-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BBl3OwG01c0JJ4MPwL5Ecce2lK6XoXNFQQKc89BxIzC+7uJEU1gwcXKLDTuB1I2b 9wbC9vYLVi9r/+ZVEvLoEg== 0000078214-96-000004.txt : 19960227 0000078214-96-000004.hdr.sgml : 19960227 ACCESSION NUMBER: 0000078214-96-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960223 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILLIPS PETROLEUM CO CENTRAL INDEX KEY: 0000078214 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 730400345 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00720 FILM NUMBER: 96524905 BUSINESS ADDRESS: STREET 1: PHILLIPS BUILDING STREET 2: 800 PLAZA OFFICE BUILDING CITY: BARTLESVILLE STATE: OK ZIP: 74004 BUSINESS PHONE: 9186616600 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 -------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------------ ------------ Commission file number 1-720 ----------------------------------- PHILLIPS PETROLEUM COMPANY (Exact name of registrant as specified in its charter) Delaware 73-0400345 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) PHILLIPS BUILDING, BARTLESVILLE, OKLAHOMA 74004 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 918-661-6600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ---------------------------------- ------------------------ Common Stock, $1.25 Par Value New York, Pacific and Toronto Stock Exchanges Preferred Share Purchase Rights Expiring July 31, 1999 New York Stock Exchange 6.65% Notes Due March 1, 2003 New York Stock Exchange 7.20% Notes Due November 1, 2023 New York Stock Exchange 7.92% Notes Due April 15, 2023 New York Stock Exchange 8.49% Notes Due January 1, 2023 New York Stock Exchange 8.86% Notes Due May 15, 2022 New York Stock Exchange 9% Notes Due 2001 New York Stock Exchange 9.18% Notes Due September 15, 2021 New York Stock Exchange 9 3/8% Notes Due 2011 New York Stock Exchange 9 1/2% Notes Due 1997 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [x] Excluding shares held by affiliates, the registrant had 261,415,352 shares of Common Stock, $1.25 Par Value, outstanding at January 31, 1996. The aggregate market value of voting stock held by non-affiliates of the registrant was $8,561,352,778 as of January 31, 1996. The registrant, solely for the purpose of this required presentation, has deemed its Board of Directors and the Compensation and Benefits Trust to be affiliates, and deducted their stockholdings of 690,471 and 29,200,000 shares, respectively, in determining the aggregate market value. Documents incorporated by reference: Proxy Statement for the Annual Meeting of Stockholders May 13, 1996 (Part III) TABLE OF CONTENTS PART I Item Page ---- ---- 1. and 2. Business and Properties........................... 1 Corporate Structure and Current Developments.... 1 Segment and Geographic Information.............. 2 Exploration and Production (E&P).............. 3 Gas Gathering, Processing and Marketing (GPM). 9 Refining, Marketing and Transportation (RM&T). 11 Chemicals..................................... 14 Other......................................... 17 Competition..................................... 18 General......................................... 19 3. Legal Proceedings................................. 20 4. Submission of Matters to a Vote of Security Holders................................ 20 -------------------- Executive Officers of the Registrant.............. 21 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 23 6. Selected Financial Data........................... 24 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 25 8. Financial Statements and Supplementary Data....... 57 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 112 PART III 10. Directors and Executive Officers of the Registrant...................................... 113 11. Executive Compensation............................ 113 12. Security Ownership of Certain Beneficial Owners and Management........................... 113 13. Certain Relationships and Related Transactions.... 113 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 114 PART I (Unless otherwise indicated, "the company" and "Phillips" are used in this report to refer to the business of Phillips Petroleum Company and its consolidated subsidiaries.) Items 1 and 2. BUSINESS AND PROPERTIES CORPORATE STRUCTURE AND CURRENT DEVELOPMENTS Phillips Petroleum Company was incorporated in the state of Delaware on June 13, 1917. The company is headquartered where it was founded, in Bartlesville, Oklahoma. The company primarily operates in four business segments: 1) Exploration and Production (E&P)--explores for and produces crude oil, natural gas and natural gas liquids on a worldwide basis; 2) Gas Gathering, Processing and Marketing (GPM)--gathers and processes both natural gas produced by others and natural gas produced from the company's own reserves, primarily in Oklahoma, Texas and New Mexico; 3) Refining, Marketing and Transportation (RM&T)-- refines, markets and transports crude oil and petroleum products, primarily in the United States; 4) Chemicals--fractionates natural gas liquids and manufactures and markets a broad range of petroleum-based chemical products on a worldwide basis. Support staffs provide technical, professional and other services to the business segments. At December 31, 1995, Phillips employed 17,400 people, 5 percent less than the previous year. Phillips continued to focus on growth opportunities, operating excellence and the lowering of its cost structure in 1995. Current developments include the following: o Construction began on a new wellhead platform and a new processing/transportation platform as part of the Ekofisk redevelopment plan, named Ekofisk II. The Ekofisk II facilities in the Norwegian sector of the North Sea will extend the life of the Ekofisk field to the year 2028. o Start-up of crude oil production from the second platform in the Xijiang project, offshore China, commenced in the fourth quarter of 1995. Combined with the first field, which began production in 1994, the Xijiang project added 15,000 net barrels of crude oil per day in the fourth quarter to Phillips' worldwide crude oil production. o The J-Block production platform was completed and installed during 1995 in the U.K. North Sea. However, initial production has been delayed as a result of the company being notified by the purchaser of the contracted gas volumes that 1 they have elected not to take gas during the early period of the gas sales contract. Alternative methods of producing the associated liquids are being pursued. o The company and its co-venturers declared the Mahogany subsalt prospect in the Gulf of Mexico commercial, and commenced construction of a production platform in 1995. Delineation drilling continues at Mahogany, and exploratory drilling is under way at other subsalt prospects. o Late in 1995, GPM completed its largest acquisition to date, acquiring 3,200 miles of gathering pipeline and 21 compressor units used to gather approximately 260 million cubic feet of natural gas per day. o As a result of incremental debottleneckings and sustained operating consistency, the refining capacity of the company's domestic crude oil refineries was revised upward from 320,000 to 345,000 barrels of oil per day. Phillips also began a plan to expand the number of company-operated retail service stations to more than 500 outlets over the next three to five years. o Demand was strong through mid-year and then moderated in the second half for the company's Chemicals operations. Expansion and debottlenecking projects are under development for most product lines, including ethylene, paraxylene, polyethylene, polypropylene, K-Resin, Ryton and specialty chemicals. SEGMENT AND GEOGRAPHIC INFORMATION Segment information concerning sales and other operating revenues, earnings, total assets and additional information for certain operations of the company in Note 16--Segment and Geographic Information in the Notes to Financial Statements on pages 89 through 91 is incorporated herein by reference. Products which contributed more than 10 percent of consolidated sales and other operating revenues follow: 1995 1994 1993 ------------------------ Crude Oil 26% 23 24 Petroleum Products 41 43 43 Natural Gas 12 14 14 2 E&P - --- The company's E&P segment explores for and produces crude oil, natural gas and natural gas liquids on a worldwide basis and produces coal in the United States. Producing areas include the United States (including the Gulf of Mexico), the Norwegian and U.K. sectors of the North Sea, Canada, Nigeria and offshore China. The information listed below appears in the oil and gas operations disclosures on pages 92 through 109 and is incorporated herein by reference. o Proved worldwide crude oil, natural gas, and natural gas liquids reserves. o Net production of crude oil, natural gas and natural gas liquids. o Average sales prices of crude oil, natural gas and natural gas liquids. o Average production costs per barrel-of-oil-equivalent (BOE). o Developed and undeveloped acreage. o Net wells completed, wells in progress and productive wells. In 1995, Phillips' worldwide crude oil production averaged 222,000 barrels per day, compared with 206,000 barrels per day in 1994. In 1995, 79,000 barrels per day of worldwide crude oil production was from the United States, down from 90,000 barrels per day in 1994. Lower U.S. production was due to property dispositions and general production declines, primarily from the Prudhoe Bay and Point Arguello fields. Foreign crude oil production was up 23 percent in 1995, due primarily to increased production from Norway, as a result of the water injection program and horizontal drilling, and the first full year's production from offshore China. Net E&P production satisfied 58 percent of Phillips' 1995 crude oil requirements, which consisted primarily of refinery crude oil runs (333,000 barrels per day) and contractual supply obligations (52,000 barrels per day). The difference between the company's requirements and production was covered mainly by crude oil purchases in the United States, from Saudi Arabia, Venezuela, and, to a lesser extent, from the North Sea, Nigeria and Kuwait. The ratio of net crude oil production to requirements for 1996 is estimated at 56 percent, based on production forecasts of 218,000 barrels per day and crude oil requirements of 3 388,000 barrels per day. As in 1995, purchases in the United States, from Saudi Arabia, Venezuela, and, to a lesser degree, from the North Sea, Nigeria and Kuwait are expected to be the major sources for covering the difference. E&P's worldwide production of natural gas liquids averaged 15,000 barrels per day in 1995, up slightly from 1994. U.S. production accounted for 5,000 barrels per day. The company's worldwide production of natural gas averaged 1,481 million cubic feet per day in 1995, up 5 percent from 1994. U.S. natural