to Equilon were $.2 billion of net
working capital assets, $2.8 billion of net properties, plant and equipment and
$.2 billion of debt. These amounts were reclassified to investment in affiliates
accounted for by the equity method.
In April 1998, we received $463 million from Equilon, representing
reimbursement of certain capital expenditures incurred prior to the formation of
the joint venture. In July 1998, we received $149 million from Equilon for
certain specifically identified assets transferred for value to Equilon.
Motiva Enterprises LLC
Effective July 1, 1998, Texaco, Shell and Saudi Aramco formed Motiva Enterprises
LLC (Motiva), a Delaware limited liability company. Motiva is a joint venture
that combined Texaco's and Saudi Aramco's interests and major elements of
Shell's eastern and Gulf Coast U.S. refining and marketing businesses. Texaco's
and Saudi Aramco's interest in these businesses were previously conducted by
Star Enterprise (Star), a joint-venture partnership owned 50% by Texaco and 50%
by Saudi Refining, Inc., a corporate affiliate of Saudi Aramco. Texaco and Saudi
Refining, Inc., each owns 32.5% and Shell owns 35% of Motiva.
The investment in Motiva at date of formation approximated the previous
investment in Star. The Motiva investment and previous Star investment are
recorded as investment in affiliates accounted for on the equity method.
- --------------------------------------------------------------------------------
The following table provides summarized financial information on a 100% basis
for the Caltex Group, Equilon, Motiva, Star and all other affiliates that we
account for on
<PAGE>
54 TEXACO 1998 ANNUAL REPORT
the equity method, as well as Texaco's share. The net income of all limited
liability companies and partnerships is net of estimated income taxes. The
actual income tax liability is reflected in the accounts of the respective
members or partners and not shown in the following table.
Motiva's and Star's assets at the respective balance sheet dates include the
remaining portion of the assets which were originally transferred from Texaco to
Star at the fair market value on the date of formation of Star. Our investment
and equity in the income of Motiva and Star, as reported in our consolidated
financial statements, reflect the remaining unamortized historical carrying cost
of the assets transferred to Star at formation of Star. Additionally, our
investments in Motiva and Star include adjustments necessary to reflect
contractual arrangements on the formation of Star, principally involving
contributed inventories.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Total
Caltex Other Texaco's
(Millions of dollars) Equilon Motiva Star Group Affiliates Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Gross revenues $ 22,246 $ 5,371 $ 3,190 $ 17,174 $ 2,541 $ 22,856
Income (loss) before income taxes and
cumulative effect of accounting change $ 502 $ 78 $ (128) $ 519 $ 170 $ 662
Net income (loss) $ 326 $ 51 $ (83) $ 143 $ 84 $ 318
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 2,648 $ 1,435 $ 1,974 $ 687 $ 2,757
Noncurrent assets 7,758 5,306 7,684 2,021 9,332
Current liabilities (4,058) (1,248) (2,840) (727) (3,932)
Noncurrent liabilities (382) (1,665) (2,421) (672) (2,141)
-------------------------------------------------------------------
Net equity $ 5,966 $ 3,828 $ 4,397 $ 1,309 $ 6,016
===========================================================================================================================
<CAPTION>
Total
Caltex Other Texaco's
(Millions of dollars) Star Group Affiliates Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Gross revenue $ 7,758 $ 18,357 $ 4,028 $ 14,641
Income before income taxes $ 301 $ 1,210 $ 605 $ 940
Net income $ 196 $ 846 $ 400 $ 616
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 1,042 $ 2,521 $ 947 $ 1,965
Noncurrent assets 3,260 7,193 3,607 6,324
Current liabilities (769) (2,991) (1,032) (2,270)
Noncurrent liabilities (1,072) (2,131) (2,022) (2,198)
---------------------------------------------
Net equity $ 2,461 $ 4,592 $ 1,500 $ 3,821
===========================================================================================================================
<CAPTION>
Total
Caltex Other Texaco's
(Millions of dollars) Star Group Affiliates Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Gross revenue $ 8,006 $ 18,166 $ 3,940 $ 14,644
Income before income taxes $ 38 $ 2,175 $ 697 $ 1,310
Net income $ 25 $ 1,193 $ 451 $ 669
- --------------------------------------------------------------------------------------------------------------------------
As of December 31:
Current assets $ 816 $ 2,681 $ 1,049 $ 1,937
Noncurrent assets 3,204 6,714 3,853 6,354
Current liabilities (704) (2,999) (1,182) (2,329)
Noncurrent liabilities (1,141) (2,140) (1,845) (2,151)
---------------------------------------------
Net equity $ 2,175 $ 4,256 $ 1,875 $ 3,811
===========================================================================================================================
</TABLE>
<PAGE>
TEXACO 1998 ANNUAL REPORT 55
Note 7 Properties, Plant and Equipment
<TABLE>
<CAPTION>
Gross Net
-------------------------- -------------------------
(Millions of dollars) As of December 31 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exploration and production
United States $ 21,993 $ 21,698 $ 7,963 $ 7,951
International 7,532 6,789 2,929 2,692
-----------------------------------------------------------------
Total 29,525 28,487 10,892 10,643
- ------------------------------------------------------------------------------------------------------------------------------------
Manufacturing, marketing and distribution
United States 74 4,600 26 2,743
International 4,486 4,309 3,054 2,894
-----------------------------------------------------------------
Total 4,560 8,909 3,080 5,637
- ------------------------------------------------------------------------------------------------------------------------------------
Global gas marketing 647 593 271 224
Other 762 967 518 612
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 35,494 $ 38,956 $ 14,761 $ 17,116
- ------------------------------------------------------------------------------------------------------------------------------------
Capital lease amounts included above $ 264 $ 450 $ 79 $ 105
====================================================================================================================================
</TABLE>
Accumulated depreciation, depletion and amortization totaled $20,733 million and
$21,840 million at December 31, 1998 and 1997. Interest capitalized as part of
properties, plant and equipment was $21 million in 1998, $20 million in 1997 and
$12 million in 1996.
In 1998, we recorded pre-tax charges of $150 million for the write-downs of
impaired assets. These charges were recorded to depreciation, depletion and
amortization expense.
In the U.S. exploration and production operating segment, pre-tax asset
write-downs for impaired properties in Louisiana and Canada were $64 million.
The Louisiana property represents an unsuccessful enhanced recovery project. We
determined in the fourth quarter of 1998 that the carrying value of this
property exceeded future undiscounted cash flows. Fair value was determined by
discounting expected future cash flows. Canadian properties were impaired
following our decision in October 1998 to exit the upstream business in Canada.
These properties were written down to their sales price with the sale closing in
December 1998.
In the international exploration and production operating segment, the
pre-tax asset write-down for the impairment of our investment in the Strathspey
field in the U.K. North Sea was $58 million. The Strathspey impairment was
caused by a downward revision in the fourth quarter of the estimated volume of
the field's proved reserves. Fair value was determined by discounting expected
future cash flows.
In the U.S. downstream operating segment, the pre-tax asset write-downs for
the impairment of surplus facilities and equipment not transferred to the
Equilon joint venture was $28 million. Fair value was determined by an
independent appraisal.
In 1997, we recorded pre-tax charges of $63 million for the write-downs of
impaired assets. These assets, consisting of producing properties and gas
plants, were in the U.S. and international exploration and production operating
segments. These charges were recorded to depreciation, depletion and
amortization expense. Fair values were based on expected future discounted cash
flows.
Note 8 Foreign Currency
Currency translations resulted in a pre-tax loss of $80 million in 1998, $59
million in 1997 and $60 million in 1996. After applicable taxes, 1998 included a
loss of $94 million compared to a gain of $154 million in 1997 and a loss of $66
million in 1996.
After-tax currency impacts for the years 1998 and 1997 were largely due to
currency volatility in Asia. In 1998, our Caltex affiliate incurred significant
currency-related losses due to the strengthening of the Korean won and Japanese
yen against the U.S. dollar. In contrast, those currencies weakened against the
U.S. dollar in 1997 which resulted in significant currency-related gains.
Results for 1996 through 1998 were also impacted by the effect of currency
rate changes on deferred income taxes denominated in British pounds. In 1998 and
1996, the U.S. dollar weakened against that currency causing us to record losses
of $5 million and $58 million. In 1997, when the U.S. dollar strengthened, we
recorded a gain of $28 million.
Effective October 1, 1997, Caltex changed the functional currency for its
operations in its Korean and Japanese affiliates to the U.S. dollar.
Currency translation adjustments shown in the separate stockholders' equity
account result from translation items
<PAGE>
56 TEXACO 1998 ANNUAL REPORT
pertaining to certain affiliates of Caltex. For the years 1998, 1997 and 1996
these adjustments were losses of $2 million, $40 million and $126 million. The
year 1996 includes the reversal of $60 million of previously deferred gains
which were recognized in earnings due to the sale by Caltex of its investment in
its Japanese affiliate, NPRC.
Note 9 Taxes
(Millions of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------
Federal and other income taxes
Current
U.S. Federal $ (45) $ (538) $ 359
Foreign 283 689 642
State and local 12 61 (16)
------------------------------------
Total 250 212 985
Deferred
U.S. (104) 457 13
Foreign (48) (6) (33)
------------------------------------
Total (152) 451 (20)
------------------------------------
Total income taxes 98 663 965
Taxes other than income taxes
Oil and gas production 70 127 114
Property 108 139 119
Payroll 119 125 120
Other 126 129 143
------------------------------------
Total 423 520 496
Import duties and other levies
U.S. 36 53 38
Foreign 6,843 5,414 4,127
------------------------------------
Total 6,879 5,467 4,165
------------------------------------
Total direct taxes 7,400 6,650 5,626
Taxes collected from consumers 2,148 3,370 3,237
------------------------------------
Total all taxes $ 9,548 $ 10,020 $ 8,863
===============================================================================
The deferred income tax assets and liabilities included in the Consolidated
Balance Sheet as of December 31, 1998 and 1997 amounted to $205 million and $145
million, as net current assets and $1,644 million and $1,825 million, as net
noncurrent liabilities. The table that follows shows deferred income tax assets
and liabilities by category:
(Liability) Asset
----------------------
(Millions of dollars) As of December 31 1998 1997
- -------------------------------------------------------------------------------
Depreciation $(1,079) $(1,054)
Depletion (429) (601)
Intangible drilling costs (726) (826)
Other deferred tax liabilities (686) (755)
----------------------
Total (2,920) (3,236)
Employee benefit plans 532 526
Tax loss carryforwards 641 728
Tax credit carryforwards 368 237
Environmental liabilities 116 167
Other deferred tax assets 639 580
----------------------
Total 2,296 2,238
----------------------
Total before valuation allowance (624) (998)
Valuation allowance (815) (682)
----------------------
Total $(1,439) $(1,680)
===============================================================================
The preceding table excludes certain potential deferred income tax asset amounts
for which possibility of realization is extremely remote.
The valuation allowance relates principally to upstream operations in
Denmark. The related deferred income tax assets result from tax loss
carryforwards and book versus tax asset basis differences for hydrocarbon tax.
Loss carryforwards from this tax are generally determined by individual field
and, in that case, are not usable against other fields' taxable income.
<PAGE>
TEXACO 1998 ANNUAL REPORT 57
The following schedule reconciles the differences between the U.S. Federal
income tax rate and the effective income tax rate excluding the cumulative
effect of accounting change in 1998:
1998 1997 1996
- --------------------------------------------------------------------------------
U.S. Federal income tax rate
assumed to be applicable 35.0% 35.0% 35.0%
IRS settlement -- (14.7) --
Net earnings and dividends
attributable to affiliated
corporations accounted
for on the equity method (7.0) (4.7) (5.5)
Aggregate earnings and
losses from international
operations 10.4 6.2 12.7
Tax adjustments (8.7) (.3) (.4)
Sales of stock of subsidiaries (6.1) -- (6.3)
Energy credits (11.7) (1.4) (1.9)
Other 2.1 (.2) (1.2)
------------------------------------
Effective income tax rate 14.0% 19.9% 32.4%
================================================================================
The year 1997 included a $488 million benefit resulting from an IRS settlement.
For companies operating in the United States, pre-tax earnings before the
cumulative effect of an accounting change aggregated $194 million in 1998,
$1,527 million in 1997 and $1,783 million in 1996. For companies with operations
located outside the United States, pre-tax earnings on that basis aggregated
$507 million in 1998, $1,800 million in 1997 and $1,200 million in 1996.
Income taxes paid, net of refunds, amounted to $430 million, $285 million
and $917 million in 1998, 1997 and 1996.
The undistributed earnings of subsidiary companies and of affiliated
corporate joint-venture companies accounted for on the equity method, for which
deferred U.S. income taxes have not been provided at December 31, 1998, amounted
to $1,328 million and $2,226 million. The corresponding amounts at December 31,
1997 were $1,482 million and $2,313 million. Determination of the unrecognized
U.S. deferred income taxes on these amounts is not practicable.
For the years 1998 and 1997, no loss carryforward benefits were recorded
for U.S. Federal income taxes. For the year 1996, we recorded a benefit of $184
million for loss carryforwards. For the years 1998, 1997 and 1996, the tax
benefits recorded for loss carryforwards were $30 million, $31 million and $16
million in foreign income taxes.
At December 31, 1998, we had worldwide tax basis loss carryforwards of
approximately $1,692 million, including $967 million which do not have an
expiration date. The remainder expire at various dates through 2019.