gas production increased 4 percent in 1995, to 1,078 million cubic feet per day. Higher production from the San Juan Basin, New Mexico, and new production from the Garden Banks (Seastar) field, Gulf of Mexico, contributed to the increased production. Higher production from Norway and Canada led to 6 percent higher foreign natural gas production in 1995. Phillips' worldwide annual average crude oil sales price increased 11 percent in 1995, to $16.43 per barrel. Both U.S. and foreign average prices were higher. E&P's annual average worldwide natural gas sales price was down 8 percent as a result of lower prices in the United States. The company's finding and development costs in 1995 were $3.52 per BOE, with a five-year average of $3.46 per BOE. At December 31, 1995, Phillips held a combined 24.8 million net developed and undeveloped acres, a 9 percent increase from year-end 1994's 22.8 million acres. The increase in net acres is primarily attributable to new acreage in Gabon and the assumption of additional interests in Tunisia. The company holds acreage in 18 nations, and produces hydrocarbons in six. E&P - U.S. OPERATIONS In the second quarter of 1995, the company and its co-venturers announced that the Mahogany field in the Gulf of Mexico was commercial and began development operations. Mahogany is the first commercial subsalt oil development in the Gulf. The field is located 80 miles offshore Louisiana on Ship Shoal Blocks 349/359. Phillips has drilled three wells which will be brought onstream upon completion of the production platform. Platform construction began in 1995, with installation planned for 1996. Initial production is expected in late 1996. Further delineation drilling continues. Phillips holds a 37.5 percent interest in the Mahogany field. 4 Drilling began late in the year on three other subsalt prospects: the Alexandrite and Agate prospects, located near the Mahogany prospect, and the Monazite prospect, in the Vermillion area. Phillips holds a 37.5 percent, 50 percent and a 33 percent interest in these three prospects, respectively. Production began in mid-year 1995 from the Seastar natural gas field, in the Garden Banks area of the Gulf of Mexico, also offshore Louisiana. A development plan utilizing subsea well completions is being used in this 100 percent-owned field. Production averaged 60 million cubic feet of natural gas per day in December 1995. Phillips continues to assess the reserves potential, development costs and commercial potential of the Sunfish prospect, located in the Cook Inlet of Alaska. Discussions are ongoing with the co-venturer concerning its future intentions with respect to Sunfish. The next appraisal well is included in the 1996 exploration capital budget. Liquefied natural gas (LNG) sales volumes from the company's Kenai, Alaska, plant were up 4 percent in 1995, compared with 1994. Through refrigeration and pressure techniques, and utilization of the company's proprietary Cascade technology, the company liquefies natural gas produced from its North Cook Inlet field, and transports the LNG to Japan. To improve production from existing fields, Phillips is making greater use of enhanced oil recovery methods, such as carbon dioxide/water injection and horizontal drilling. At the 30-year- old South Cowden field in West Texas, Phillips plans to use horizontal carbon dioxide injection wells which are expected to triple oil production to a peak of 1,300 net barrels of oil per day. Net production from the company's three jointly owned coal mines was 3.2 million tons in 1995, compared with 3.3 million tons in 1994. The mines are located in Louisiana, Texas and Wyoming. Phillips has a 50 percent interest in each, and is pursuing the development of a fourth mine. E&P - NORWEGIAN OPERATIONS Crude oil production from the company's Norwegian operations has increased each year since 1987, primarily as a result of water injection. The water injection program began in 1987 at the Ekofisk field in the North Sea, and the company currently injects up to 875,000 barrels of water per day into the field. The water displaces oil in the reservoir, increasing production. 5 Construction is under way on a new wellhead platform and a new processing/transportation platform as part of Ekofisk II. The Ekofisk II plan projects significantly reduced operating costs while allowing for the long-term recovery of Ekofisk field reserves, through the extension of the production license from 2011 to the year 2028. The oil and gas pipeline transportation assets and the onshore processing assets which serve the Ekofisk area fields are held by various Norwegian and U.K. companies. These companies in turn are owned by Phillips and the other co-venturers in the Ekofisk field. Phillips and its co-venturers have agreed to exchange ownership interests, effective January 1, 1996, in order to increase the alignment of ownership and usage of the facilities. As a result, Phillips' ownership in the companies which own the oil transportation and processing assets will increase, and its ownership in the companies which own the gas transportation and processing facilities will decrease. No gain or loss will be realized from these ownership exchanges. Under Ekofisk II, the Ekofisk, Eldfisk, Embla and Tor fields will be connected to the Ekofisk II facilities. Some third-party fields will also be connected. It is anticipated that the remaining fields in the Ekofisk area will be shut in. In early 1996, the company was awarded an operatorship and a 30 percent interest in four blocks in the Norwegian sector of the North Sea east of the Troll field, and a 20 percent non-operating interest in a block near the Norne field, currently under development. As part of its Norwegian operations in the North Sea, Phillips acquired interests in two licenses offshore Denmark, where the company participated in a discovery well. The well, about 60 miles east of Ekofisk, was tested in December and flowed 5,800 gross barrels of oil per day. Phillips has acquired a 12.5 percent interest in the license, pending approval. Appraisal drilling is scheduled to begin in 1996. Phillips was also named operator and awarded a 35 percent interest in another license in the Danish sector of the North Sea. Work began late in 1995 with the acquisition of a 3-D seismic survey, which will form the basis for future exploratory drilling. E&P - U.K. OPERATIONS In the U.K. sector of the North Sea, the company installed a production platform at the Judy field and subsea production facilities at the Joanne field, an adjacent development tied to the Judy platform. Phillips' interest in Judy and Joanne, referred to as J-Block, is 36.5 percent. 6 Phillips announced in September 1995 that initial production from J-Block, originally scheduled for early 1996, would be delayed as a result of the sole purchaser of natural gas from J-Block making a non-binding election not to take any natural gas volumes under its take-or-pay contract through September 1997. Since natural gas and liquids are produced in association with each other, liquids production is dependent on the amount of natural gas produced. The company intends, subject to governmental approval, to install gas injection facilities, which would allow for the production of liquids while the natural gas produced is reinjected for later delivery. In order to maximize the value of its J-Block infrastructure, the company has also initiated an active drilling program to explore and appraise several satellite fields. In 1995, the company developed two smaller fields located near existing facilities in the U.K. North Sea. The Alison and Dawn fields have a total net productive capacity of 28 million cubic feet of natural gas per day. Phillips holds a 42 percent interest in Alison, which is controlled from the nearby Audrey field platform. The company holds an 18.9 percent interest in the Dawn field. Natural gas from this field is produced through the Hewett platform. Phillips has an interest in two fields being developed in the U.K. North Sea--Armada and Britannia. Armada is scheduled to begin production in late 1997 at a net rate of 2,800 barrels of liquids per day and 40 million cubic feet of natural gas per day. Britannia is scheduled to begin production in late 1998, with net production of 2,700 barrels of liquids per day and 37 million cubic feet of natural gas per day anticipated. The company has an 11.5 percent interest in Armada and a 6.78 percent interest in Britannia. The Republic of Ireland awarded Phillips a 33.3 percent interest in seven deep water blocks located in a frontier area west of Ireland. Drilling is expected to begin in 1997. In addition, a 40 percent interest was awarded in one block east of the Isle of Man, with a well planned for 1996. E&P - OTHER OPERATIONS In the South China Sea approximately 80 miles southeast of Hong Kong, start-up of crude oil production from the second platform in the Xijiang project commenced in the fourth quarter of 1995. The initial Xijiang field began producing in 1994. The crude oil produced from both Xijiang fields flows through subsea pipelines to a floating storage and offloading vessel, and is then transported to market by tankers. Phillips' combined net 7 production of crude oil from both fields averaged 15,000 barrels per day in the fourth quarter of 1995. In the Gulf of Bohai, along China's northern coast, several exploratory wells are planned over the next four years. In Nigeria, the company's non-operating interest in 23 fields yielded net average crude oil production of 24,000 barrels per day, about the same as 1994. In Canada, natural gas production was up 18 percent, to 58 million cubic feet per day, compared with 1994. Exploratory drilling in the Timor Sea, located offshore northwest Australia in the Zone of Cooperation A, led to a major gas discovery in early 1995. The initial well tested at 90 million cubic feet of gas per day and 5,250 barrels per day of condensate. A second successful well, completed in early 1996, tested at 35 million cubic feet of gas per day and 2,100 barrels per day of condensate. Phillips is the operator of the license and holds a 37.5 percent interest. Phillips plans to start another appraisal well in the second quarter of 1996. Three successful appraisal wells have also been drilled by the owners of an adjacent block, with results indicating that this is an extension of the discovery on the company's block. Phillips is working closely with the owners of the adjacent block to evaluate the development potential, including the possible use of an onshore LNG facility using the company's proprietary technology. Late in 1995, Phillips began work on its first exploratory well on a block in the Borj Messouda area of eastern Algeria. This followed an extensive seismic survey of the region. Phillips holds a 100 percent interest in the block. The 1996 exploratory budget includes planned expenditures totaling $104 million for exploratory drilling in the United States, Norway, the United Kingdom, Denmark, Algeria, and the Timor Sea Zone of Cooperation. E&P - RESERVES In 1995, on a BOE basis, Phillips replaced 139 percent of the reserves it produced during the year. The total includes replacement of 170 percent of foreign production and 114 percent of U.S. production. U.S. reserves increased slightly, while foreign reserves increased 6 percent. Total worldwide proved reserves on a BOE basis were 2.2 billion barrels at year-end. Crude oil reserves increased 2 percent, natural gas liquids reserves remained the same, and natural gas reserves increased 5 percent. Natural gas comprises 51 percent of proved worldwide hydrocarbon reserves and 64 percent of U.S. reserves. 8 Ninety-two percent of Phillips' proved reserves base is located in North America and the North Sea. From 1991 through 1995, Phillips' five-year-average BOE production replacement equaled 117 percent. Estimates of proved reserves are based upon reservoir information, technology and economics available at the time the estimates are made. Adjustments are made to reflect changes in economic conditions, results of drilling and production and the technical reevaluation of reservoirs. The company has not filed any figures with any other federal authority or agency with respect to its estimated total proved reserves at December 31, 1995. No difference exists between the company's estimated total proved reserves for year-end 1994 and year-end 1993, which are shown in this filing, and estimates of these reserves shown in a filing with another federal agency in 1995. DELIVERY COMMITMENTS Phillips has a commitment to deliver a fixed and determinable quantity of liquefied natural gas in the future to two utility customers in Japan. The company is obligated over the next three years to supply a total of 140.7 billion cubic feet of liquefied natural gas. Production from one field in Alaska, with estimated proved reserves greater than the company's obligation and with an estimated production level sufficient to meet the required delivery amount, will be used to fulfill the obligation. The company sells natural gas in the United States from its producing operations under a variety of contractual arrangements. Certain contracts generally commit the company to sell quantities based on production from specified properties. Other gas sales contracts specify delivery of fixed and determinable quantities. The quantities of natural gas the company is obligated to deliver in the United States in the future, under existing contracts, are not significant in relation to the quantities available from production of the company's proved developed U.S. natural gas reserves. GPM - --- GPM gathers and processes both natural gas purchased from others and natural gas produced from the company's E&P reserves. The natural gas liquids--ethane, propane, butanes and pentanes--are extracted and sold primarily to the company's Chemicals operations, where they are used as feedstock or sold to outside 9 customers. The residue gas is sold to others or used as fuel in company operations. GPM wholly owns 15 natural gas liquids extraction plants, and controls or has an interest in 3 more. The plants are located in Texas (10), Oklahoma (4), and New Mexico (4). In addition, GPM operates gas gathering systems with approximately 25,000 miles of gathering pipelines, with some 17,600 active meter connections to producing wells. GPM completed its largest acquisition to date through the purchase of the stock of two Enron Corp. subsidiaries in late 1995. As a result, GPM's raw gas throughput volumes will increase by approximately 15 percent. The new assets include approximately 3,200 miles of natural gas gathering pipeline and 21 compressor units used to gather approximately 260 million cubic feet of natural gas per day through 1,900 meter stations. Other growth activity included: o The purchase of gas gathering, treating and processing facilities in southeastern New Mexico. The purchase included more than 375 miles of high-pressure pipeline and added 25 million cubic feet per day of raw gas throughput. o An early 1996 agreement with ANR Pipeline Company to purchase gas gathering assets in northwestern Oklahoma. The purchase would include systems that gather 200 million cubic feet of gas per day through about 1,000 meter stations, 1,570 miles of gathering lines and 14 compressor stations. GPM completed three modernization projects in 1995. Older, piston-engine compression equipment was replaced with turbine-powered compressors at the Goldsmith plant in Ector County, Texas, and at the Eunice plant in Lea County, New Mexico. At the Linam Ranch plant in New Mexico, the modernization effort included cryogenic technology, a new control system, modern compression units and equipment that remotely monitors compressor sites. In addition to the modernization projects, GPM completed projects to route existing gas to plants with idle capacity and to convert three plants to booster sites, which will result in greater plant efficiency and lower operating costs. GPM contracted with South-Tex Treaters of Odessa, Texas, to treat up to 200 million cubic feet per day of natural gas production. This will accommodate increased horizontal drilling by producers in South Central Texas. GPM's raw gas throughput averaged 1.6 billion cubic feet per day in 1995, compared with 1.5 billion cubic feet per day in 1994, reflecting the acquisitions and expansions discussed above. Raw gas purchased from Phillips E&P represented approximately 12 percent of GPM's total 1995 throughput. 10 GPM continued to be a significant U.S. producer of natural gas liquids. GPM's natural gas liquids production was as follows: Thousands of Barrels Daily -------------------------- 1995 1994 1993 -------------------------- From Phillips E&P leasehold gas 19 21 22 From gas purchased outside Phillips 125 130 124 - ----------------------------------------------------------------- 144 151 146 ================================================================= Residue gas sales were 1,017 million cubic feet per day in 1995, compared with 949 million cubic feet per day in 1994. Residue gas sales made directly to end-users, such as utilities or local gas distribution companies, were approximately 62 percent of total sales during 1995, compared with 69 percent in 1994. The company's average sales price for unfractionated natural gas liquids increased to $10.07 per barrel, up 3 percent from 1994. During 1995, average residue gas prices decreased to $1.49 per thousand cubic feet, from $1.79 in 1994. At year-end 1995, gross raw natural gas supplies available for processing through GPM-operated plants were estimated at 6.7 trillion cubic feet, versus 5.8 trillion cubic feet at year-end 1994. At year-end 1995 and 1994, respectively, these supplies included about 644 million and 655 million barrels of natural gas liquids, assuming full ethane extraction. RM&T - ---- REFINING The company owns and operates three refineries in the United States having an aggregate rated crude oil capacity of 345,000 barrels per day and has part-ownership of a refinery in Teesside, England. The U.S. refineries are located at Borger and Sweeny, Texas, and Woods Cross, Utah. Incremental debottlenecking changes and improved reliability resulted in the revision of the company's total U.S. refining capacity from 320,000 barrels of oil per day to 345,000 barrels of oil per day, effective January 1, 1995. Even with the higher rated capacity, the company's refineries ran at 97 percent of capacity in 1995. The purchase cost of a barrel of crude oil delivered to the U.S. refineries was 11 percent higher in 1995 than in 1994. High-sulfur crude accounted for 61 percent of the crude processed during 1995, down from 67 percent in 1994. Approximately 40 percent of the crude oil processed by Phillips' refineries in 11 1995 came from the United States, with the remainder provided primarily by purchases from the Middle East, Venezuela, the North Sea and Nigeria. Output from refining operations--automotive gasoline, distillates, aviation fuels, chemical feedstocks and other products--averaged 392,000 barrels per day, up from 365,000 barrels per day in 1994. Phillips' U.S. refineries continued to implement two major safety programs in 1995. One is Process Safety Management, a program aimed at improving safety at major manufacturing facilities. The other is an employee-driven safety process that is based on peer review and positive reinforcement. Phillips continued a modernization plan at the Borger refinery in 1995. The company completed a centralized control room that features advanced process controls to improve safety, operating efficiency and product yields. Eventually, the facility will control all major manufacturing processes at the Borger Complex. A similar modernization project is under way at the Sweeny Complex. At the Woods Cross refinery, installation of a fluid catalytic cracker is under way, with start-up expected in the first half of 1996. The new unit will provide both economic and environmental advantages. Phillips and a subsidiary of Dallas-based Central and South West Corporation (CSW) are developing and installing a co-generation plant at the Sweeny Complex that will produce electricity from natural gas-powered turbines. The waste heat exhausted from the turbines will produce steam, supplying the Sweeny Complex's needs and offering cost benefits for both CSW and Phillips. Plant construction is scheduled to begin in 1996, with completion expected in 1997. Regulatory approvals for a similar project at the Borger Complex are being sought. The company's U.S. refineries continued to focus on cost control during 1995. As a result, controllable costs were down in 1995, compared with a year ago, even with higher crude throughput volumes. The company will continue to focus on the operating cost structure of its refining operations, with lower controllable costs and higher profitability set as clear targets for 1996. MARKETING In the United States, the company's wholesale and retail operations market refined products in 26 states under the Phillips 66 trademark, with concentration highest in the Midwest. 