Foreign tax credit carryforwards available for U.S. Federal income tax
purposes amounted to approximately $113 million at December 31, 1998, expiring
at various dates through 2003. Alternative minimum tax and other tax credit
carryforwards available for U.S. Federal income tax purposes were $368 million
at December 31, 1998, of which $317 million have no expiration date. The
remaining credits expire at various dates through 2013. The credits that are not
utilized by the expiration dates may be taken as deductions for U.S. Federal
income tax purposes. For the year 1998, we recorded tax credit carryforwards of
$52 million for U.S. Federal income tax purposes.
Note 10 Short-Term Debt, Long-Term Debt, Capital Lease Obligations and Related
Derivatives
Notes Payable, Commercial Paper and Current Portion of Long-term Debt
(Millions of dollars) As of December 31 1998 1997
- --------------------------------------------------------------------------------
Notes payable to banks and others
with originating terms of
one year or less $ 368 $ 473
Commercial paper 1,617 892
Current portion of long-term debt
and capital lease obligations
Indebtedness 991 1,005
Capital lease obligations 13 15
-------------------
2,989 2,385
Less short-term obligations
intended to be refinanced 2,050 1,500
-------------------
Total $ 939 $ 885
================================================================================
<PAGE>
58 TEXACO 1998 ANNUAL REPORT
The weighted average interest rates of commercial paper and notes payable to
banks at December 31, 1998 and 1997 were 5.9% and 6.1%.
Long-term Debt and Capital Lease Obligations
(Millions of dollars) As of December 31 1998 1997
- --------------------------------------------------------------------------------
Long-Term Debt
3-1/2% convertible notes due 2004 $ 204 $ 205
5.7% notes due 2008 201 --
6% notes due 2005 299 --
6-7/8% notes due 1999 200 200
6-7/8% debentures due 2023 196 195
7.09% notes due 2007 150 150
7-1/2% debentures due 2043 198 198
7-3/4% debentures due 2033 199 199
8% debentures due 2032 147 147
8-1/4% debentures due 2006 150 150
8-3/8% debentures due 2022 198 198
8-1/2% notes due 2003 199 199
8-5/8% debentures due 2010 150 150
8-5/8% debentures due 2031 199 199
8-5/8% debentures due 2032 199 199
8.65% notes due 1998 -- 200
8-7/8% debentures due 2021 150 150
9% notes due 1999 200 200
9-3/4% debentures due 2020 250 250
10.61% notes due 2005 -- 206
Medium-term notes, maturing
from 1999 to 2043 (7.5%) 543 489
Revolving Credit Facility,
due 1999-2002 -
variable rate (5.9%) 309 330
Pollution Control Revenue Bonds,
due 2012 - variable rate (3.3%) 166 166
Other long-term debt:
Texaco Inc. - Guarantee of ESOP
Series F loan - variable rate (6.6%) 2 76
U.S. dollars (6.5%) 335 417
Other currencies (11.2%) 394 20
-------------------
Total 5,238 4,893
Capital Lease Obligations (see Note 11) 68 134
-------------------
5,306 5,027
Less current portion of long-term
debt and capital lease obligations 1,004 1,020
-------------------
4,302 4,007
Short-term obligations intended
to be refinanced 2,050 1,500
-------------------
Total long-term debt and
capital lease obligations $ 6,352 $ 5,507
================================================================================
The percentages shown for variable-rate debt are the interest rates at December
31, 1998. The percentages shown for the categories "Medium-term notes" and
"Other long-term debt" are the weighted average interest rates at year-end 1998.
Where applicable, principal amounts shown in the preceding schedule include
unamortized premium or discount. Interest paid, net of amounts capitalized,
amounted to $474 million in 1998, $395 million in 1997 and $433 million in 1996.
At December 31, 1998, we had revolving credit facilities with commitments
of $2.05 billion with syndicates of major U.S. and international banks. These
facilities are available as support for our issuance of commercial paper as well
as for working capital and other general corporate purposes. We had no amounts
outstanding under these facilities at year-end 1998. We pay commitment fees on
these facilities. The banks reserve the right to terminate the credit facilities
upon the occurrence of certain specific events, including change in control.
At December 31, 1998, our long-term debt included $2.05 billion of
short-term obligations scheduled to mature during 1999, which we have both the
intent and the ability to refinance on a long-term basis through the use of our
$2.05 billion revolving credit facilities.
Contractual annual maturities of long-term debt, including sinking fund
payments and potential repayments resulting from options that debtholders might
exercise, for the five years subsequent to December 31, 1998 are as follows (in
millions):
1999 2000 2001 2002 2003
- --------------------------------------------------------------------------------
$ 991 $ 211 $ 219 $ 246 $ 272
Debt-related Derivatives
We seek to maintain a balanced capital structure that provides financial
flexibility and supports our strategic objectives while achieving a low cost of
capital. This is achieved by balancing our liquidity and interest rate
exposures. We manage these exposures primarily through long-term and short-term
debt on the balance sheet. As part of our interest rate exposure management, we
seek to balance the benefit of the lower cost of floating rate debt, with its
inherent increased risk, with fixed rate debt having less market risk. To
achieve this objective, we also use off-balance sheet derivative instruments,
primarily interest rate swaps, to manage identifiable exposures on a
non-leveraged, non-speculative basis.
Summarized below are the carrying amounts and fair values of our debt and
debt-related derivatives at December 31, 1998 and 1997, excluding a combined
interest rate and
<PAGE>
TEXACO 1998 ANNUAL REPORT 59
equity swap entered into in 1997. Derivative usage during the periods presented
was limited to interest rate swaps, where we either paid or received the net
effect of a fixed rate versus a floating rate (commercial paper or LIBOR) index
at specified intervals, calculated by reference to an agreed notional principal
amount.
(Millions of dollars) As of December 31 1998 1997
- --------------------------------------------------------------------------------
Notes Payable and Commercial Paper:
Carrying amount $ 1,985 $ 1,365
Fair value 1,985 1,365
Related Derivatives -
Payable (Receivable):
Carrying amount $ -- $ --
Fair value 17 3
Notional principal amount $ 300 $ 300
Weighted average maturity (years) 8.3 9.3
Weighted average fixed pay rate 6.42% 6.42%
Weighted average floating
receive rate 5.32% 6.09%
Long-Term Debt, including
Current maturities:
Carrying amount $ 5,238 $ 4,893
Fair value 5,842 5,289
Related Derivatives -
Payable (Receivable):
Carrying amount $ -- $ --
Fair value (9) (1)
Notional principal amount $ 449 $ 544
Weighted average maturity (years) 8.4 .7
Weighted average fixed receive rate 6.24% 5.71%
Weighted average floating pay rate 5.03% 5.76%
Unamortized net gain on
terminated swaps
Carrying amount $ 5 $ 8
================================================================================
Excluded from this table is an interest rate and equity swap with a notional
principal amount of $200 million entered into in 1997, related to the 3-1/2%
notes due 2004. We pay floating rate and receive fixed rate. Also, the
counterparty assumes all exposure for the potential equity-based cash redemption
premium on the notes. The fair value of this swap at year-end 1998 and 1997 was
not material.
During 1998, floating rate pay swaps having an aggregate notional principal
amount of $503 million were amortized or matured. We initiated $466 million of
new floating rate pay swaps. There was no activity in fixed rate pay swaps
during 1998.
Fair values of debt are based upon quoted market prices, as well as rates
currently available to us for borrowings with similar terms and maturities. We
estimate the fair value of swaps as the amount that would be received or paid to
terminate the agreements at year-end, taking into account current interest rates
and the current creditworthiness of the swap counterparties. The notional
amounts of derivative contracts do not represent cash flow and are not subject
to credit risk.
Amounts receivable or payable based on the interest rate differentials of
derivatives are accrued monthly and are reflected in interest expense as a hedge
of interest on outstanding debt. Gains and losses on terminated swaps are
deferred and amortized over the life of the associated debt or the original term
of the swap, whichever is shorter.
Note 11 Lease Commitments and Rental Expense
We have leasing arrangements involving service stations, tanker charters, crude
oil production and processing equipment and other facilities. We reflect amounts
due under capital leases in our balance sheet as obligations, while we reflect
our interest in the related assets as properties, plant and equipment. The
remaining lease commitments are operating leases, and we record payments on such
leases as rental expense.
As of December 31, 1998, we had estimated minimum commitments for payment
of rentals (net of noncancelable sublease rentals) under leases which, at
inception, had a noncancelable term of more than one year, as follows:
(Millions of dollars) Operating Leases Capital Leases
- --------------------------------------------------------------------------------
1999 $ 154 $ 13
2000 112 12
2001 95 18
2002 323 8
2003 56 8
After 2003 320 21
------------------------
Total lease commitments $ 1,060 $ 80
======
Less interest 12
------
Present value of total capital
lease obligations $ 68
======
Operating lease commitments for 2002 include a $213 million residual value
guarantee of leased production facilities. Payment is required only if we do not
renew the lease.
<PAGE>
60 TEXACO 1998 ANNUAL REPORT
Rental expense relative to operating leases, including contingent rentals
based on factors such as gallons sold, is provided in the table below. Such
payments do not include rentals on leases covering oil and gas mineral rights.
(Millions of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------
Rental expense
Minimum lease rentals $ 208 $ 270 $ 259
Contingent rentals -- 3 10
-------------------------------
Total 208 273 269
Less rental income on
properties subleased
to others 50 78 53
-------------------------------
Net rental expense $ 158 $ 195 $ 216
===============================================================================
Note 12 Employee Benefit Plans
Texaco Inc. and certain of its non-U.S. subsidiaries sponsor various benefit
plans for active employees and retirees. The costs of the savings, health care
and life insurance plans relative to employees' active service are shared by the
company and its employees, with Texaco's costs for these plans charged to
expense as incurred. In addition, reserves for employee benefit plans are
provided principally for the unfunded costs of various pension plans, retiree
health and life insurance benefits, incentive compensation plans and for
separation benefits payable to employees.
Employee Stock Ownership Plans (ESOP)
We recorded ESOP expense of $1 million in 1998, $2 million in 1997 and $15
million in 1996. Our contributions to the Employees Thrift Plan of Texaco Inc.
and the Employees Savings Plan of Texaco Inc. amounted to $1 million in 1998, $2
million in 1997 and $26 million in 1996. These plans are designed to provide
participants with a benefit of approximately 6% of base pay, as well as any
benefits earned under the current employee Performance Compensation Program.
ESOP expenses in 1996 included $9 million for the 1995 employee incentive award
program.
In 1998, 1997 and 1996, we paid $42 million, $44 million and $46 million in
dividends on Series B and Series F stock. The trustee applies the dividends to
fund interest payments which amounted to $5 million, $7 million and $10 million
for 1998, 1997 and 1996, as well as to reduce principal on the ESOP loans.
Dividends on the shares of Series B and Series F used to service debt of the
Plans are tax deductible to the company. In November 1998 and December 1997, a
portion of the original Thrift Plan ESOP loan was refinanced through a company
loan. The refinancing will extend the ESOP for a period of up to six years.
We reflect in our long-term debt the plans' original ESOP loans guaranteed
by Texaco Inc. As we repay the original and refinanced ESOP loans, we reduce the
remaining ESOP-related unearned employee compensation included as a component of
stockholders' equity.
Benefit Plan Trust
We have established a benefit plan trust for funding company obligations under
some of our benefit plans. At year-end 1998, the trust contained 9.2 million
shares of treasury stock. We intend to continue to pay our obligations under our
benefit plans. The trust will use the shares, proceeds from the sale of such
shares and dividends on such shares to pay benefits only to the extent that we
do not pay such benefits. The trustee will vote the shares held in the trust as
instructed by the trust's beneficiaries. The shares held by the trust are not
considered outstanding for earnings per share purposes until distributed or sold
by the trust in payment of benefit obligations.
Termination Benefits
In the fourth quarter of 1998, we recorded an after-tax charge of $80 million
for employee separations, curtailment costs and special termination benefits
associated with our previously-announced restructuring of our worldwide upstream
and natural gas businesses, along with our corporate center restructuring and
other cost-cutting initiatives, primarily in the international downstream areas.
The charge was comprised of $88 million of operating expenses, $27 million of
selling, general and administrative expenses and $35 million in related income
tax benefits. Under the restructuring program, we estimate that over 1,400
employee reductions worldwide will occur, substantially by the end of the first
quarter of 1999. Through December 31, 1998, we have terminated 433 employees and
we paid $15 million of benefits under this program. The remaining benefits will
be paid in future periods in accordance with plan provisions.
We recorded an after-tax charge of $56 million in the fourth quarter of
1996 to cover the costs of employee
<PAGE>
TEXACO 1998 ANNUAL REPORT 61
separations, including employees of affiliates, as a result of a companywide
realignment and consolidation of our operations. We recorded an adjustment of $6
million in the fourth quarter of 1997 to increase the accrual from the previous
amount. The program was completed by the end of 1997 with the reduction of
approximately 920 employees. During 1998, we paid $8 million of benefits under
this program. The remaining benefits of $12 million will be paid in future
periods in accordance with plan provisions.
Pension Plans
We sponsor pension plans that cover the majority of our employees. Generally,
these plans provide defined pension benefits based on years of service and final
average pay. Pension plan assets are principally invested in equity and fixed
income securities and deposits with insurance companies.