12 Gasoline and other products are distributed in the United States through approximately 8,000 service stations, bulk distributing plants, airport dealers and marinas. Of these, Phillips operates 295 retail outlets, 39 of which are on leased property. Excluding spot sales, RM&T gasoline sales volumes in the United States were up 3 percent during the year. Total distillates sales volumes in RM&T increased 5 percent in 1995. In total, RM&T petroleum product sales in the United States during 1995, from both Phillips' refinery output and purchased products, averaged 526,000 barrels per day, compared with 493,000 barrels per day in 1994. Phillips plans to add over 200 company-operated retail service stations over the next three to five years. The new outlets will feature larger convenience stores with an improved design, fast-food offerings and a new brand name--"Kicks," which will be displayed along with the Phillips shield. In early 1996, Phillips will open the first new retail outlet with a Kicks store in Albuquerque, New Mexico. Most of the additional retail units will be built in markets where Phillips perceives it has a business or supply advantage. The Borger refinery and a network of pipelines and terminals provides Phillips with a cost advantage in supplying the Southwest and Rocky Mountain regions. In addition, the Woods Cross refinery is positioned to supply the Salt Lake City area. TRANSPORTATION Phillips' RM&T and Chemicals segments own or have an interest in 6,800 miles of common carrier crude oil and products pipeline systems, of which 5,900 miles are company-operated. The largest segment of the total system consists of 2,000 miles of products line extending from the Texas Panhandle to East Chicago, Indiana. The pipeline mileage above excludes the company's 1.36 percent interest in the 800-mile Trans-Alaska Pipeline System, which is a part of E&P operations, and other equity interests. In addition to two leased LNG tankers, the company has a U.S.- flag tanker of 37,000 tons under charter. Phillips also owns or leases barges, tank cars, hopper cars, corporate aircraft and trucks. During the third quarter of 1995, Phillips received approval from the Federal Energy Regulatory Commission to abandon gas service in its Seagas Pipeline. Phillips signed an agreement in 1995 to form a new partnership, Seaway Pipeline Company, to transport crude oil through pipelines from the Houston Gulf Coast area to 13 refineries and other markets in the mid-continent area. Phillips contributed its Seagas Pipeline to the partnership during fourth quarter 1995, in exchange for cash and an interest in the partnership. Chemicals - --------- The Chemicals segment is divided into three vertically integrated operations: 1) Natural gas liquids (NGL). Processed (fractionated) natural gas liquids are sold to third parties or used as feedstocks by the company at its refineries or for producing chemicals. The company owns and operates processing facilities at the Sweeny and Borger Complexes and has an equity interest in a plant in Conway, Kansas. 2) Intermediate petrochemical products. Primary products in this operation include olefins (ethylene and propylene) and aromatics (paraxylene and cyclohexane). Major production facilities are located at the Sweeny Complex and in Puerto Rico. 3) Plastics products. Products in this operation include polyethylene, polypropylene, K-Resin, plastic pipe and Ryton. The major production facility is the Houston Chemical Complex (HCC), near Houston, Texas. The company owns an equity interest in a polyethylene plant in Singapore and a polypropylene plant at HCC. Ryton is produced at the Borger Complex and plastic pipe is manufactured at five regionally located U.S. plants. NGL The NGL business operated at 88 percent of rated fresh-feed capacity for the year, compared with 91 percent in 1994 and 87 percent in 1993. Total NGL fresh-feed processing capacity will increase to approximately 250,000 barrels per day from 227,000 barrels per day, effective January 1, 1996. The increase in capacity is attributable to the Sweeny Complex, due in part to debottlenecking during a turnaround late in 1995. INTERMEDIATE PETROCHEMICALS Phillips' ethylene and propylene are produced at its Sweeny, Texas, Complex. In addition to 100 percent-owned ethylene and propylene facilities, the 50 percent-owned Sweeny Olefins Limited 14 Partnership (SOLP) is also located there. A significant volume of ethylene is used within Phillips as a feedstock for polyethylene. Propylene is used as a feedstock for polypropylene, a plastic used to manufacture a variety of products. The Sweeny Complex's total current annual ethylene and propylene capacities are 3.6 billion and 1.1 billion pounds, respectively. Phillips' share is 2.9 billion pounds per year and 900 million pounds per year, respectively. Construction began on two projects to increase ethylene capacity by 25 percent at the Sweeny Complex. At SOLP, incremental debottlenecking will increase total capacity to 2 billion pounds per year. Completion of this project is scheduled for the second half of 1996. In addition, the company is restarting a 100 percent-owned ethylene unit that has been idle since 1992. This project, scheduled to be completed in late 1996, will add an additional 400 million pounds per year of ethylene capacity. Together, these two projects will increase the total Sweeny Complex's ethylene capacity to 4.5 billion pounds per year, with Phillips' share at 3.5 billion pounds. Paraxylene and cyclohexane are produced at the company's Puerto Rico Core facility in Guayama, Puerto Rico, and cyclohexane is also produced at the Sweeny Complex. Paraxylene is a feedstock for polyester fibers and plastic soft drink bottles, while cyclohexane is a feedstock for nylon. The company completed its installation of the Aromax catalytic reforming technology at Puerto Rico Core in mid-1995. This technology enables the facility to use a lower volume of a broader range of lower-cost naphtha feedstocks and achieve higher yields of higher-value cyclohexane and paraxylene than with previous technology. Earlier in 1995, the company completed the first phase of a paraxylene expansion, increasing design capacity from 525 million pounds per year to 675 million pounds per year. The company intends to increase capacity further, reaching 880 million pounds per year by the second quarter of 1997. As part of the company's growth strategy for its specialty chemicals business, Phillips plans to construct a 100 million- pound-per-year methyl mercaptan plant at its Borger Complex. If approved, construction could begin in 1996, with first production in late 1998. Methyl mercaptan is a sulfur-based chemical used in the production of methionine, a feed supplement for poultry. Methyl mercaptan is also a raw ingredient for agricultural chemicals. The new facility will use hydrogen sulfide produced at the Borger Complex as feedstock. 15 PLASTICS At HCC, capacity to produce an additional 400 million pounds of polyethylene annually is being added through debottlenecking. This will increase annual production capacity by 22 percent, from the current level of 1.8 billion pounds to 2.2 billion pounds by project completion in late 1997. Production of polyethylene will not be affected during debottlenecking, as work will occur during normally scheduled maintenance procedures. Polyethylene is used as a feedstock to manufacture a wide variety of plastic products, such as trash bags and plastic milk jugs. Phillips is increasing its participation in the plastics markets of Asia through the expansion of its 50 percent-owned Singapore polyethylene facility. The expansion will more than double the facility's total annual linear polyethylene capacity to 870 million pounds. Completion of the project is expected in second quarter 1997. In late 1995, Phillips and Shanghai Petrochemical Company Limited formed a joint venture to build and operate a linear polyethylene plant near Shanghai, China, with an annual capacity of 220 million pounds. Construction will begin in 1996 and take two years to complete. Phillips will own a 40 percent-equity interest in the plant. This project marks Phillips' first downstream investment in China, and will strengthen the company's position in the polyethylene market in Asia. In August 1994, Phillips contributed its polypropylene assets to Phillips Sumika Polypropylene Company (PSPC), a partnership formed in 1992 between Phillips and Sumika Polymers America Corporation (Sumika). Sumika is funding the construction of a new PSPC polypropylene facility at HCC. Construction began during the fourth quarter of 1994, and is scheduled to be completed in 1996. The new facility's annual polypropylene capacity will be approximately 270 million pounds, bringing PSPC's total annual production capacity to 750 million pounds. Phillips will ultimately hold a 50 percent interest in PSPC. K-Resin, a clear plastic used in food and medical packaging, is produced at HCC. A new copolymer reactor began operation in the fall of 1995, enhancing performance and increasing annual capacity to 270 million pounds. Phillips is planning modifications to further enhance performance and increase production capacity to 300 million pounds per year by 1998. 16 Other - ----- The Corporate Technology organization provides a flexible, cost-effective support team for the operating segments. Examples of Corporate Technology support in 1995 included: o Upstream (E&P and GPM) - Development of 3-D seismic technology, called 3-D pre-stack depth migration, to provide better images of rock formations below the earth's surface. This reduces the amount of time required to process seismic data, which in turn accelerates exploratory drilling programs. The technology is being used extensively in the subsalt exploration program in the Gulf of Mexico, along with other selected sites worldwide. - Use of new computer software that provides high resolution models of the earth. The models are created by combining data on rock type, porosity, fluid content and other information, leading to increased production at several projects around the world. - Continued research into enhanced oil recovery techniques. o Downstream (RM&T and Chemicals) - Development of an advanced computer modeling program that assists refinery operators in making timely and precise process adjustments. - Assisted with the installation of fluid catalytic cracking technology at the Woods Cross refinery. - Advanced to the pilot-plant stage for utilizing an extremely efficient process to produce 1-hexene, a chemical used to modify polyethylene plastics for high-value uses. - Development of a catalyst system that removes impurities and improves ethylene production. The system improved operating consistency and increased production of polymer-grade ethylene at the Sweeny Complex in 1995. Corporate Technology is also involved in a company-wide, long- range effort to replace various computer systems, including plant maintenance, materials management and financial systems. In addition to supporting the software selection and implementation processes, Corporate Technology will also evaluate and select the hardware needed to implement this new client-server technology. The goal is improved access to business information by implementing common, integrated computing systems across the company. 17 At the end of 1995, Phillips held a total of 4,523 active patents in 52 countries worldwide, including 2,199 active U.S. patents. During 1995, the company received 102 patents in the United States, and 332 foreign patents. The profitability of any business segment is not dependent upon any single patent, trademark, license, franchise or concession. The company's products and processes were licensed in 33 countries at year-end 1995, resulting in licensing revenues of $85 million. Polypropylene-related licenses contributed about two-thirds of the total, with polyethylene-related licenses contributing 18 percent. COMPETITION All phases of the businesses in which Phillips is engaged are highly competitive. Phillips competes at various levels with both petroleum and non-petroleum companies in providing energy, chemicals and other products to the consumer. Several of the company's competitors are larger and have substantially greater resources. While Phillips is one of approximately 20 large integrated oil companies, and generally ranks in the middle of the group, each of the segments in which Phillips operates is highly competitive and characterized by a great number of competitors. No single competitor, or small group of competitors, dominates any of Phillips' operating segments. Upstream, the company competes with numerous other companies in the industry to locate and obtain new sources of supply and to produce oil and gas in a cost-effective and efficient manner. The principal methods of competition include geological, geophysical and engineering research and technology, experience and expertise, and economic analysis in connection with property acquisitions. Downstream, competitive methods consist of product improvement and new product development through research and technology, and efficient manufacturing and distribution systems. In the marketing phase of the business, competitive factors include product quality and reliability, price, advertising and sales promotion, and development of customer loyalty to Phillips' branded products. Because Phillips is a significant U.S. producer of natural gas liquids, the company has wide access to relatively low-cost feedstocks, which are upgraded into chemicals and plastics. The company's structure is well-integrated vertically--with 18 businesses ranging from feedstocks to plastic pipe--which helps ensure markets for certain products. A substantial percentage of Phillips' olefins, for example, are typically used as a raw material in plastic resins manufactured by the company. Phillips' Corporate Technology organization is focused on providing technical support to the company's operating segments. Corporate Technology identifies technologies that drive Phillips' core businesses, enhancing the company's competitive position in areas ranging from reservoir characterization to improved plastics manufacturing processes. GENERAL Phillips continued to set new marks in safety, having its safest year ever in 1995. The company's injury rate fell 15 percent to 1.53 injuries per 100 employees. Chargeable vehicle accidents were the lowest recorded in the company's history as well. Company-sponsored research and development activities charged against earnings were $66 million, $71 million and $80 million in 1995, 1994 and 1993, respectively. The environmental information contained in Management's Discussion and Analysis on pages 50 and 51 under the caption, "Environmental" is incorporated herein by reference. It includes information on expensed environmental costs and capitalized environmental costs for 1995 and those expected for 1996 and 1997. International and domestic political developments and government regulation are prime factors that may materially affect the company's operations. Such political developments and regulation may impact price, production, allocation and distribution of raw materials and products, including their import, export and ownership; the amount of tax and timing of payment; and environmental protection. The occurrences and effect of such events are unpredictable. 19 Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 20 EXECUTIVE OFFICERS OF THE REGISTRANT Officer Name Position Held Age* Since ---- ------------- --- ------- W. W. Allen Chairman of the Board of 59 1988 Directors and Chief Executive Officer Knut Am Senior Vice President 52 1996 Worldwide Exploration and Production C. L. Bowerman Executive Vice President 56 1984 Director R. G. Ceconi Vice President Corporate 53 1991 Engineering K. L. Hedrick Senior Vice President 43 1994 Refining, Marketing and Transportation J. L. Howe Senior Vice President 51 1992 NGL, Chemicals and Plastics J. C. Mihm Senior Vice President 53 1988 Corporate Technology T. C. Morris Senior Vice President and 55 1993 Chief Financial Officer J. J. Mulva President and Chief Operating 49 1985 Officer Director M. J. Panatier President and Chief Executive 47 1994 Officer of Phillips Gas Company Barbara J. Price Vice President Health, 51 1992 Environment and Safety J. Bryan Whitworth Senior Vice President 57 1981 and General Counsel - ------------------------ *On February 1, 1996 21 There is no family relationship among the officers named above. Each officer is elected by the Board of Directors at its first meeting after the Annual Meeting of Stockholders and thereafter as appropriate. Each officer holds office from date of election until the first meeting of the directors held after the next Annual Meeting of Stockholders or until a successor is elected. The date of the next annual meeting is May 13, 1996. All of the executive officers named above have been employed by the company for more than five years. 22 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Quarterly Common Stock Prices and Cash Dividends Per Share Stock Price ------------------- High Low Dividends ------------------- --------- 1995 First $36 5/8 29 7/8 .28 Second 37 1/8 32 1/4 .305 Third 35 1/2 31 7/8 .305 Fourth 34 7/8 30 1/2 .305 - ----------------------------------------------------------------- 1994 First 31 1/8 25 1/2 .28 Second 34 1/4 26 .28 Third 35 1/8 30 1/4 .28 Fourth 37 1/4 31 1/2 .28 - ----------------------------------------------------------------- Closing Stock Price at December 31, 1995 $34 1/8 Number of Stockholders of Record at January 31, 1996 65,700 - ----------------------------------------------------------------- Phillips' common stock is traded primarily on the New York, Pacific and Toronto stock exchanges. 23 Item 6. SELECTED FINANCIAL DATA Millions of Dollars Except Per Share Amounts -------------------------------------------- 1995 1994 1993 1992 1991 -------------------------------------------- Sales and other operating revenues $13,368 12,211 12,309 11,933 12,604 Income before extraordinary items and cumulative effect of changes in accounting principles 469 484 245 270 98 Net income 469 484 243 180 258 Net operating income 580 407 217 242 257 Per common share Income before extraordinary items and cumulative effect of changes in accounting principles 1.79 1.85 .94 1.04 .38 Net income 1.79 1.85 .93 .69 .99 Total assets 11,978 11,453 11,035 11,468 11,473 Long-term debt 3,097 3,106 3,208 3,718 3,876 Cash dividends declared per common share 1.195 1.12 1.12 1.12 1.12 - ------------------------------------------------------------------ See Management's Discussion and Analysis for a discussion of factors that will enhance an understanding of this data. 24 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS February 21, 1996 Management's Discussion and Analysis is the company's analysis of its financial performance and of significant trends that may affect future performance. It should be read in conjunction with the financial statements and notes, accounting policies, and supplemental oil and gas disclosures. RESULTS OF OPERATIONS Consolidated Results A summary of the company's net income, by business segment and consolidated, follows: Millions of Dollars ----------------------- Years Ended December 31 1995 1994 1993 ----------------------- Exploration and Production (E&P) $ 390 342 389 Gas Gathering, Processing and Marketing (GPM) (22) (1) 42 Refining, Marketing and Transportation (RM&T) 40 136 65 Chemicals 386 259 91 Corporate and Other (325) (252) (342) - ----------------------------------------------------------------- Income before extraordinary item 469 484 245 Extraordinary item - - (2) - ----------------------------------------------------------------- Net income $ 469 484 243 ================================================================= Earnings for the three years included the following special items and extraordinary item on an after-tax basis: 25 Millions of Dollars ----------------------- 1995 1994 1993 ----------------------- Property impairments $ (51) - - Net gains on asset sales - 13 61 Gain on subsidiary stock transaction - 20 - Capital-loss carryforwards - 50 27 Work force reduction charges (31) (36) (26) Foreign currency gains (losses) (3) 3 (2) Pending claims and settlements (12) 17 (32) Incinerator project writedown (2) - (20) Other items (12) 10 20 - ----------------------------------------------------------------- Total special items (111) 77 28 - ----------------------------------------------------------------- Extraordinary item--early retirement of debt - - (2) - ----------------------------------------------------------------- Total $(111) 77 26 ================================================================= Net operating income, which excludes the above items, was $580 million in 1995, $407 million in 1994 and $217 million in 1993. 1995 vs. 1994 The company's E&P and Chemicals operations were the primary drivers behind significantly improved net operating income for Phillips in 1995. Higher worldwide crude oil and natural gas production, along with higher worldwide crude oil sales prices, contributed to a 41 percent improvement in E&P net operating income. Chemicals' earnings were up sharply because of higher ethylene, polyethylene and paraxylene margins in a solid year for the commodity chemicals industry. GPM's results were lower than a year ago, as low U.S. residue gas prices continued to negatively impact this business line. In RM&T, the refined products marketplace did not allow the recovery of higher crude oil feedstock costs, resulting in lower gasoline and distillates margins and a 64 percent decrease in net operating income. 1994 vs. 1993 Comparing 1994 with 1993, the company's net operating income benefited from improved operations, lower costs and higher margins and volumes in the commodity chemicals business. 