Total worldwide expense for all employee pension plans of Texaco, including
pension supplementations and smaller non-U.S. plans, was $92 million in 1998 and
1997 and $91 million in 1996. The following data are provided for principal U.S.
and non-U.S. plans:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits
----------------------------------------------
1998 1997 Other U.S. Benefits
-------------------- -------------------- --------------------
(Millions of dollars) As of December 31 U.S. Int'l U.S. Int'l 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Changes in Benefit (Obligations)
Benefit (obligations) at January 1 $(1,769) $ (835) $(1,657) $ (801) $ (756) $ (699)
Service cost (60) (21) (54) (17) (9) (6)
Interest cost (117) (86) (117) (85) (50) (49)
Amendments -- (3) (18) -- -- (5)
Actuarial gain/(loss) (191) (117) (85) (74) 8 (39)
Employee contributions (4) (3) (4) (1) (12) (10)
Benefits paid 240 70 182 59 56 53
Curtailments/settlements 17 -- -- -- (7) --
Special termination benefits (12) -- -- (1) (3) --
Currency adjustments -- 16 -- 85 -- --
Acquisitions/joint ventures 12 -- (16) -- -- (1)
------------------------------------------------------------------------
Benefit (obligations) at December 31 $(1,884) $ (979) $(1,769) $ (835) $ (773) $ (756)
Changes in Plan Assets
Fair value of plan assets at January 1 $ 1,702 $ 900 $ 1,483 $ 829 $ -- $ --
Actual return on plan assets 293 142 304 166 -- --
Company contributions 90 32 87 27 44 43
Employee contributions 4 3 4 1 12 10
Expenses (6) (2) (5) (2) -- --
Benefits paid (240) (70) (182) (59) (56) (53)
Currency adjustments -- 23 -- (62) -- --
Acquisitions/joint ventures (17) -- 11 -- -- --
------------------------------------------------------------------------
Fair value of plan assets at December 31 $ 1,826 $ 1,028 $ 1,702 $ 900 $ -- $ --
===================================================================================================================================
</TABLE>
<PAGE>
62 TEXACO 1998 ANNUAL REPORT
<TABLE>
<CAPTION>
Pension Benefits
----------------------------------------------
1998 1997 Other U.S. Benefits
------------------ ------------------- --------------------
(Millions of dollars) As of December 31 U.S. Int'l U.S. Int'l 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Funded Status of the Plans
Obligation (greater than) less than assets $ (58) $ 49 $ (67) $ 65 $(773) $(756)
Unrecognized net transition asset (14) (14) (21) (23) -- --
Unrecognized prior service cost 68 52 85 46 4 5
Unrecognized actuarial (gain)/loss (93) 4 (100) (53) (92) (94)
------------------------------------------------------------------------
Net (liability)/asset recorded in
Texaco's Consolidated Balance Sheet $ (97) $ 91 $(103) $ 35 $(861) $(845)
Net (liability)/asset recorded in Texaco's
Consolidated Balance Sheet consists of:
Prepaid benefit asset $ 72 $ 346 $ 64 $ 303 $ -- $ --
Accrued benefit liability (215) (268) (195) (299) (861) (845)
Intangible asset 23 12 21 22 -- --
Other accumulated nonowner equity 23 1 7 9 -- --
------------------------------------------------------------------------
Net (liability)/asset recorded in
Texaco's Consolidated Balance Sheet $ (97) $ 91 $(103) $ 35 $(861) $(845)
===================================================================================================================================
Assumptions as of December 31
Discount rate 6.75% 9.5% 7.0% 10.9% 6.75% 7.0%
Expected return on plan assets 10.0% 8.4% 10.0% 8.5% -- --
Rate of compensation increase 4.0% 6.1% 4.0% 6.2% 4.0% 4.0%
Health care cost trend rate -- -- -- -- 4.0% 4.0%
===================================================================================================================================
<CAPTION>
Pension Benefits
--------------------------------------------------
1998 1997 1996 Other U.S. Benefits
-------------- -------------- -------------- -----------------------
(Millions of dollars) As of December 31 U.S. Int'l U.S. Int'l U.S. Int'l 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Components of Net
Periodic Benefit Expenses
Service cost $ 60 $ 21 $ 54 $ 17 $ 57 $ 16 $ 9 $ 6 $ 12
Interest cost 117 86 117 85 117 81 50 49 51
Expected return on plan assets (136) (79) (132) (66) (130) (64) -- -- --
Amortization of transition asset (4) (10) (5) (8) (5) (8) -- -- --
Amortization of prior
service cost 11 7 10 6 10 6 -- -- --
Amortization of (gain)/loss 6 (2) 3 -- 3 2 (4) (5) (1)
Curtailments/settlements 6 -- -- -- -- -- 1 -- --
Special termination charges 8 -- -- -- -- -- 2 -- --
-----------------------------------------------------------------------------
Net periodic benefit expense $ 68 $ 23 $ 47 $ 34 $ 52 $ 33 $ 58 $ 50 $ 62
===================================================================================================================================
</TABLE>
For pension plans with accumulated obligations in excess of plan assets, the
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $414 million, $383 million and $0 as of December 31, 1998, and
$412 million, $384 million and $11 million as of December 31, 1997.
<PAGE>
TEXACO 1998 ANNUAL REPORT 63
We acquired Monterey on November 1, 1997, including their pension and
postretirement benefit plans. We amended our plans to authorize Monterey to
become a participating employer in our plans. In connection with the formation
of Equilon, effective January 1, 1998, we transferred to Equilon pension benefit
obligations of $12 million and related plan assets of $17 million.
Other U.S. Benefits
We sponsor postretirement plans in the U.S. that provide health care and life
insurance for retirees and eligible dependents. Our U.S. health insurance
obligation is our fixed dollar contribution. The plans are unfunded, and the
costs are shared by us and our employees and retirees. Certain of the company's
non-U.S. subsidiaries have postretirement benefit plans, the cost of which is
not significant to the company. For measurement purposes, the fixed dollar
contribution is expected to increase by 4% per annum for all future years.
A change in our fixed dollar contribution has a significant effect on the
amounts we report. A 1% change in our contributions would have the following
effects:
1-Percentage 1-Percentage
(Millions of dollars) Point Increase Point Decrease
- -------------------------------------------------------------------------------
Effect on annual total of service
and interest cost components $ 5 $ (4)
Effect on postretirement
benefit obligation $ 52 $(45)
===============================================================================
Note 13 Stock Incentive Plan
Under our Stock Incentive Plan, stock options, restricted stock and other
incentive award forms may be granted to executives, directors and key employees
to provide motivation to enhance the company's success and increase shareholder
value. The maximum number of shares that may be awarded as stock options or
restricted stock under the plan is 1% of the common stock outstanding on
December 31 of the previous year. The following table summarizes the number of
shares at December 31, 1998, 1997 and 1996 available for awards during the
subsequent year:
(Shares) As of December 31 1998 1997 1996
- --------------------------------------------------------------------------------
To all participants 12,677,325 9,607,506 7,027,010
To those participants not
officers or directors 1,967,715 2,362,273 1,932,796
----------------------------------------
Total 14,645,040 11,969,779 8,959,806
================================================================================
Restricted shares granted under the plan contain a performance element which
must be satisfied in order for all or a specified portion of the shares to vest.
Restricted performance shares awarded in each year under the plan were as
follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Shares 334,798 281,174 282,476
Weighted average fair value $ 61.59 $ 55.09 $ 42.43
================================================================================
Stock options granted under the plan extend for 10 years from the date of grant
and vest over a two year period at a rate of 50% in the first year and 50% in
the second year. The exercise price cannot be less than the fair market value of
the underlying shares of common stock on the date of the grant. The plan
provides for restored options. This feature enables a participant who exercises
a stock option by exchanging previously acquired common stock or who has shares
withheld by us to satisfy tax withholding obligations, to receive new options
equal to the number of shares exchanged or withheld. The restored options are
fully exercisable six months after the date of grant and the exercise price is
the fair market value of the common stock on the day the restored option is
granted.
We apply APB Opinion 25 in accounting for our stock-based compensation
programs. Stock-based compensation expense recognized in connection with the
plan was $17 million in 1998, $18 million in 1997 and $13 million in 1996.
Had we accounted for our plan using the accounting method recommended by SFAS
123, net income and earnings per share would have been the pro forma amounts
below:
1998 1997 1996
- --------------------------------------------------------------------------------
Net income (Millions of dollars)
As reported $ 578 $ 2,664 $ 2,018
Pro forma $ 524 $ 2,621 $ 1,997
Earnings per share (dollars)
Basic-- as reported $ .99 $ 4.99 $ 3.77
-- pro forma $ .89 $ 4.91 $ 3.73
Diluted-- as reported $ .99 $ 4.87 $ 3.68
-- pro forma $ .89 $ 4.79 $ 3.64
================================================================================
We used the Black-Scholes model with the following assumptions to estimate the
fair market value of options at date of grant:
1998 1997 1996
- -------------------------------------------------------------------------------
Expected life 2 yrs 2 yrs 3 yrs
Interest rate 5.4% 6.0% 6.1%
Volatility 22.5% 18.6% 15.0%
Dividend yield 3.0% 3.0% 3.3%
===============================================================================
<PAGE>
64 TEXACO 1998 ANNUAL REPORT
Option award activity during 1998, 1997 and 1996 is summarized in the following
table:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Stock Options) Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1 10,071,307 $53.31 9,436,406 $42.73 9,335,288 $33.45
Granted 2,388,593 61.56 2,084,902 55.06 2,040,530 42.43
Exercised (7,732,978) 53.18 (9,533,861) 44.86 (8,088,040) 34.22
Restored 6,889,941 60.77 8,103,502 55.32 6,271,720 45.52
Canceled (814) 78.08 (19,642) 51.43 (123,092) 36.77
---------- ---------- ----------
Outstanding December 31 11,616,049 59.48 10,071,307 53.31 9,436,406 42.73
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable December 31 5,945,445 58.93 3,197,262 51.21 2,853,236 39.20
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $ 8.48 $ 6.92 $ 5.50
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information on stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted- Weighted- Weighted-
Exercisable Price Average Average Average
Range (per share) Shares Remaining Life Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$23.39 - 31.84 54,329 3.6 yrs. $ 30.00 54,329 $ 30.00
$32.06 - 78.08 11,561,720 6.2 yrs. $ 59.62 5,891,116 $ 59.20
---------- ----------
$23.39 - 78.08 11,616,049 6.2 yrs. $ 59.48 5,945,445 $ 58.93
====================================================================================================================================
</TABLE>
Note 14 Preferred Stock and Rights
Series B ESOP Convertible Preferred Stock
At December 31, 1998, the outstanding shares of Series B ESOP Convertible
Preferred Stock (Series B) were held by an ESOP. Dividends on each share of
Series B are cumulative and payable semiannually at the rate of $57 per annum.
Participants may partially convert Series B holdings into common stock
beginning at age 55, and may elect full conversion upon retirement or separation
from the company. Presently, each share of Series B entitles a participant to
25.7 votes, voting together with the holders of common stock, and is convertible
into 25.736 shares of common stock. As an alternative to conversion, a
participant can elect to receive $600 per share of Series B, payable in cash or
common stock. If the participant elects cash, we will cause shares of common
stock to be sold to fund such election. We may redeem the outstanding shares of
Series B at $600 per share, subject to the participants' right to elect
conversion to common stock at that time.
Series D Junior Participating Preferred Stock and Rights
In 1989, we declared a dividend distribution of one Right for each outstanding
share of common stock. This was adjusted to one-half Right when we declared a
two-for-one stock split in 1997. In 1998, our shareholders approved the
extension of the Rights until May 1, 2004. Unless we redeem the Rights, the
Rights will be exercisable only after a person(s) acquires, obtains the right to
acquire or commences a tender offer that would result in that person(s)
acquiring 20% or more of the outstanding common stock other than pursuant to a
Qualifying Offer. A Qualifying Offer is an all-cash, fully financed tender offer
for all outstanding shares of common stock which remains open for 45 days, which
results in the acquiror owning a majority of the company's voting stock, and in
which the acquiror agrees to purchase for cash all remaining shares of common
stock. The Rights entitle holders to purchase from the company Units of Series D
Junior Participating Preferred Stock (Series D). In general, each Right entitles
the holder to acquire shares of Series D, or in certain cases common stock,
property or other securities at a formula value equal to two times the exercise
price of the Right.
We can redeem the Rights at one cent per Right at any time prior to 10 days
after the Rights become exercisable. Until a Right becomes exercisable, the
holder has no additional voting or dividend rights and it will not have any
<PAGE>
TEXACO 1998 ANNUAL REPORT 65
dilutive effect on the company's earnings. We have reserved and designated 3
million shares as Series D for issuance upon exercise of the Rights. At December
31, 1998, the Rights are not exercisable.
Series F ESOP Convertible Preferred Stock
At December 31, 1998, the outstanding shares of Series F ESOP Convertible
Preferred Stock were held by an ESOP. Dividends on each share of Series F were
cumulative and payable semiannually at the rate of $64.53 per annum.
On February 16, 1999, each share of Series F was converted into 20 shares
of common stock, after we called the Series F for redemption.
Market Auction Preferred Shares
There are outstanding 1,200 shares of cumulative variable rate preferred stock,
called Market Auction Preferred Shares. The MAPS are grouped into four series
(300 shares each of Series G, H, I and J) of $75 million each, with an aggregate
value of $300 million.
The dividend rates for each series are determined by Dutch auctions
conducted at seven-week intervals.
During 1998, the annual dividend rate for the MAPS ranged between 3.96% and
4.50% and dividends totaled $13 million ($11,280, $11,296, $11,227 and $11,218
per share for Series G, H, I and J).