26 Phillips at a Glance 1995 1994 1993 ----------------------- U.S. crude oil production (MBD) 79 90 93 Worldwide crude oil production (MBD) 222 206 203 U.S. natural gas production (MMCFD) 1,078 1,035 973 Worldwide natural gas production (MMCFD) 1,481 1,414 1,355 Worldwide natural gas liquids production (MBD) 159 165 159 Liquefied natural gas sales (MMCFD) 125 120 107 Refinery utilization rate (%) 97 99 91 U.S. automotive gasoline sales (MBD) 331 308 305 U.S. distillates sales (MBD) 135 128 105 Worldwide petroleum products sales (MBD) 696 689 659 Natural gas liquids processed (MBD) 199 207 198 Ethylene production (MMlbs)* 2,465 2,590 2,381 Polyethylene production (MMlbs)* 1,797 1,885 1,786 Polypropylene production (MMlbs)* 418 433 251 - ----------------------------------------------------------------- *Includes equity in affiliates. Consolidated Income Statement Analysis 1995 vs. 1994 Sales and other operating revenues were $13.4 billion in 1995, an increase from $12.2 billion in 1994. Revenues increased from 1994 levels as a result of higher prices for crude oil, chemicals and petroleum products, partially offset by lower U.S. natural gas sales prices. These factors also accounted for the corresponding increase in purchase costs. Equity in earnings of affiliated companies increased 51 percent in 1995, compared with 1994. Higher earnings from the company's Chemicals equity ventures were primarily responsible for the increase. Other revenues declined in 1995, compared with 1994, primarily due to higher gains on assets sales in 1994. Controllable costs, composed primarily of production and operating and selling, general and administrative expenses, were slightly lower in 1995 than in 1994. After adjusting for special items and asset dispositions, controllable costs were approximately $400 million lower in 1995 than in 1991, the year before the company embarked on its restructuring and cost reduction program. Exploration costs were 12 percent lower in 1995, compared with 1994, because the company incurred higher dry hole charges in 1994, primarily in the Gulf of Mexico and Norway. 27 After adjusting for the 1995 adoption of Financial Accounting Standards Board (FASB) Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," depreciation, depletion and amortization (DD&A) costs were 2 percent lower in 1995, compared with 1994, due primarily to lower DD&A costs in the company's U.S. E&P operations. See "New Accounting Standards" and Note 1 to the financial statements for more information on the adoption of FASB Statement No. 121. Taxes other than income taxes and interest expense, adjusted for special items, were both slightly lower in 1995, compared with 1994. 1994 vs. 1993 Total revenues for 1994 were 1 percent lower, compared with 1993, as a result of lower crude oil revenues being largely offset by higher revenues from petroleum products, olefins and plastics products. Total costs and expenses were 4 percent lower in 1994, compared with 1993, as a result of the company's cost control efforts. 28 Segment Results E&P Millions of Dollars ---------------------------- 1995 1994 1993 ---------------------------- Net income $390 342 389 Less special items (61) 23 48 - ----------------------------------------------------------------- Net operating income $451 319 341 ================================================================= Sales prices, exploration expenses and other statistics were: 1995 1994 1993 ---------------------------- Average Sales Prices Crude oil (per barrel) United States $14.98 13.37 14.20 Foreign 17.16 15.75 17.30 Worldwide 16.43 14.74 15.92 Natural gas--lease (per thousand cubic feet) United States 1.37 1.69 1.93 Foreign 2.50 2.31 2.37 Worldwide 1.77 1.92 2.10 - ----------------------------------------------------------------- Average Production Costs per Barrel-of-Oil-Equivalent United States 4.17 4.58 4.86 Foreign 4.28 5.36 5.57 Worldwide 4.22 4.90 5.15 - ----------------------------------------------------------------- Finding and Development Costs per Barrel-of-Oil-Equivalent United States 2.77 5.75 2.54 Foreign 4.21 2.10 9.45 Worldwide 3.52 2.88 3.94 - ----------------------------------------------------------------- Millions of Dollars ---------------------------- Worldwide Exploration Expenses Geological and geophysical $126 124 127 Leasehold impairment 30 27 24 Dry holes 36 68 98 Lease rentals 6 7 7 - ----------------------------------------------------------------- $198 226 256 ================================================================= 29 1995 1994 1993 ---------------------------- Thousands of Barrels Daily Operating Statistics ---------------------------- Crude oil produced United States 79 90 93 Norway 100 82 72 United Kingdom 3 5 6 Africa 24 23 24 China 11 1 - Canada 5 5 8 - ----------------------------------------------------------------- 222 206 203 ================================================================= Natural gas liquids produced United States 5 5 5 Norway 8 8 8 Other areas 2 1 - - ----------------------------------------------------------------- 15 14 13 ================================================================= Millions of Cubic Feet Daily ---------------------------- Natural gas produced United States (less gas equivalent of liquids shown above) 1,078 1,035 973 Norway* 299 272 272 United Kingdom* 46 58 54 Canada 58 49 56 - ----------------------------------------------------------------- 1,481 1,414 1,355 ================================================================= *Dry basis. Liquefied natural gas sales 125 120 107 - ----------------------------------------------------------------- 1995 vs. 1994 Phillips' average worldwide crude oil price was $16.43 per barrel in 1995, an 11 percent increase over 1994. Worldwide crude oil production averaged 222,000 barrels per day in 1995, an 8 percent increase over 1994. It was also the highest annual average since 1988, reflecting the company's growth strategy for its E&P operations. Taken together, these two factors resulted in higher crude oil revenues and were primarily responsible for the E&P segment's 41 percent improvement in net operating income in 1995, compared with 1994. Also positively affecting 1995 results were higher liquefied natural gas (LNG) revenues, lower U.S. lifting costs and lower worldwide exploration costs. These items were partially offset by lower U.S. natural gas revenues compared with 1994, due to a 19 percent lower average sales price. Phillips' worldwide monthly average crude oil sales prices rose through the first five months of the year, before declining in the summer and fall. Prices moved higher in November and 30 December, as the industry reacted to lean global inventories, colder than normal weather and commodity fund buying. 1994 vs. 1993 Comparing E&P's 1994 net operating income with 1993, low average crude oil and natural gas sales prices primarily contributed to 6 percent lower net operating income. Partially offsetting the low sales prices were higher natural gas production in the United States, lower worldwide exploration expenses and lower worldwide lifting costs. U.S. E&P - -------- Millions of Dollars ---------------------------- 1995 1994 1993 ---------------------------- Net income $249 257 253 Less special items (44) 18 9 - ----------------------------------------------------------------- Net operating income $293 239 244 ================================================================= 1995 vs. 1994 Net operating income increased 23 percent in 1995, compared with 1994, due primarily to lower costs. Production and operating costs, exploration expenses and depreciation, depletion and amortization (DD&A) costs were all lower in 1995, compared with 1994. Cost cutting programs, the sale of non-core properties and lower dry hole costs all contributed to lower costs in 1995. Also benefiting 1995 results were favorable natural gas imbalance settlements during the year. Crude oil lease revenues were down slightly from a year ago, as higher average sales prices were more than offset by lower production. Lease gas revenues were significantly lower than 1994, as average lease gas sales prices decreased 19 percent compared with the prior year. LNG revenues were higher in 1995, due in part to 4 percent more volume being sold to the company's utility customers in Japan. U.S. crude oil production continued to decline in 1995, due to general production declines, primarily from Point Arguello and Prudhoe Bay, and the effect of property dispositions. U.S. natural gas production was 4 percent higher in 1995 than 1994, primarily as a result of higher production from the San Juan Basin and new production from the Garden Banks (Seastar) field in the Gulf of Mexico, which came online in mid-year 1995. 31 Special items in 1995 included property impairments on an after-tax basis of $35 million associated with the adoption of FASB Statement No. 121, along with work force reduction charges, a net loss on asset dispositions and a contingency accrual. Special items in 1994 included net after-tax gains of $15 million from asset sales along with favorable settlements related to the company's Alaska operations and a net profits interest. These positive special items were partially offset by contingency accruals. 1994 vs. 1993 Net operating income decreased slightly in 1994, compared with 1993, as lower exploration expenses, lower DD&A, and higher LNG revenues were more than offset by lower crude oil and natural gas revenues. The average U.S. annual crude oil sales price in 1994 was at its lowest since 1979. Natural gas prices trended downward during 1994, as supplies outpaced demand. U.S. crude oil production was lower in 1994, compared with 1993, due to asset sales and normal declines in production, partially offset by increased production in the Gulf of Mexico. U.S. natural gas production was up 6 percent from 1993, due to higher production from the San Juan Basin and the South Marsh Island field. Special items in 1993 included a $5 million after-tax refund of windfall profit taxes. Foreign E&P - ----------- Millions of Dollars ---------------------------- 1995 1994 1993 ---------------------------- Net income $141 85 136 Less special items (17) 5 39 - ----------------------------------------------------------------- Net operating income $158 80 97 ================================================================= 1995 vs. 1994 Net operating income from the company's foreign E&P operations almost doubled in 1995, compared with 1994, to $158 million. The increase is primarily attributable to higher crude oil revenues, due to higher crude oil production and a 9 percent increase in the average crude oil sales price. The positive effect of higher crude oil revenues was partially offset by higher DD&A, as a result of higher production rates and new production from offshore China. 32 Foreign crude oil production was 23 percent higher in 1995, compared with 1994. The increase is attributable to continued higher production in Norway, as a result of the water injection program and horizontal drilling, and the first full year's production from offshore China. Higher production in Norway and Canada led to higher foreign natural gas production. Special items in 1995 included after-tax work force reduction charges of $8 million, after-tax property impairments of $6 million, a contract settlement and foreign currency losses. Special items in 1994 consisted primarily of income tax items related to the company's China and Norway operations. 