For 1997, the annual dividend rate for the MAPS ranged between 3.88% and
4.29% and dividends totaled $11 million ($9,689, $9,650, $9,675 and $9,774 per
share for Series G, H, I and J). For 1996, the annual dividend rate for the MAPS
ranged between 3.90% and 4.19% and dividends totaled $12 million ($9,510,
$11,043, $11,009 and $11,015 per share for Series G, H, I and J).
We may redeem the MAPS, in whole or in part, at any time at a liquidation
preference of $250,000 per share, plus premium, if any, and accrued and unpaid
dividends thereon.
The MAPS are non-voting, except under limited circumstances.
Note 15 Financial Instruments
In the normal course of our business, we utilize various types of financial
instruments. These instruments include recorded assets and liabilities, and also
items such as derivatives which principally involve off-balance sheet risk.
Derivatives are contracts whose value is derived from changes in an
underlying commodity price, interest rate or other item. We use derivatives to
reduce our exposure to changes in foreign exchange rates, interest rates and
crude oil and natural gas prices. We do not use derivatives for speculative
purposes. Derivative transactions expose us to counterparty credit risk. We
place contracts only with parties where credit-worthiness has been
pre-determined under credit policies. Also, we employ dollar limits. Therefore,
risk of counterparty non-performance and exposure to concentrations of credit
risk are limited.
CASH AND CASH EQUIVALENTS Fair value approximates cost as reflected in the
Consolidated Balance Sheet at December 31, 1998 and 1997 because of the
short-term maturities of these instruments. Cash equivalents are classified as
held-to-maturity. The amortized cost of cash equivalents at December 31, 1998
and 1997 includes $72 million and $129 million of time deposits and $109 million
and $47 million of commercial paper.
SHORT-TERM AND LONG-TERM INVESTMENTS Fair value is primarily based on quoted
market prices and valuation statements obtained from major financial
institutions. At December 31, 1998, our available-for-sale securities had an
estimated fair value of $492 million, including gross unrealized gains and
losses of $40 million and $8 million. At December 31, 1997, our
available-for-sale securities had an estimated fair value of $621 million,
including gross unrealized gains and losses of $47 million and $13 million. The
available-for-sale securities consist primarily of debt securities issued by
U.S. and foreign governments and corporations. The majority of these investments
mature within five years.
Proceeds from sales of available-for-sale securities were $1,011 million in
1998, $1,040 million in 1997 and $1,503 million in 1996. These sales resulted in
gross realized gains of $53 million in 1998, $48 million in 1997 and $51 million
in 1996, and gross realized losses of $22 million, $19 million, and $17 million.
The estimated fair value of other long-term investments qualifying as
financial instruments but not included above, for which it is practicable to
estimate fair value, approximated the December 31, 1998 and 1997 carrying values
of $331 million and $197 million.
SHORT-TERM DEBT, LONG-TERM DEBT AND RELATED DERIVATIVES Refer to Note 10 for
additional information about debt and related derivatives outstanding at
December 31, 1998 and 1997.
FORWARD EXCHANGE AND OPTION CONTRACTS As an international company, we are
exposed to currency exchange risk. To hedge against adverse changes in foreign
currency
<PAGE>
66 TEXACO 1998 ANNUAL REPORT
exchange rates, we will enter into forward and option contracts to buy and sell
foreign currencies. Shown below in U.S. dollars are the notional amounts of
outstanding forward exchange contracts to buy and sell foreign currencies.
(Millions of dollars) Buy Sell
- --------------------------------------------------------------------------------
Australian dollars $ 370 $ 60
British pounds 1,476 440
Danish krone 449 237
Dutch guilders 303 13
New Zealand dollars 126 13
Other European currencies 179 77
Other currencies 50 43
-------------------------
Total at December 31, 1998 $ 2,953 $ 883
Total at December 31, 1997 $ 1,845 $ 606
================================================================================
Market risk exposure on these contracts is essentially limited to currency rate
movements. At year-end 1998, there were $8 million unrealized gains and $19
million unrealized losses related to these contracts. At year-end 1997, there
were $5 million unrealized gains and $29 million unrealized losses.
We use forward exchange contracts to buy foreign currencies primarily to
hedge the net monetary liability position of our European, Australian and New
Zealand operations and to hedge portions of significant foreign currency capital
expenditures and lease commitments. These contracts generally have terms of 60
days or less. Contracts that hedge foreign currency monetary positions are
marked-to-market monthly. Any resultant gains and losses are included in income
currently as other costs. At year-end 1998 and 1997, hedges of foreign currency
commitments principally involved capital projects requiring expenditure of
British pounds and Danish krone. The percentages of planned capital expenditures
hedged at year-end were: British pounds - 54% in 1998 and 62% in 1997; Danish
krone - 40% in 1998 and 74% in 1997. Realized gains and losses on hedges of
foreign currency commitments are initially recorded to deferred charges.
Subsequently, the amounts are applied to the capitalized project cost on a
percentage-of-completion basis, and are then amortized over the lives of the
applicable projects. At year-end 1998 and 1997, net hedging gains of $50 million
and $51 million, respectively, had yet to be amortized.
Contracts to sell foreign currencies are primarily related to a separately
managed program to hedge the value of our investment portfolio denominated in
foreign currencies. Our strategy is to hedge the full value of this portion of
our investment portfolio and to close out forward contracts upon the sale or
maturity of the corresponding investments. We value these contracts at market
based on the foreign exchange rates in effect on the balance sheet dates. We
record changes in the value of these contracts as part of the carrying amount of
the related investments. We record related gains and losses, net of applicable
income taxes, to stockholders' equity until the underlying investments are sold
or mature.
PREFERRED SHARES OF SUBSIDIARIES Refer to Note 16 regarding derivatives related
to subsidiary preferred shares.
PETROLEUM AND NATURAL GAS HEDGING We hedge a portion of the market risks
associated with our crude oil, natural gas and petroleum product purchases,
sales and exchange activities to reduce price exposure. All hedge transactions
are subject to the company's corporate risk management policy which sets out
dollar, volumetric and term limits, as well as to management approvals as set
forth in our delegations of authorities.
We use established petroleum futures exchanges, as well as
"over-the-counter" hedge instruments, including futures, options, swaps and
other derivative products. In carrying out our hedging programs, we analyze our
major commodity streams for fixed cost, fixed revenue and margin exposure to
market price changes. Based on this corporate risk profile, forecasted trends
and overall business objectives, we determine an appropriate strategy for risk
reduction.
Hedge positions are marked-to-market for valuation purposes. Gains and
losses on hedge transactions, which offset losses and gains on the underlying
"cash market" transactions, are recorded to deferred income or charges until the
hedged transaction is closed, or until the anticipated future purchases, sales
or production occur. At that time, any gain or loss on the hedging contract is
recorded to operating revenues as an increase or decrease in margins, or to
inventory, as appropriate.
At December 31, 1998 and 1997, there were open derivative commodity
contracts required to be settled in cash, consisting mostly of basis swaps
related to location differences in prices. Notional contract amounts, excluding
unrealized gains and losses, were $4,397 million and $974 million at year-end
1998 and 1997. These amounts principally represent future values of contract
volumes over the remaining duration of outstanding swap contracts at the
respective dates. These contracts hedge a small fraction of our business
activities, generally for the next twelve months. Unrealized gains and losses on
contracts outstanding at year-end 1998 were $161 million and $140 million,
respectively. At year-end 1997, unrealized gains and losses were $93 million and
$58 million, respectively.
<PAGE>
TEXACO 1998 ANNUAL REPORT 67
Note 16 Other Financial Information, Commitments and Contingencies
Environmental Liabilities
Texaco Inc. and subsidiary companies have financial liabilities relating to
environmental remediation programs which we believe are sufficient for known
requirements. At December 31, 1998, the balance sheet includes liabilities of
$285 million for future environmental remediation costs. Also, we have accrued
$794 million for the future cost of restoring and abandoning existing oil and
gas properties.
We have accrued for our probable environmental remediation liabilities to
the extent reasonably measurable. We based our accruals for these obligations on
technical evaluations of the currently available facts, interpretation of the
regulations and our experience with similar sites. Additional accrual
requirements for existing and new remediation sites may be necessary in the
future when more facts are known. The potential also exists for further
legislation which may provide limitations on liability. It is not possible to
project the overall costs or a range of costs for environmental items beyond
that disclosed above. This is due to uncertainty surrounding future
developments, both in relation to remediation exposure and to regulatory
initiatives. However, while future environmental expenditures in the petroleum
industry are expected to be significant, they will be a cost of doing business
that will have to be recovered in the marketplace. Moreover, it is not believed
that such future costs will be material to our financial position or to our
operating results over any reasonable period of time.
Preferred Shares of Subsidiaries
Minority holders own $602 million of preferred shares of our subsidiary
companies, which is reflected as minority interest in subsidiary companies in
the Consolidated Balance Sheet.
MVP Production Inc., a subsidiary, has variable rate cumulative preferred
shares of $75 million owned by one minority holder. The shares have voting
rights and are redeemable in 2003. Dividends on these shares were $4 million in
1998, 1997 and 1996.
Texaco Capital LLC, another subsidiary, has three classes of preferred
shares, all held by minority holders. The first class is 14 million shares
totaling $350 million of Cumulative Guaranteed Monthly Income Preferred Shares,
Series A (Series A). The second class is 4.5 million shares totaling $112
million of Cumulative Adjustable Rate Monthly Income Preferred Shares, Series B
(Series B). The third class, issued in Canadian dollars, is 3.6 million shares
totaling $65 million of Deferred Preferred Shares, Series C (Series C). Texaco
Capital LLC's sole assets are notes receivable from Texaco Inc. The payment of
dividends and payments on liquidation or redemption with respect to Series A,
Series B and Series C are guaranteed by Texaco Inc.
The fixed dividend rate for Series A is 6-7/8% per annum. The annual
dividend rate for Series B averaged 5.1% for 1998 and 5.9% for both 1997 and
1996. The dividend rate on Series B is reset quarterly per contractual formula.
Dividends on Series A and Series B are paid monthly. Dividends on Series A for
1998, 1997 and 1996 totaled $24 million for each year. Annual dividends on
Series B totaled $6 million for 1998 and $7 million for both 1997 and 1996.
Series A and Series B are redeemable under certain circumstances and, at
the option of Texaco Capital LLC (with Texaco Inc.'s consent) in whole or in
part, from time to time, at $25 per share on or after October 31, 1998 for
Series A and June 30, 1999 for Series B, plus, in each case, accrued and unpaid
dividends to the date fixed for redemption.
Dividends on Series C at a rate of 7.17% per annum, compounded annually,
will be paid at the redemption date of February 28, 2005, unless earlier
redemption occurs. Early redemption may result upon the occurrence of certain
specific events.
We have entered into an interest rate and currency swap related to Series C
preferred shares. The swap matures in the year 2005. Over the life of the
interest rate swap component of the contract, we will make LIBOR-based floating
rate interest payments based on a notional principal amount of $65 million.
Canadian dollar interest will accrue to us at a fixed rate applied to the
accreted notional principal amount, which was Cdn. $87 million at the inception
of the swap.
The currency swap component of the transaction calls for us to exchange at
contract maturity date $65 million for Cdn. $170 million, representing Cdn. $87
million plus accrued interest. The carrying amount of this contract represents
the Canadian dollar accrued interest receivable by us. At year-end 1998 and
1997, the carrying amount and the fair value of this transaction were not
material.
Series A, Series B and Series C preferred shares are non-voting, except
under limited circumstances.
The above preferred stock issues currently require annual dividend payments
of approximately $34 million. We are required to redeem $75 million of this
preferred stock in 2003, $65 million (plus accreted dividends of $59 million) in
2005, $112 million in 2024 and $350 million in 2043. We have the ability to
extend the required redemption dates for the $112 million and $350 million of
preferred stock beyond 2024 and 2043.
<PAGE>
68 TEXACO 1998 ANNUAL REPORT
Financial Guarantees
We have guaranteed the payment of certain debt, lease commitments and other
obligations of third parties and affiliate companies. These guarantees totaled
$797 million and $372 million at December 31, 1998 and 1997. The year-end 1998
amount includes $387 million of operating lease commitments of Equilon, our
affiliate.
Exposure to credit risk in the event of non-payment by the obligors is
represented by the contractual amount of these instruments. No loss is
anticipated under these guarantees.
Additionally, in June 1997, our 50% owned affiliate, Caltex Petroleum
Corporation (Caltex), received a claim from the United States Internal Revenue
Service for $292 million in excise taxes, $140 million in penalties and $1.6
billion in interest. The IRS claim relates to sales of crude oil by Caltex to
Japanese customers beginning in 1980. Caltex believes that the underlying claim
for excise taxes and penalties is wrong and that the claim for interest is
flawed. We believe that this claim is without merit and is not anticipated to be
materially important in relation to our consolidated financial position or
results of operations. In February 1999, the original letter of credit to the
IRS for $2.3 billion, which Caltex arranged in order to litigate this claim, was
increased to $2.5 billion. Texaco and its 50% partner, Chevron Corporation, have
severally guaranteed Caltex' letter of credit obligation to a syndicate of
banks.
Throughput Agreements
Texaco Inc. and certain of its subsidiary companies previously entered into
certain long-term agreements wherein we committed to ship through affiliated
pipeline companies and an offshore oil port sufficient volume of crude oil or
petroleum products to enable these affiliated companies to meet a specified
portion of their individual debt obligations, or, in lieu thereof, to advance
sufficient funds to enable these affiliated companies to meet these obligations.