1994 vs. 1993 Net operating income fell 18 percent in 1994, compared with 1993, because of lower crude oil revenues, partially offset by lower lifting costs. Average annual foreign crude oil sales prices realized by Phillips in 1994 were 9 percent lower than 1993. Also negatively affecting foreign crude oil revenues were lower crude oil sales volumes in the United Kingdom, Africa and other areas, due in part to asset sales. The effect of higher crude oil sales volumes in Norway partially offset the negative impact of lower volumes in other foreign areas. Foreign crude oil production was up 5 percent in 1994, compared with 1993, due primarily to increased production from Norway. Approximately half of Norway's crude oil production increase in 1994 was from the Embla field, which started production in mid- year 1993. Foreign natural gas production was marginally lower in 1994, compared with 1993. Special items in 1993 included after-tax asset-sale gains of $26 million. 33 GPM Millions of Dollars ---------------------------- 1995 1994 1993 ---------------------------- Net income (loss) $(22) (1) 42 Less special items (11) (6) - Less minority interest--preferred dividend requirements of Phillips Gas Company (32) (32) (32) - ----------------------------------------------------------------- Net operating income $ 21 37 74 ================================================================= The company's GPM operations are conducted primarily through GPM Gas Corporation, a wholly owned subsidiary of Phillips Gas Company. The effect of Phillips Gas Company's preferred dividend requirements has been excluded in determining net operating income. Sales prices and operating statistics for GPM were: 1995 1994 1993 ---------------------------- Average Sales Prices U.S. residue gas (per thousand cubic feet) $ 1.49 1.79 2.03 U.S. natural gas liquids (per barrel--unfractionated) 10.07 9.77 10.79 - ----------------------------------------------------------------- Millions of Cubic Feet Daily ---------------------------- Operating Statistics Natural gas purchases Outside Phillips 1,247 1,164 1,063 Phillips 194 206 205 - ----------------------------------------------------------------- 1,441 1,370 1,268 ================================================================= Raw gas throughput 1,620 1,505 1,428 - ----------------------------------------------------------------- Residue gas sales Outside Phillips 833 853 780 Phillips 184 96 87 - ----------------------------------------------------------------- 1,017 949 867 ================================================================= Thousands of Barrels Daily ---------------------------- Natural gas liquids net production From Phillips E&P leasehold gas 19 21 22 From gas purchased outside Phillips 125 130 124 - ----------------------------------------------------------------- 144 151 146 ================================================================= 34 1995 vs. 1994 GPM's average annual raw gas throughput volumes continued to grow in 1995, ending the year 8 percent higher than 1994 and 13 percent higher than 1993. Acquisitions and expansions in 1995 and late 1994 contributed to the increase in raw gas throughput volumes. Higher raw gas throughput volumes led to increased residue gas sales volumes in 1995, compared with 1994. However, 17 percent lower residue gas sales prices contributed to a sharp decline in GPM's net operating income in 1995. Abundant gas supplies kept residue gas prices lower than 1994 levels for most of the year. In December 1995, residue gas prices turned higher because of rising seasonal demand. Natural gas liquids (NGL) average sales prices were slightly higher in 1995 than 1994, but the higher sales prices were more than offset by lower sales volumes, primarily as a result of lower retention rates at GPM's Linam Ranch plant, a lean oil absorption plant acquired in 1994. Conversion of the Linam Ranch plant to a cryogenic plant was completed in late 1995, which should increase NGL sales volumes up to 6,000 barrels per day. Operating costs were lower in 1995, compared with 1994, as GPM continued to aggressively lower its overall cost structure. Completion of modernization projects at three major plants, completion of reengineering studies and continuing implementation of technology should further reduce costs in 1996. GPM completed an acquisition in late 1995 that should increase raw gas throughput volumes by approximately 260 million cubic feet per day in 1996. Another acquisition announced in early 1996 is awaiting regulatory approval. Upon completion, this acquisition should add another 200 million cubic feet of raw gas per day to throughput volumes. Special items in 1995 and 1994 consisted of work force reduction charges. 1994 vs. 1993 Comparing 1994 with 1993, 9 percent lower NGL sales prices and 12 percent lower residue gas sales prices led to a 50 percent decrease in net operating income. GPM's operating costs were higher in 1994, compared with 1993, due to gathering fees the company paid GPM Gas Gathering L.L.C., a limited liability company in which GPM Gas Corporation owns a 50 percent interest. 35 RM&T Millions of Dollars ---------------------------- 1995 1994 1993 ---------------------------- Net income $ 40 136 65 Less special items (11) (7) (15) - ----------------------------------------------------------------- Net operating income $ 51 143 80 ================================================================= Sales prices and operating statistics for RM&T were: 1995 1994 1993 ---------------------------- Average Sales Prices (per gallon) Automotive gasoline-wholesale $.58 .56 .58 Automotive gasoline-retail .74 .72 .73 Distillates .52 .51 .56 Propane .38 .35 .38 - ----------------------------------------------------------------- Thousands of Barrels Daily ---------------------------- Operating Statistics U.S. refinery crude oil Capacity 345 320 305 Refined 333 317 278 Capacity utilization (percent) 97% 99 91 - ----------------------------------------------------------------- Petroleum products outside sales United States Automotive gasoline-wholesale 286 252 237 Automotive gasoline-retail 35 38 41 Aviation fuels 29 32 31 Distillates 135 128 105 Propane 23 25 26 Other products 18 18 16 - ----------------------------------------------------------------- 526 493 456 Foreign 45 54 50 - ----------------------------------------------------------------- 571 547 506 ================================================================= 1995 vs. 1994 Net operating income decreased 64 percent in 1995, compared with 1994. Higher crude oil feedstock costs, particularly during the first six months of the year, could not be fully recovered in the motor fuel and distillates markets. Ample supplies caused these markets to remain highly competitive in 1995, resulting in lower motor fuel and distillate margins. In addition to general increases in crude oil feedstock costs, pricing differentials on various slates of crude oil negatively impacted the company's RM&T operations. The company's Sweeny and Borger, Texas, refineries are designed to run a slate of heavy crudes. 36 Typically, these crudes are less expensive than other grades. But in 1995, the cost differential between heavy crudes and other grades narrowed, reducing the company's advantage of running heavy crude and tightening its petroleum products margins. Continued operating efficiencies and incremental debottlenecking led the company to revise its U.S. crude oil refining capacity again in 1995, from 320,000 barrels per day to 345,000 barrels per day, effective January 1, 1995. Even at the higher capacity, Phillips' U.S. refineries ran at 97 percent of capacity, while at the same time lowering controllable costs. The company launched a retail marketing growth strategy in 1995 designed to increase the number of company-operated retail marketing outlets by approximately 66 percent over the next several years. This growth effort is focused on increasing the company's total motor fuel sales volumes, as well as increasing retail sales as a percentage of that total. Special items in 1995 included an inventory writedown and work force reduction charges. Special items in 1994 included work force reduction charges. 1994 vs. 1993 Improved refinery operations and higher gasoline margins contributed to a significant increase in RM&T net operating income in 1994, compared with 1993. The company's refineries showed sustained operating consistency in 1994, running at a crude oil capacity utilization rate of 99 percent in 1994, up from 1993's 91 percent. The higher utilization rate led to higher gasoline and distillates sales volumes for the year. Earnings also benefited from higher gasoline margins in the company's marketing operations, compared with 1993. Lower operating expenses at the company's refineries also contributed to RM&T's improved earnings in 1994. Special items in 1993 included an after-tax charge of $20 million for the writedown of an incinerator project. 37 Chemicals Millions of Dollars ---------------------------- 1995 1994 1993 ---------------------------- Net income $386 259 91 Less special items (4) 34 13 - ----------------------------------------------------------------- Net operating income $390 225 78 ================================================================= Operating statistics for Chemicals were: 1995 1994 1993 ---------------------------- Millions of Pounds Except as Indicated ---------------------------- Operating Statistics Production* Ethylene 2,465 2,590 2,381 Polyethylene 1,797 1,885 1,786 Propylene 434 372 361 Polypropylene 418 433 251 Paraxylene 578 393 521 Cyclohexane (millions of gallons) 133 174 196 - ----------------------------------------------------------------- *Includes equity in affiliates. Thousands of Barrels Daily ---------------------------- U.S. petroleum products outside sales Automotive gasoline 10 18 27 Liquefied petroleum gas 75 84 79 Other products 40 40 47 - ----------------------------------------------------------------- 125 142 153 ================================================================= Natural gas liquids Processing capacity 227 227 227 Liquids processed 199 207 198 - ----------------------------------------------------------------- 1995 vs. 1994 The company's chemicals segment reported substantial earnings growth in 1995, with net operating income of $390 million, compared with $225 million in 1994. The 73 percent improvement reflects improved product margins in the commodity chemicals industry that began during 1994. Demand for olefins, which includes ethylene and propylene, was strong in the first half of 1995, before softening during the second half. The slowdown occurred mainly because buyers had increased inventories of resins made from ethylene in 1994, when prices were increasing rapidly. These higher inventory levels 38 were drawn down in 1995, reducing demand for new production. Also tempering demand in 1995 was a softening export market. Growing demand led to higher paraxylene margins in 1995. The demand for paraxylene, a feedstock for polyester, increased rapidly due to growing polyester fiber demand in Asia. In addition, the demand for clear plastics in packaging applications is increasing, as plastic soft drink bottles are replacing glass and aluminum ones. Paraxylene is produced at the company's Puerto Rico Core facilities. In the company's plastics operations, higher polyethylene and polypropylene margins in 1995 contributed to the higher Chemicals earnings. Polyethylene margins, although higher than a year ago, slowed somewhat in 1995, due to high customer product inventories and a soft export market, particularly to Asia. Higher polypropylene margins led to higher equity earnings from the company's interest in the Phillips Sumika Polypropylene Company partnership. Special items for 1995 included property impairments on an after-tax basis of $3 million. Favorable special items in 1994 included an after-tax gain of $20 million from a subsidiary stock transaction, along with an income tax item related to the company's Puerto Rico Core operations and an adjustment to a 1993 pipeline abandonment accrual. These favorable items were partly offset by work force reduction charges. 