In 1998, we assigned the shipping obligations to Equilon, our affiliate, but
Texaco remains responsible for deficiency payments on virtually all of these
agreements. Additionally, Texaco has entered into long-term purchase commitments
with third parties for take or pay gas transportation. At December 31, 1998 and
1997, our maximum exposure to loss was estimated to be $500 million and $525
million.
However, based on our right of counterclaim against Equilon and
unaffiliated third parties in the event of nonperformance, our net exposure was
estimated to be $195 million and $422 million at December 31, 1998 and 1997.
No significant losses are anticipated as a result of these obligations.
Other Commitments
During 1997, 1996 and 1995, we sold leasehold interests in certain equipment not
yet in service and received British pound payments totaling $530 million. Under
a related agreement, in 1997 we leased back these leasehold interests. We made a
British pound payment in 1997, which released us from future lease commitments
under this agreement. This payment effectively repurchased the leasehold
interests previously sold.
Litigation
Texaco and approximately fifty other oil companies are defendants in seventeen
purported class actions. The actions are pending in Texas, New Mexico, Oklahoma,
Louisiana, Utah, Mississippi and Alabama. The plaintiffs allege that the
defendants undervalued oil produced from properties leased from the plaintiffs
by establishing artificially low selling prices. They allege that these low
selling prices resulted in the defendants underpaying royalties or severance
taxes to them. Plaintiffs seek to recover royalty underpayments and interest. In
some cases plaintiffs also seek to recover severance taxes and treble and
punitive damages. Texaco and twenty-four other defendants have executed a
settlement agreement with most of the plaintiffs that will resolve many of these
disputes. The federal court in Texas has preliminarily approved the settlement
and is considering final approval. Similar claims by the federal and various
state governments remain unresolved.
- --------------------------------------------------------------------------------
It is impossible for us to ascertain the ultimate legal and financial liability
with respect to contingencies and commitments. However, we do not anticipate
that the aggregate amount of such liability in excess of accrued liabilities
will be materially important in relation to our consolidated financial position
or results of operations.
<PAGE>
TEXACO 1998 ANNUAL REPORT 69
Report of Management
We are responsible for preparing Texaco's consolidated financial statements in
accordance with generally accepted accounting principles. In doing so, we must
use judgment and estimates when the outcome of events and transactions is not
certain. Information appearing in other sections of this Annual Report is
consistent with the financial statements.
Texaco's financial statements are based on its financial records. We rely
on Texaco's internal control system to provide us reasonable assurance that
these financial records are being accurately and objectively maintained and that
the company's assets are being protected. The internal control system comprises:
o Corporate Conduct Guidelines that require all employees to obey all
applicable laws, comply with company policies and maintain the highest ethical
standards in conducting company business,
o An organizational structure in which responsibilities are defined and
divided, and
o Written policies and procedures that cover initiating, reviewing, approving
and recording transactions.
We require members of our management team to formally certify each year that the
internal controls for their business units are operating effectively.
Texaco's internal auditors review and report on the effectiveness of
internal controls during the course of their audits. Arthur Andersen LLP,
selected by the Audit Committee and approved by stockholders, independently
audits Texaco's financial statements. Arthur Andersen assesses the adequacy and
effectiveness of Texaco's internal controls when determining the nature, timing
and scope of their audit. We seriously consider all suggestions for improving
Texaco's internal controls that are made by the internal and independent
auditors.
The Audit Committee is comprised of seven directors who are not employees
of Texaco. This Committee reviews and evaluates Texaco's accounting policies and
reporting practices, internal auditing, internal controls, security and other
matters. The Committee also evaluates the independence and professional
competence of Arthur Andersen LLP and reviews the results and scope of their
audit. The internal and independent auditors have free access to the Committee
to discuss financial reporting and internal control issues.
/s/ Peter I. Bijur
Peter I. Bijur
Chairman of the Board and Chief Executive Officer
/s/ Patrick J. Lynch
Patrick J. Lynch
Senior Vice President and Chief Financial Officer
/s/ Robert C. Oelkers
Robert C. Oelkers
Vice President and Comptroller
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
To the Stockholders, Texaco Inc.:
We have audited the accompanying consolidated balance sheet of Texaco Inc. (a
Delaware corporation) and subsidiary companies as of December 31, 1998 and 1997,
and the related statements of consolidated income, cash flows, stockholders'
equity and nonowner changes in equity for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Texaco Inc. and subsidiary
companies as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
February 25, 1999
New York, N.Y.
<PAGE>
70 TEXACO 1998 ANNUAL REPORT
Supplemental Oil and Gas Information
The following pages provide information required by Statement of Financial
Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities.
Table I - Net Proved Reserves
The reserve quantities include only those quantities that are recoverable based
upon reasonable estimates from sound geological and engineering principles. As
additional information becomes available, these estimates may be revised. Also,
we have a large inventory of potential hydrocarbon resources that we expect will
increase our reserve base, as future investments are made in exploration and
development programs.
o Proved developed reserves are reserves that we expect to be recovered
through existing wells with existing equipment and operating methods.
o Proved undeveloped reserves are reserves that we expect to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for completion of development.
Table I
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Proved Reserves of Net Proved Reserves of Natural Gas
Crude Oil and Natural Gas Liquids (Billions of Cubic Feet)
(Millions of Barrels)
Consolidated Subsidiaries Equity
-------------------------------------------------------------------------------------
Affiliate
United Other Other - Other World-
States West Europe East Total East wide
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Developed reserves 1,125 52 142 413 1,732 350 2,082
Undeveloped reserves 216 2 208 62 488 88 576
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995 1,341 54 350 475 2,220 438 2,658
Discoveries & extensions 82 4 80 29 195 1 196
Improved recovery 20 -- -- -- 20 81 101
Revisions 44 2 6 21 73 (3) 70
Net purchases (sales) (23) -- 3 (1) (21) -- (21)
Production (142) (4) (42) (58) (246) (54) (300)
- -----------------------------------------------------------------------------------------------------------------------------------
Total changes (19) 2 47 (9) 21 25 46
Developed reserves 1,100 50 165 418 1,733 354 2,087
Undeveloped reserves 222 6 232 48 508 109 617
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996* 1,322 56 397 466 2,241 463 2,704
Discoveries & extensions 107 13 34 61 215 4 219
Improved recovery 15 -- 65 -- 80 18 98
Revisions 55 3 11 100 169 22 191
Net purchases (sales) 413 (2) (31) (8) 372 -- 372
Production (145) (5) (45) (66) (261) (56) (317)
- -----------------------------------------------------------------------------------------------------------------------------------
Total changes 445 9 34 87 575 (12) 563
Developed reserves 1,374 54 210 463 2,101 354 2,455
Undeveloped reserves 393 11 221 90 715 97 812
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997* 1,767 65 431 553 2,816 451 3,267
Discoveries & extensions 70 2 8 32 112 1 113
Improved recovery 136 -- 16 3 155 156 311
Revisions 46 (15) 22 55 108 137 245
Net purchases (sales) (38) -- -- 26 (12) -- (12)
Production (157) (4) (58) (71) (290) (61) (351)
- -----------------------------------------------------------------------------------------------------------------------------------
Total changes 57 (17) (12) 45 73 233 306
Developed reserves 1,415 39 246 490 2,190 456 2,646
Undeveloped reserves 409 9 173 108 699 228 927
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998* 1,824 48 419 598 2,889 684 3,573
- -----------------------------------------------------------------------------------------------------------------------------------
*Includes net proved
NGL reserves
As of December 31, 1996 207 1 54 1 263 6 269
As of December 31, 1997 246 -- 71 -- 317 4 321
As of December 31, 1998 272 -- 68 -- 340 6 346
===================================================================================================================================
<CAPTION>
Consolidated Subsidiaries Equity
----------------------------------------------------------------------------------------
Affiliate
United Other Other - Other World-
States West Europe East Total East wide
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Developed reserves 3,666 522 452 84 4,724 140 4,864
Undeveloped reserves 396 325 492 3 1,216 15 1,231
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995 4,062 847 944 87 5,940 155 6,095
Discoveries and extensions 436 263 34 3 736 15 751
Improved recovery 8 -- -- -- 8 1 9
Revisions (99) (1) 58 13 (29) -- (29)
Net purchases (sales) (53) (7) -- 1 (59) -- (59)
Production (626) (71) (75) (4) (776) (18) (794)
- -----------------------------------------------------------------------------------------------------------------------------------
Total changes (334) 184 17 13 (120) (2) (122)
Developed reserves 3,360 893 452 96 4,801 136 4,937
Undeveloped reserves 368 138 509 4 1,019 17 1,036
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996* 3,728 1,031 961 100 5,820 153 5,973
Discoveries and extensions 692 26 92 346 1,156 2 1,158
Improved recovery 7 -- 22 -- 29 5 34
Revisions 228 75 41 (22) 322 19 341
Net purchases (sales) 10 (118) (7) (310) (425) -- (425)
Production (643) (96) (81) (2) (822) (17) (839)
- -----------------------------------------------------------------------------------------------------------------------------------
Total changes 294 (113) 67 12 260 9 269
Developed reserves 3,379 792 576 110 4,857 145 5,002
Undeveloped reserves 643 126 452 2 1,223 17 1,240
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997* 4,022 918 1,028 112 6,080 162 6,242
Discoveries and extensions 599 6 47 98 750 1 751
Improved recovery 4 -- 7 -- 11 3 14
Revisions 152 (12) (6) 34 168 10 178
Net purchases (sales) (39) -- -- 250 211 -- 211
Production (633) (92) (112) (17) (854) (25) (879)
- -----------------------------------------------------------------------------------------------------------------------------------
Total changes 83 (98) (64) 365 286 (11) 275
Developed reserves 3,345 688 615 374 5,022 135 5,157
Undeveloped reserves 760 132 349 103 1,344 16 1,360
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998* 4,105 820(a) 964 477 6,366(a) 151 6,517(a)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Additionally, there is approximately 586 BCF of natural gas in Other West
which will be available from production during the period 2005-2016 under a
long-term purchase associated with a service agreement.
<PAGE>
TEXACO 1998 ANNUAL REPORT 71
The following chart summarizes our experience in finding new quantities of
oil and gas to replace our production. Our reserve replacement performance is
calculated by dividing our reserve additions by our production. Our additions
relate to new discoveries, existing reserve extensions, improved recoveries and
revisions to previous reserve estimates. The chart excludes oil and gas
quantities from purchases and sales.
Worldwide United States International
- -----------------------------------------------------------------
Year 1998 166% 144% 191%
Year 1997 167% 132% 212%
Year 1996 113% 83% 154%
3 year average 150% 120% 187%
5 year average 138% 113% 171%
Table II - Standardized Measure
The standardized measure provides a common benchmark among those companies that
have exploration and producing activities. This measure may not necessarily
match our view of the future cash flows from our proved reserves.
The standardized measure is calculated at a 10% discount. Future revenues
are based on year-end prices for liquids and gas. Future production and
development costs are based on current year costs. Extensive judgement is used
to estimate the timing of production and future costs over the remaining life of
the reserves. Future income taxes are calculated using each country's statutory
tax rate.
Our inventory of potential hydrocarbon resources, which may become proved
in the future, are excluded. This could significantly impact our standardized
measure in the future.
Table II - Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Subsidiaries Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Affiliate -
United Other Other Other
(Millions of dollars) States West Europe East Total East Worldwide
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Future cash inflows from sale of oil & gas,
and service fee revenue $ 23,147 $ 1,657 $ 6,581 $ 4,816 $ 36,201 $ 4,708 $ 40,909
Future production costs (10,465) (605) (2,574) (2,551) (16,195) (1,992) (18,187)
Future development costs (4,055) (142) (1,695) (761) (6,653) (803) (7,456)
Future income tax expense (2,583) (419) (715) (1,023) (4,740) (967) (5,707)
---------------------------------------------------------------------------------
Net future cash flows before discount 6,044 491 1,597 481 8,613 946 9,559
10% discount for timing of future cash flows (2,626) (244) (644) (167) (3,681) (391) (4,072)
---------------------------------------------------------------------------------
Standardized measure of discounted future
net cash flows $ 3,418 $ 247 $ 953 $ 314 $ 4,932 $ 555 $ 5,487
====================================================================================================================================
As of December 31, 1997
Future cash inflows from sale of oil & gas,
and service fee revenue $ 34,084 $ 2,305 $ 9,395 $ 7,690 $ 53,474 $ 5,182 $ 58,656
Future production costs (10,980) (807) (2,854) (2,303) (16,944) (1,840) (18,784)
Future development costs (4,693) (132) (1,809) (749) (7,383) (476) (7,859)
Future income tax expense (5,512) (652) (898) (3,445) (10,507) (1,519) (12,026)
---------------------------------------------------------------------------------
Net future cash flows before discount 12,899 714 3,834 1,193 18,640 1,347 19,987
10% discount for timing of future cash flows (5,361) (252) (1,424) (374) (7,411) (519) (7,930)
---------------------------------------------------------------------------------
Standardized measure of discounted future
net cash flows $ 7,538 $ 462 $ 2,410 $ 819 $ 11,229 $ 828 $ 12,057
====================================================================================================================================
As of December 31, 1996
Future cash inflows from sale of oil & gas,
and service fee revenue $ 41,807 $ 2,863 $ 11,242 $ 9,261 $ 65,173 $ 6,632 $ 71,805
Future production costs (8,080) (894) (2,368) (1,993) (13,335) (1,776) (15,111)
Future development costs (2,790) (141) (2,094) (551) (5,576) (740) (6,316)
Future income tax expense (10,444) (758) (1,946) (5,099) (18,247) (2,181) (20,428)
---------------------------------------------------------------------------------
Net future cash flows before discount 20,493 1,070 4,834 1,618 28,015 1,935 29,950
10% discount for timing of future cash flows (8,602) (458) (1,740) (489) (11,289) (695) (11,984)
---------------------------------------------------------------------------------
Standardized measure of discounted future
net cash flows $ 11,891 $ 612 $ 3,094 $ 1,129 $ 16,726 $ 1,240 $ 17,966
====================================================================================================================================
</TABLE>
<PAGE>
72 TEXACO 1998 ANNUAL REPORT
Table III - Changes in the Standardized Measure
The annual change in the standardized measure is explained in this table by the
major sources of change, discounted at 10%.
o Sales & transfers, net of production costs capture the current year's
revenues less the associated producing expenses. The net amount reflected here
correlates to Table VII for revenues less production costs.
o Net changes in prices, production & development costs are computed before
the effects of changes in quantities. The beginning-of-the-year production
forecast is multiplied by the net annual change in the unit sales price and
production cost. The large reduction in the 1998 standardized measure due to
change in price reflects the sharp drop in crude oil and natural gas prices
during 1998.
o Discoveries & extensions indicate the value of the new reserves at year-end
prices, less related costs.
o Development costs incurred during the period capture the current year's
development costs that are shown in Table V. These costs will reduce the
previously estimated future development costs.
o Accretion of discount represents 10% of the beginning discounted future net
cash flows before income tax effects.
o Net change in income taxes is computed as the change in present value of
future income taxes.
Table III - Changes in the Standardized Measure
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Including
Equity in Affiliate - Other East
-----------------------------------------
(Millions of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Standardized measure - beginning of year $ 12,057 $ 17,966 $ 11,872
Sales of minerals-in-place (160) (79) (458)
-----------------------------------------
11,897 17,887 11,414
Changes in ongoing oil and gas operations:
Sales and transfers of produced oil and gas,
net of production costs during the period (3,129) (4,921) (4,859)
Net changes in prices, production and development costs (11,205) (14,632) 8,820
Discoveries and extensions and improved recovery, less related costs 728 2,681 3,182
Development costs incurred during the period 1,770 1,976 1,575
Timing of production and other changes (1,170) (969) (251)
Revisions of previous quantity estimates 852 1,476 527
Purchases of minerals-in-place 48 449 138
Accretion of discount 1,916 3,027 1,952
Net change in discounted future income taxes 3,780 5,083 (4,532)
-----------------------------------------
Standardized measure - end of year $ 5,487 $ 12,057 $ 17,966
====================================================================================================================================
</TABLE>
Table IV - Capitalized Costs
Costs of the following assets are capitalized under the "successful efforts"
method of accounting. These costs include the activities of Texaco's upstream
operations but exclude the crude oil marketing activities, geothermal and other
non-producing activities. As a result, this table will not correlate to
information in Note 7 to the financial statements.
o Proved properties include mineral properties with proved reserves,
development wells and uncompleted development well costs.
o Unproved properties include leaseholds under exploration (even where
hydrocarbons were found but not in sufficient quantities to be considered proved
reserves) and uncompleted exploratory well costs.
o Support equipment and facilities include costs for seismic and drilling
equipment, construction and grading equipment, repair shops, warehouses and
other supporting assets involved in oil and gas producing activities.
o The accumulated depreciation, depletion and amortization represents the
portion of the assets that have been charged to expense in prior periods. It
also includes provisions for future restoration and abandonment activity.
<PAGE>
TEXACO 1998 ANNUAL REPORT 73
Table IV - Capitalized Costs
<TABLE>
<CAPTION>
Consolidated Subsidiaries Equity
--------------------------------------------------------------------------------
Affiliate -
United Other Other Other
(Millions of dollars) States West Europe East Total East Worldwide
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Proved properties $ 20,601 $ 515 $ 4,709 $ 1,799 $ 27,624 $ 1,015 $ 28,639
Unproved properties 1,188 53 71 390 1,702 408 2,110
Support equipment and facilities 437 27 37 342 843 768 1,611
--------------------------------------------------------------------------------
Gross capitalized costs 22,226 595 4,817 2,531 30,169 2,191 32,360
Accumulated depreciation,
depletion and amortization (14,140) (277) (3,381) (1,253) (19,051) (1,119) (20,170)
--------------------------------------------------------------------------------
Net capitalized costs $ 8,086 $ 318 $ 1,436 $ 1,278 $ 11,118 $ 1,072 $ 12,190
====================================================================================================================================
As of December 31, 1997
Proved properties $ 20,196 $ 581 $ 4,584 $ 1,623 $ 26,984 $ 1,112 $ 28,096
Unproved properties 1,248 16 89 225 1,578 338 1,916
Support equipment and facilities 438 26 37 228 729 578 1,307
--------------------------------------------------------------------------------
Gross capitalized costs 21,882 623 4,710 2,076 29,291 2,028 31,319
Accumulated depreciation,
depletion and amortization (13,849) (298) (3,135) (1,131) (18,413) (1,013) (19,426)
--------------------------------------------------------------------------------
Net capitalized costs $ 8,033 $ 325 $ 1,575 $ 945 $ 10,878 $ 1,015 $ 11,893
====================================================================================================================================
</TABLE>
Table V - Costs Incurred
This table summarizes how much we spent to explore and develop our existing
reserve base, and how much we spent to acquire mineral rights from others
(classified as proved or unproved).
o Exploration costs include geological and geophysical costs, the cost of
carrying and retaining undeveloped properties and exploratory drilling costs.
o Development costs include the cost of drilling and equipping development
wells and constructing related production facilities for extracting, treating,
gathering and storing oil and gas from proved reserves.
o Exploration and development costs may be capitalized or expensed, as
applicable. Such costs also include administrative expenses and depreciation
applicable to support equipment associated with these activities. As a result,
the costs incurred will not correlate to Capital and Exploratory Expenditures.
On a worldwide basis, in 1998 we spent $3.45 for each BOE we added. Finding and
development costs averaged $3.91 for the three-year period 1996-1998 and $3.75
per BOE for the five-year period 1994-1998.
<PAGE>
74 TEXACO 1998 ANNUAL REPORT
Table V - Costs Incurred
<TABLE>
<CAPTION>
Consolidated Subsidiaries Equity
---------------------------------------------------------------------------------
Affiliate -
United Other Other Other
(Millions of dollars) States West Europe East Total East Worldwide
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended December 31, 1998
Proved property acquisition $ 27 $ -- $ -- $ 199 $ 226 $ -- $ 226
Unproved property acquisition 85 1 -- 32 118 -- 118
Exploration 417 92 65 277 851 19 870
Development 1,073 25 308 204 1,610 160 1,770
---------------------------------------------------------------------------------
Total $ 1,602 $ 118 $ 373 $ 712 $ 2,805 $ 179 $ 2,984
====================================================================================================================================
For the year ended December 31, 1997
Proved property acquisition $ 1,099* $ -- $ -- $ -- $ 1,099 $ -- $ 1,099
Unproved property acquisition 527* 1 -- 23 551 -- 551
Exploration 480 15 59 234 788 18 806
Development 1,220 62 419 108 1,809 167 1,976
---------------------------------------------------------------------------------
Total $ 3,326 $ 78 $ 478 $ 365 $ 4,247 $ 185 $ 4,432
====================================================================================================================================
For the year ended December 31, 1996
Proved property acquisition $ 56 $ -- $ -- $ -- $ 56 $ -- $ 56
Unproved property acquisition 91 5 -- 20 116 -- 116
Exploration 356 18 90 225 689 9 698
Development 827 107 384 113 1,431 144 1,575
---------------------------------------------------------------------------------
Total $ 1,330 $ 130 $ 474 $ 358 $ 2,292 $ 153 $ 2,445
====================================================================================================================================
</TABLE>
*Includes the acquisition of Monterey Resources on a net cost basis of $1,520
million, which is net of deferred income taxes amounting to $469 million and
$245 million for the acquired proved and unproved properties, respectively.
Table VI - Unit Prices
Average sales prices are calculated using the gross revenues in Table VII.
Average production costs equal producing (lifting) costs, other taxes and the
depreciation, depletion and amortization of support equipment and facilities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Average sales prices
------------------------------------------------------------------------
Natural Natural Natural
Crude oil gas per Crude oil gas per Crude oil gas per
and NGL thousand and NGL thousand and NGL thousand Average production costs
per barrel cubic feet per barrel cubic feet per barrel cubic feet (per composite barrel)
---------------------- ---------------------- ---------------------- ----------------------------
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 10.14 $ 1.93 $ 16.32 $ 2.32 $ 16.97 $ 2.10 $ 4.07 $ 3.94 $ 3.82
Other West 9.65 .92 14.40 1.03 16.80 .96 1.86 2.80 3.44
Europe 11.73 2.42 18.41 2.42 20.37 2.47 5.24 5.58 5.95
Other East 9.61 .38 16.87 1.89 18.61 3.20 3.65 4.11 4.07
Affiliate - Other East 9.81 -- 14.89 -- 16.30 -- 2.68 3.76 3.71
====================================================================================================================================
</TABLE>
Table VII - Results of Operations
Results of operations for exploration and production activities consist of all
the activities within our upstream operations, except for crude oil marketing
activities, geothermal and other non-producing activities. As a result, this
table will not correlate to the Analysis of Income by Operating Segments.
o Revenues are based upon our production that is available for sale and
excludes revenues from resale of third party volumes, equity earnings of certain
smaller affiliates, trading activity and miscellaneous operating income.
Expenses are associated with current year operations but do not include general
overhead and special items.
<PAGE>
TEXACO 1998 ANNUAL REPORT 75
o Production costs consist of costs incurred to operate and maintain wells and
related equipment and facilities. These costs also include taxes other than
income taxes and administrative expenses.
o Exploration costs include dry hole, leasehold impairment, geological and
geophysical expenses, the cost of retaining undeveloped leaseholds and
administrative expenses. Also included are taxes other than income taxes.
o Depreciation, depletion and amortization includes the amount for support
equipment and facilities.
o Estimated income taxes are computed by adjusting each country's income
before income taxes for permanent differences related to the oil and gas
producing activities, then multiplying the result by the country's statutory tax
rate and adjusting for applicable tax credits.
Table VII - Results of Operations
<TABLE>
<CAPTION>
Consolidated Subsidiaries Equity
--------------------------------------------------------------------------
United Other Other Affiliate -
(Millions of dollars) States West Europe East Total Other East Worldwide
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended December 31, 1998
Gross revenues from:
Sales and transfers, including affiliate sales $ 2,570 $ -- $ 438 $ 571 $ 3,579 $ 454 $ 4,033
Sales to unaffiliated entities 218 120 509 122 969 28 997
Production costs (1,066) (35) (400) (250) (1,751) (150) (1,901)
Exploration costs (286) (31) (53) (137) (507) (16) (523)
Depreciation, depletion and amortization (832) (22) (422) (113) (1,389) (106) (1,495)
Other expenses (198) -- (4) (10) (212) (1) (213)
--------------------------------------------------------------------------
Results before estimated income taxes 406 32 68 183 689 209 898
Estimated income taxes (49) (14) (27) (166) (256) (102) (358)
--------------------------------------------------------------------------
Net results $ 357 $ 18 $ 41 $ 17 $ 433 $ 107 $ 540
====================================================================================================================================
For the year ended December 31, 1997
Gross revenues from:
Sales and transfers, including affiliate sales $ 3,492 $ -- $ 495 $ 934 $ 4,921 $ 610 $ 5,531
Sales to unaffiliated entities 312 165 499 178 1,154 43 1,197
Production costs (986) (57) (323) (249) (1,615) (192) (1,807)
Exploration costs (238) (10) (60) (195) (503) (16) (519)
Depreciation, depletion and amortization (735) (27) (382) (129) (1,273) (110) (1,383)
Other expenses (249) -- -- (24) (273) 9 (264)
--------------------------------------------------------------------------
Results before estimated income taxes 1,596 71 229 515 2,411 344 2,755
Estimated income taxes (511) (40) (85) (418) (1,054) (173) (1,227)
--------------------------------------------------------------------------
Net results $ 1,085 $ 31 $ 144 $ 97 $ 1,357 $ 171 $ 1,528
====================================================================================================================================
For the year ended December 31, 1996
Gross revenues from:
Sales and transfers, including affiliate sales $ 3,383 $ -- $ 524 $ 863 $ 4,770 $ 648 $ 5,418
Sales to unaffiliated entities 310 140 475 181 1,106 45 1,151
Production costs (937) (54) (321) (215) (1,527) (183) (1,710)
Exploration costs (196) (27) (57) (150) (430) (8) (438)
Depreciation, depletion and amortization (652) (24) (310) (107) (1,093) (110) (1,203)
Other expenses (241) (1) (1) (40) (283) 8 (275)
--------------------------------------------------------------------------
Results before estimated income taxes 1,667 34 310 532 2,543 400 2,943
Estimated income taxes (534) (26) (112) (417) (1,089) (212) (1,301)
--------------------------------------------------------------------------
Net results $ 1,133 $ 8 $ 198 $ 115 $ 1,454 $ 188 $ 1,642
====================================================================================================================================
</TABLE>
<PAGE>
76 TEXACO 1998 ANNUAL REPORT
Supplemental Market Risk Disclosures
We use derivative financial instruments to hedge interest rate, foreign currency
exchange and market rate risks. Derivatives principally include interest rate
and/or currency swap contracts, forward and option contracts to buy and to sell
foreign currencies, and commodity futures, options, swaps and other instruments.
We hedge only a portion of our risk exposures for assets, liabilities,
commitments and future production, purchases and sales. We remain exposed on the
unhedged portion of such risks.
The estimated sensitivity effects below assume that valuations of all items
within a risk category will move in tandem. This cannot be assured for exposures
involving interest rates, currency exchange rates, petroleum and natural gas.
Users should realize that actual impacts from future interest rate, currency
exchange and petroleum and natural gas price movements will likely differ from
the disclosed impacts due to ongoing changes in risk exposure levels and
concurrent adjustments of hedging derivative positions. Additionally, the range
of variability in prices and rates is representative only of past fluctuations
for each risk category. Past fluctuations in rates and prices may not
necessarily be an indicator of probable future fluctuations.
Notes 10, 15 and 16 to the financial statements include details of our
hedging activities, fair values of financial instruments, related derivatives
exposures and accounting policies.
Debt and Debt-Related Derivatives
We had variable rate debt of approximately $2.7 billion and $2.0 billion at
year-end 1998 and 1997, before effects of related interest rate swaps. Interest
rate swap notional amounts at year-end 1998 decreased by less than $100 million
from year-end 1997.
Based on our overall interest rate exposure on variable rate debt and
interest rate swaps at December 31, 1998 (including the interest rate and equity
swap), a hypothetical two percentage points increase or decrease in interest
rates would not materially affect our consolidated financial position, net
income or cash flows.
Forward Exchange and Option Contracts
In 1998, the net notional amount of open forward contracts increased by $831
million. This related mostly to hedging of increased balance sheet monetary
exposures.
The effect on fair value of our forward exchange contracts at year-end 1998
from a hypothetical 10% change in currency exchange rates would be an increase
or decrease of approximately $207 million. This would be offset by an opposite
effect on the related hedged exposures.
Petroleum and Natural Gas Hedging
In 1998, the notional amount of open derivative contracts increased by $3,423
million, mostly related to natural gas hedging.
For commodity derivatives permitted to be settled in cash or another
financial instrument, sensitivity effects are as follows. At year-end 1998, the
aggregate effect of a hypothetical 25% change in natural gas prices, a 15%
change in crude oil prices and a 16-21% change in petroleum product prices
(dependent on product and location) would not materially affect our consolidated
financial position, net income or cash flows.
Investments in Debt and Publicly Traded Equity Securities
We are subject to price risk on this unhedged portfolio of available-for-sale
securities. During 1998, market risk exposure decreased by $129 million. At
year-end 1998, a 10% appreciation or depreciation in debt and equity prices
would change portfolio fair value by about $49 million. This assumes no
fluctuations in currency exchange rates.
Preferred Shares of Subsidiaries
We are exposed to interest rate risk on dividend requirements of Series B
preferred shares of Texaco Capital LLC.
We are exposed to currency exchange risk on the Canadian dollar denominated
Series C preferred shares of Texaco Capital LLC. We are exposed to offsetting
currency exchange risk as well as interest rate risk on a swap contract used to
hedge the Series C.
Based on the above exposures, a hypothetical two percentage points increase
or decrease in the applicable variable interest rates and a hypothetical 10%
appreciation or depreciation in the Canadian dollar exchange rate would not
materially affect our consolidated financial position, net income or cash flows.
Market Auction Preferred Shares (MAPS)
We are exposed to interest rate risk on dividend requirements of MAPS. A
hypothetical two percentage points increase or decrease in interest rates would
not materially affect our consolidated financial position or cash flows. There
are no derivatives related to MAPS.
<PAGE>
TEXACO 1998 ANNUAL REPORT 77
Selected Financial Data
Selected Quarterly Financial Data
<TABLE>
<CAPTION>
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------------------------------------- --------------------------------------
(Millions of dollars) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Sales and services $ 7,922 $ 7,729 $ 7,481 $ 7,778 $11,813 $10,983 $10,834 $11,557
Equity in income of affiliates, interest,
asset sales and other 225 315 226 31 216 513 259 492
--------------------------------------------------------------------------------
8,147 8,044 7,707 7,809 12,029 11,496 11,093 12,049
--------------------------------------------------------------------------------
Deductions
Purchases and other costs 6,114 5,972 5,836 6,257 9,298 8,671 8,355 8,906
Operating expenses 580 645 593 690 781 790 806 874
Selling, general and
administrative expenses 276 296 290 362 419 417 450 469
Exploratory expenses 141 90 93 137 99 93 114 165
Depreciation, depletion and amortization 388 375 409 503 385 372 388 488
Interest expense, taxes other than
income taxes and minority interest 249 240 237 233 261 247 220 272
--------------------------------------------------------------------------------
7,748 7,618 7,458 8,182 11,243 10,590 10,333 11,174
--------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change 399 426 249 (373) 786 906 760 875
Provision for (benefit from) income taxes 140 84 34 (160) (194) 335 270 252
--------------------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting change 259 342 215 (213) 980 571 490 623
Cumulative effect of accounting change (25) -- -- -- -- -- -- --
--------------------------------------------------------------------------------
Net income (loss) $ 234 $ 342 $ 215 $ (213) $ 980 $ 571 $ 490 $ 623
- -------------------------------------------------------------------------------------------------------------------------------
Total nonowner changes in equity $ 264 $ 344 $ 210 $ (246) $ 939 $ 596 $ 476 $ 590
===============================================================================================================================
Net income (loss) per common share (dollars)
Basic
Income (loss) before cumulative
effect of accounting change $ .46 $ .62 $ .38 $ (.43) $ 1.86 $ 1.07 $ .91 $ 1.15
Cumulative effect of
accounting change (.05) -- -- -- -- -- -- --
--------------------------------------------------------------------------------
Net income (loss) $ .41 $ .62 $ .38 $ (.43) $ 1.86 $ 1.07 $ .91 $ 1.15
================================================================================
Diluted
Income (loss) before cumulative
effect of accounting change $ .46 $ .61 $ .38 $ (.43) $ 1.80 $ 1.05 $ .90 $ 1.12
Cumulative effect of
accounting change (.04) -- -- -- -- -- -- --
--------------------------------------------------------------------------------
Net income (loss) $ .42 $ .61 $ .38 $ (.43) $ 1.80 $ 1.05 $ .90 $ 1.12
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
78 TEXACO 1998 ANNUAL REPORT
<TABLE>
<CAPTION>
Five-Year Comparison of Selected Financial Data
(Millions of dollars) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year:
Revenues from continuing operations $ 31,707 $ 46,667 $ 45,500 $ 36,787 $ 33,353
Net income (loss) before cumulative effect of accounting changes
Continuing operations $ 603 $ 2,664 $ 2,018 $ 728 $ 979
Discontinued operations -- -- -- -- (69)
Cumulative effect of accounting changes (25) -- -- (121) --
-------------------------------------------------------
Net income $ 578 $ 2,664 $ 2,018 $ 607 $ 910
-------------------------------------------------------
Total nonowner changes in equity $ 572 $ 2,601 $ 1,863 $ 592 $ 972
-------------------------------------------------------
Net income (loss) per common share (dollars)
Basic
Income (loss) before cumulative effect of accounting changes
Continuing operations $ 1.04 $ 4.99 $ 3.77 $ 1.29 $ 1.72
Discontinued operations -- -- -- -- (.14)
Cumulative effect of accounting changes (.05) -- -- (.24) --
-------------------------------------------------------
Net income $ .99 $ 4.99 $ 3.77 $ 1.05 $ 1.58
-------------------------------------------------------
Diluted
Income (loss) before cumulative effect of accounting changes
Continuing operations $ 1.04 $ 4.87 $ 3.68 $ 1.28 $ 1.72
Discontinued operations -- -- -- -- (.14)
Cumulative effect of accounting changes (.05) -- -- (.23) --
-------------------------------------------------------
Net income $ .99 $ 4.87 $ 3.68 $ 1.05 $ 1.58
-------------------------------------------------------
Cash dividends per common share (dollars) $ 1.80 $ 1.75 $ 1.65 $ 1.60 $ 1.60
Total cash dividends paid on common stock $ 952 $ 918 $ 859 $ 832 $ 830
At end of year:
Total assets $ 28,570 $ 29,600 $ 26,963 $ 24,937 $ 25,505
Debt and capital lease obligations
Short-term $ 939 $ 885 $ 465 $ 737 $ 917
Long-term 6,352 5,507 5,125 5,503 5,564
-------------------------------------------------------
Total debt and capital lease obligations $ 7,291 $ 6,392 $ 5,590 $ 6,240 $ 6,481
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TEXACO 1998 ANNUAL REPORT 81
Investor Information
Common Stock -- Market
and Dividend Information:
Texaco Inc. common stock (symbol TX) is traded principally on the New York Stock
Exchange. As of February 25, 1999, there were 209,728 shareholders of record. In
1998, Texaco's common stock price reached a high of $65.00, and closed December
31, 1998, at $53.00.
<TABLE>
<CAPTION>
Common Stock Price Range
---------------------------------------------------
High Low High Low Dividends
----------------------- ----------------------- ------------------
1998 1997* 1998 1997*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 65 $ 49 1/16 $ 55 3/4 $ 48 7/8 $ .45 $ .425
Second Quarter 63 3/4 55 3/4 57 7/16 50 1/2 .45 .425
Third Quarter 64 7/8 55 1/4 61 11/16 54 11/32 .45 .45
Fourth Quarter 63 7/8 50 1/4 63 7/16 51 1/8 .45 .45
====================================================================================================================================
</TABLE>
*Reflects two-for-one stock split, effective September 29, 1997.
Stock Transfer Agent and
Shareholder Communications
For information about Texaco
or assistance with your account,
please contact:
Texaco Inc.
Investor Services
2000 Westchester Avenue
White Plains, NY 10650-0001
Phone: 1-800-283-9785
Fax: (914) 253-6286
E-mail: [email protected]
NY Drop Agent
ChaseMellon Shareholder Services
120 Broadway - 13th Floor
New York, NY 10271
Phone: (212) 374-2500
Fax: (212) 571-0871
Co-Transfer Agent
Montreal Trust Company
151 Front Street West - 8th Floor
Toronto, Ontario, Canada M5J 2N1
Phone: 1-800-663-9097
Fax: (416) 981-9507
Security analysts and institutional
investors should contact:
Elizabeth P. Smith
Vice President, Texaco Inc.
Phone: (914) 253-4478
Fax: (914) 253-6269
E-mail: [email protected]
Annual Meeting
Texaco Inc.'s Annual Shareholders Meeting will be held at the Rye Town Hilton,
Rye Brook, NY, on Tuesday, April 27, 1999. A formal notice of the meeting,
together with a proxy statement and proxy form, is being mailed to shareholders
with this report.
Investor Services Plan
The company's Investor Services Plan offers a variety of benefits to individuals
seeking an easy way to invest in Texaco Inc. common stock. Enrollment in the
Plan is open to anyone, and investors may make initial investments directly
through the company. The Plan features dividend reinvestment, optional cash
investments and custodial service for stock certificates. Texaco's Investor
Services Plan is an excellent way to start an investment program for family or
friends. For a complete informational package, including a Plan prospectus, call
1-800-283-9785, e-mail at [email protected], or visit Texaco's Internet home
page at www.texaco.com.
EXHIBIT 21
--------------------------
Subsidiaries of Registrant
1998
Parents of Registrant
None
Registrant
Texaco Inc.
The significant subsidiaries included in the consolidated financial statements
of the Registrant are as follows:
<TABLE>
<CAPTION>
Organized
under
the laws of
------------------
<S> <C>
Bridgeline Gas Distribution LLC Louisiana
FAMM LLC Delaware
Four Star Oil and Gas Company Delaware
Heddington Insurance Ltd. Bermuda
MVP Production Inc. Delaware
Refineria Panama, S.A. Panama
S.A. Texaco Belgium N.V. Belgium
Saudi Arabian Texaco Inc. Delaware
TEPI Holdings Inc. Delaware
TRMI Holdings Inc. Delaware
Texaco Brazil S.A. - Produtos de Petroleo Brazil
Texaco California Inc. Delaware
Texaco Caribbean Inc. Delaware
Texaco Cogeneration Company Delaware
Texaco Denmark Inc. Delaware
Texaco Exploration and Production Inc. Delaware
Texaco International Trader Inc. Delaware
Texaco Investments (Netherlands), Inc. Delaware
Texaco Limited England
Texaco Natural Gas Inc. Delaware
Texaco Nederland B.V. Netherlands
Texaco North Sea U.K. Company Delaware
Texaco Oil ( Britain) Ltd. England
Texaco Overseas Holdings Inc. Delaware
Texaco Panama Inc. Panama
Texaco Raffinaderij Pernis B.V. Netherlands
Texaco Refining and Marketing Inc. Delaware
Texaco Refining and Marketing (East) Inc. Delaware
Texaco Trading and Transportation Inc. Delaware
Texaco Trinidad Inc. Delaware
Texas Petroleum Company New Jersey
</TABLE>
Names of certain subsidiary companies are omitted because, considered in the
aggregate as a single subsidiary company, they do not constitute a significant
subsidiary company.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 25, 1999 included or incorporated by reference in Texaco
Inc.'s Form 10-K for the year ended December 31, 1998, into the following
previously filed Registration Statements:
1. Form S-3 File Number 2-37010
2. Form S-3 File Number 33-31148
3. Form S-8 File Number 2-67125
4. Form S-8 File Number 2-76755
5. Form S-8 File Number 2-90255
6. Form S-8 File Number 33-34043
7. Form S-8 File Number 33-45952
8. Form S-8 File Number 33-45953
9. Form S-3 File Number 33-50553 and 33-50553-01
10. Form S-8 File Number 333-11019
11. Form S-3 File Number 333-46527 and 333-46527-01
12. Form S-3 File Number 333-68217 and 333-68217-01
13. Form S-8 File Number 333-73329
ARTHUR ANDERSEN LLP
New York, N.Y.
March 25, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Texaco Inc.:
We hereby consent to the incorporation by reference of our report dated February
8, 1999 relating to the combined balance sheets of the Caltex Group of Companies
as of December 31, 1998 and 1997, and the related combined statements of income,
comprehensive income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1998, which report appears in the
December 31, 1998 Annual Report on Form 10-K of Texaco Inc., into the following
previously filed Registration Statements:
1. Form S-3 File Number 2-37010
2. Form S-3 File Number 33-31148
3. Form S-8 File Number 2-67125
4. Form S-8 File Number 2-76755
5. Form S-8 File Number 2-90255
6. Form S-8 File Number 33-34043
7. Form S-8 File Number 33-45952
8. Form S-8 File Number 33-45953
9. Form S-3 File Number 33-50553 and 33-50553-01
10. Form S-8 File Number 333-11019
11. Form S-3 File Number 333-46527 and 333-46527-01
12. Form S-3 File Number 333-68217 and 333-68217-01
13. Form S-8 File Number 333-73329
KPMG LLP
Dallas, Texas
March 25, 1999
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated March 5,
1999, on our audits of the consolidated balance sheets of Equilon Enterprises
LLC as of December 31, 1998 and January 1, 1998, and the related statements of
consolidated income, owners' equity and cash flows for the year ended December
31, 1998, included in the Annual Report on Form 10-K of Texaco Inc. for the year
ended December 31, 1998, into the following previously filed Registration
Statements:
1. Form S-3 File Number 2-37010
2. Form S-3 File Number 33-31148
3. Form S-8 File Number 2-67125
4. Form S-8 File Number 2-76755
5. Form S-8 File Number 2-90255
6. Form S-8 File Number 33-34043
7. Form S-8 File Number 33-45952
8. Form S-8 File Number 33-45953
9. Form S-3 File Number 33-50553 and 33-50553-01
10. Form S-8 File Number 333-11019
11. Form S-3 File Number 333-46527 and 333-46527-01
12. Form S-3 File Number 333-68217 and 333-68217-01
13. Form S-8 File Number 333-73329
PricewaterhouseCoopers LLP Arthur Andersen LLP
Houston, Texas Houston, Texas
March 25, 1999 March 25, 1999
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated March 5,
1999, on our audits of the balance sheets of Motiva Enterprises LLC as of
December 31, 1998 and July 1, 1998, and the related statements of income,
owners' equity and cash flows for the period from inception (July 1, 1998) to
December 31, 1998, included in the Annual Report on Form 10-K of Texaco Inc.
for the year ended December 31, 1998, into the following previously filed
Registration Statements:
1. Form S-3 File Number 2-37010
2. Form S-3 File Number 33-31148
3. Form S-8 File Number 2-67125
4. Form S-8 File Number 2-76755
5. Form S-8 File Number 2-90255
6. Form S-8 File Number 33-34043
7. Form S-8 File Number 33-45952
8. Form S-8 File Number 33-45953
9. Form S-3 File Number 33-50553 and 33-50553-01
10. Form S-8 File Number 333-11019
11. Form S-3 File Number 333-46527 and 333-46527-01
12. Form S-3 File Number 333-68217 and 333-68217-01
13. Form S-8 File Number 333-73329
Arthur Andersen LLP
Deloitte & Touche LLP
PricewaterhouseCoopers LLP
Houston, Texas
March 25, 1999
EXHIBIT 24.1
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Chairman of the
Board and Chief Executive Officer of TEXACO INC., a Delaware corporation (the
"Company"), hereby makes, designates, constitutes and appoints KJESTINE M.
ANDERSON and ROBERT E. KOCH, and either of them (with full power to act without
the other), as the undersigned's true and lawful attorneys-in-fact and agents,
with full power and authority to act in any and all capacities for and in the
name, place and stead of the undersigned in connection with the filing of: (i)
any and all registration statements and all amendments and post-effective
amendments thereto (collectively, "Registration Statements") under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission,
and any and all registrations, qualifications or notifications under the
applicable securities laws of any and all states and other jurisdictions, with
respect to the securities of the Company of whatever class, including without
limitation thereon the Company's Common Stock, par value $3.125 per share, and
preferred stock, par value $1.00 per share, however offered, sold, issued,
distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1998, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
1st day of February, 1999.
/S/ Peter I. Bijur
------------------
Peter I. Bijur
Chairman of the Board
and Chief Executive Officer
EXHIBIT 24.2
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Senior Vice
President and Chief Financial Officer of TEXACO INC., a Delaware corporation
(the "Company"), hereby makes, designates, constitutes and appoints KJESTINE M.
ANDERSON and ROBERT E. KOCH, and either of them (with full power to act without
the other), as the undersigned's true and lawful attorneys-in-fact and agents,
with full power and authority to act in any and all capacities for and in the
name, place and stead of the undersigned in connection with the filing of: (i)
any and all registration statements and all amendments and post-effective
amendments thereto (collectively, "Registration Statements") under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission,
and any and all registrations, qualifications or notifications under the
applicable securities laws of any and all states and other jurisdictions, with
respect to the securities of the Company of whatever class, including without
limitation thereon the Company's Common Stock, par value $3.125 per share, and
preferred stock, par value $1.00 per share, however offered, sold, issued,
distributed, placed or resold by the Company, by any of its subsidiary
companies, or by any other person or entity, that may be required to effect: (a)
any such filing, (b) any primary or secondary offering, sale, distribution,
exchange, or conversion of the Company's securities, (c) any acquisition,
merger, reorganization or consolidation involving the issuance of the Company's
securities, (d) any stock option, restricted stock grant, incentive, investment,
thrift, profit sharing, or other employee benefit plan relating to the Company's
securities, or (e) any dividend reinvestment or stock purchase plan relating to
the Company's securities; (ii) the Company's Annual Report to the Securities and
Exchange Commission for the year ended December 31, 1998, on Form 10-K, and any
and all amendments thereto on Form 8 or otherwise, under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and (iii) Statements of Changes of
Beneficial Ownership of Securities on Form 4 or Form 5 (or such other forms as
may be designated from time to time for such purposes), pursuant to Section
16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
19th day of January, 1999.
/S/ Patrick J. Lynch
--------------------
Patrick J. Lynch
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 24.3
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Vice President
and Comptroller of TEXACO INC., a Delaware corporation (the "Company"), hereby
makes, designates, constitutes and appoints KJESTINE M. ANDERSON and ROBERT E.
KOCH, and either of them (with full power to act without the other), as the
undersigned's true and lawful attorneys-in-fact and agents, with full power and
authority to act in any and all capacities for and in the name, place and stead
of the undersigned in connection with the filing of: (i) any and all
registration statements and all amendments and post-effective amendments thereto
(collectively, "Registration Statements") under the Securities Act of 1933, as
amended, with the Securities and Exchange Commission, and any and all
registrations, qualifications or notifications under the applicable securities
laws of any and all states and other jurisdictions, with respect to the
securities of the Company of whatever class, including without limitation
thereon the Company's Common Stock, par value $3.125 per share, and preferred
stock, par value $1.00 per share, however offered, sold, issued, distributed,
placed or resold by the Company, by any of its subsidiary companies, or by any
other person or entity, that may be required to effect: (a) any such filing, (b)
any primary or secondary offering, sale, distribution, exchange, or conversion
of the Company's securities, (c) any acquisition, merger, reorganization or
consolidation involving the issuance of the Company's securities, (d) any stock
option, restricted stock grant, incentive, investment, thrift, profit sharing,
or other employee benefit plan relating to the Company's securities, or (e) any
dividend reinvestment or stock purchase plan relating to the Company's
securities; (ii) the Company's Annual Report to the Securities and Exchange
Commission for the year ended December 31, 1998, on Form 10-K, and any and all
amendments thereto on Form 8 or otherwise, under the Securities Exchange Act of
1934, as amended ("Exchange Act"), and (iii) Statements of Changes of Beneficial
Ownership of Securities on Form 4 or Form 5 (or such other forms as may be
designated from time to time for such purposes), pursuant to Section 16(a) of
the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
18th day of January, 1999.
/S/Robert C. Oelkers
--------------------
Robert C. Oelkers
Vice President and Comptroller
(Principal Accounting Officer)
EXHIBIT 24.4
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
22nd day of January, 1999.
/S/ A. Charles Baillie
----------------------
EXHIBIT 24.5
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
18th day of March, 1999.
/S/ John Brademas
-----------------
EXHIBIT 24.6
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set her name as of the
2nd day of February, 1999.
/S/ Mary K. Bush
----------------
EXHIBIT 24.7
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
18th day of March, 1999.
/S/ Willard C. Butcher
----------------------
EXHIBIT 24.8
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
25th day of January, 1999.
/S/ Edmund M. Carpenter
-----------------------
EXHIBIT 24.9
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
19th day of January, 1999.
/S/ Michael C. Hawley
---------------------
EXHIBIT 24.10
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
25th day of January, 1999.
/S/ Franklyn G. Jenifer
-----------------------
EXHIBIT 24.11
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
28th day of January, 1999.
/S/ Sam Nunn
------------
EXHIBIT 24.12
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
27th day of January, 1999.
/S/ Charles H. Price, II
------------------------
EXHIBIT 24.13
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
29th day of January, 1999.
/S/ Charles R. Shoemate
-----------------------
EXHIBIT 24.14
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set her name as of the
27th day of January, 1999.
/S/ Robin B. Smith
------------------
EXHIBIT 24.15
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
20th day of January, 1999.
/S/ William C. Steere, Jr.
--------------------------
EXHIBIT 24.16
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
TEXACO INC., a Delaware corporation (the "Company"), hereby makes, designates,
constitutes and appoints KJESTINE M. ANDERSON and ROBERT E. KOCH, and either of
them (with full power to act without the other), as the undersigned's true and
lawful attorneys-in-fact and agents, with full power and authority to act in any
and all capacities for and in the name, place and stead of the undersigned in
connection with the filing of: (i) any and all registration statements and all
amendments and post-effective amendments thereto (collectively, "Registration
Statements") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission, and any and all registrations, qualifications or
notifications under the applicable securities laws of any and all states and
other jurisdictions, with respect to the securities of the Company of whatever
class, including without limitation thereon the Company's Common Stock, par
value $3.125 per share, and preferred stock, par value $1.00 per share, however
offered, sold, issued, distributed, placed or resold by the Company, by any of
its subsidiary companies, or by any other person or entity, that may be required
to effect: (a) any such filing, (b) any primary or secondary offering, sale,
distribution, exchange, or conversion of the Company's securities, (c) any
acquisition, merger, reorganization or consolidation involving the issuance of
the Company's securities, (d) any stock option, restricted stock grant,
incentive, investment, thrift, profit sharing, or other employee benefit plan
relating to the Company's securities, or (e) any dividend reinvestment or stock
purchase plan relating to the Company's securities; (ii) the Company's Annual
Report to the Securities and Exchange Commission for the year ended December 31,
1998, on Form 10-K, and any and all amendments thereto on Form 8 or otherwise,
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(iii) Statements of Changes of Beneficial Ownership of Securities on Form 4 or
Form 5 (or such other forms as may be designated from time to time for such
purposes), pursuant to Section 16(a) of the Exchange Act.
Without limiting the generality of the foregoing grant of authority,
such attorneys-in-fact and agents, or either of them, are hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such Registration Statements,
registrations, qualifications, or notifications, the Company's Form 10-K, any
and all amendments thereto, statements of changes, and any and all other
documents in connection with the foregoing, and take such other and further
action as such attorneys-in-fact and agents, or either of them, deem necessary
or appropriate. The powers and authorities granted herein to such
attorneys-in-fact and agents, and either of them, also include the full right,
power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken pursuant to the powers and authorities
herein granted by such attorneys-in-fact and agents, or either of them, or by
their respective substitutes. This Power of Attorney expires by its terms and
shall be of no further force and effect on March 31, 2000.
IN WITNESS WHEREOF, the undersigned has hereunto set his name as of the
18th day of February, 1999.
/S/ Thomas A. Vanderslice
-------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TEXACO INC.'S 1998 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 249
<SECURITIES> 22
<RECEIVABLES> 3,983
<ALLOWANCES> 28
<INVENTORY> 1,154
<CURRENT-ASSETS> 5,636
<PP&E> 35,494
<DEPRECIATION> 20,733
<TOTAL-ASSETS> 28,570
<CURRENT-LIABILITIES> 5,264
<BONDS> 6,352
0
673
<COMMON> 1,700
<OTHER-SE> 9,460
<TOTAL-LIABILITY-AND-EQUITY> 28,570
<SALES> 30,910
<TOTAL-REVENUES> 31,707
<CGS> 24,179
<TOTAL-COSTS> 26,687
<OTHER-EXPENSES> 3,839
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 480
<INCOME-PRETAX> 701
<INCOME-TAX> 98
<INCOME-CONTINUING> 603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (25)
<NET-INCOME> 578
<EPS-PRIMARY> 0.99<F1>
<EPS-DILUTED> 0.99
<FN>
<F1>EPS-PRIMARY REPRESENTS BASIC EARNINGS PER SHARE IN ACCORDANCE WITH STATEMENT
OF FINANCIAL ACCOUNTING STANDARD 128.
</FN>
</TABLE>