1994 vs. 1993 Results for 1994, compared with 1993, reflected the rise in demand and improved product margins in the commodity chemicals industry during 1994. Net operating income increased to $225 million, almost triple 1993's $78 million. The strengthening economy in 1994 resulted in higher demand for the company's olefins, particularly ethylene. In the company's plastics operations, higher demand in 1994 resulted in higher sales volumes, especially in total U.S. polyethylene sales volumes, which increased 19 percent, compared with 1993. Net operating income benefited $18 million from the sale of a polypropylene license in 1994. The company's natural gas liquids fractionation business benefited from higher sales volumes in 1994. Special items in 1993 included net after-tax asset-sale gains of $33 million from the sale of the assets of Aztec Catalyst Company and the sale of Phillips Fibers Corporation. These gains were partly offset by a $12 million after-tax writedown of assets held for sale, resulting from the company's decision to exit the 39 catalyst business, and a $10 million after-tax charge for the abandonment of a pipeline. Corporate and Other Millions of Dollars ----------------------- 1995 1994 1993 ----------------------- Corporate and Other $(325) (252) (342) Less special items (24) 33 (18) - ----------------------------------------------------------------- Adjusted Corporate and Other $(301) (285) (324) ================================================================= Adjusted Corporate and Other includes: Corporate general and administrative expenses $(131) (125) (153) Net interest (173) (179) (181) Other 3 19 10 - ----------------------------------------------------------------- Adjusted Corporate and Other $(301) (285) (324) ================================================================= 1995 vs. 1994 Salaries, a significant component of Corporate general and administrative expenses, were lower in 1995 than in 1994. In addition, the company's cost control efforts led to lower costs in such areas as travel, utilities and insurance. However, overall Corporate general and administrative expenses were 5 percent higher in 1995, compared with 1994, as a result of comparatively higher benefit costs, due in part to favorable accrual reversals in 1994, and lower allocations to the operating segments. Net interest represents interest income and expense, net of capitalized interest. Net interest declined 3 percent in 1995, compared with 1994, as a result of higher capitalized interest associated with the J-Block development in the U.K. sector of the North Sea. Other consists primarily of the company's insurance operations, along with income tax and other items that are not directly associated with the operating segments on a stand-alone basis. Other was adversely impacted in 1995 by higher tax accruals not directly associated with a specific operating segment. Special items in 1995 included property impairments on an after- tax basis of $7 million, contingency accruals and work force reduction charges. Favorable special items in 1994 included an after-tax benefit of $50 million from a capital-loss carryforward 40 applied against gains from asset sales, along with interest applicable to various favorable settlements of claims. Partially offsetting these favorable special items were after-tax work force reduction charges of $16 million, along with losses from asset sales. 1994 vs. 1993 The company's focus on cost control benefited Corporate general and administrative expenses in 1994, which declined 18 percent compared with 1993. Compared with 1993, net interest declined slightly in 1994 to $179 million. Other in 1994, relative to 1993, benefited from higher earnings from the company's insurance operations. Special items in 1993 included an after-tax benefit of $27 million from capital-loss carryforwards applied against capital gains from asset sales, and after-tax interest income of $9 million from windfall profit tax refunds, partially offset by after-tax work force reduction charges of $26 million. 41 CAPITAL RESOURCES AND LIQUIDITY Financial Indicators Millions of Dollars Except as Indicated ----------------------- 1995 1994 1993 ----------------------- Current ratio .9 1.0 1.0 Long-term debt $3,097 3,106 3,208 Preferred stock of subsidiary $ 345 345 345 Stockholders' equity $3,188 2,953 2,688 Percent of long-term debt to capital* 47% 49 51 Percent of floating-rate debt to total debt 22% 23 25 - ----------------------------------------------------------------- *Capital includes long-term debt, preferred stock of subsidiary and stockholders' equity. Although net income was down slightly, cash from operations for 1995 increased 33 percent, compared with 1994. The increase in cash from operations can be primarily attributed to a decrease in net non-cash working capital, mainly due to the sale of $200 million of receivables. An increase in taxes and other accruals of $170 million, combined with a decrease in cash of $126 million and an increase in payables of $123 million resulted in a decreased current ratio of .9 for 1995, compared with 1.0 in 1994 and 1993; however, in 1995, stockholders' equity was greater than total debt for the first time since 1984. The company's short-term liquidity position at December 31, 1995, was stronger than indicated because the current cost of the company's inventories was approximately $443 million greater than their last-in, first-out (LIFO) carrying value. During the third quarter of 1995, Moody's Investors Service upgraded the rating of Phillips' senior, unsecured debt from Baa2 to Baa1, which lowered the company's cost of debt. During the year, the company replaced its commercial paper program, which had been supported by a direct-pay irrevocable bank letter of credit, with a $250 million commercial paper program supported by a portion of the company's unused revolving lines of credit equal to 100 percent of the commercial paper outstanding. To facilitate the change in programs and to maintain liquidity for other uses, the company increased its revolving bank credit facility from $800 million to $1,100 million in August 1995. At December 31, 1995, $77 million of this facility was outstanding, and $123 million of the facility supported the commercial paper program. Also outstanding at December 31, 1995, was $20 million of Phillips 42 Petroleum Company Norway's $500 million revolving bank credit facility from a group of international banks. At December 31, 1995, no portion of the company's $500 million shelf registration of debt securities, which became effective in 1994, had been issued. In the first quarter of 1996, the company intends to file with the Securities and Exchange Commission a shelf registration for $750 million of trust preferred securities and subordinated debt securities. During 1995, the company and a bank-sponsored entity entered into two one-year agreements, with options to renew, which provide for the revolving sale of credit card and trade receivables. The maximum aggregate amount of receivables which can be sold and outstanding under both agreements is limited to $200 million, all of which was outstanding at December 31, 1995. The Compensation and Benefits Trust (CBT) was established in December 1995 to purchase, hold and distribute shares of the company's common stock, which will be used to fund future compensation and benefit obligations of the company. The trust, an irrevocable grantor trust that is consolidated by Phillips, is administered by an independent trustee. The CBT does not increase or alter the amount of benefits or compensation which will be paid under existing plans, but offers the company enhanced financial flexibility in funding those plans. In December 1995, the company sold 29,200,000 shares of previously unissued Phillips common stock, $1.25 par value, to the CBT. Shares held by the CBT do not affect earnings per share or total stockholders' equity until after they are transferred out of the CBT. In 1995, Phillips' improved safety performance record and a favorable insurance market allowed the company to negotiate a number of multi-year insurance programs for the first time. These programs will provide greater coverage stability to Phillips in future years than would be possible under traditional twelve-month insurance arrangements. In December 1995, the company contributed a 30-inch natural gas pipeline and related assets, as well as a crude oil tanker dock and related tankage, to Seaway Pipeline Company (Seaway), a partnership formed in 1995 between, and jointly controlled by, Phillips and ARCO Pipe Line Company. No gain or loss was realized on the contribution. In addition, ARCO contributed assets to Seaway and paid some cash to Phillips. Using cash from operations and possible partner capital contributions, Seaway will convert the 30-inch pipeline to crude oil service in 1996 and use it to transport, for a fee, customer crude oil from the Houston area to markets in Oklahoma and Texas. Phillips' share 43 of net cash flows, including any future capital contributions, as well as gains and losses, is 20 percent and will increase to 40 percent and 60 percent in the years 2002 and 2006, respectively. Phillips owns a 50 percent-interest in Sweeny Olefins Limited Partnership (SOLP), which owns and operates a 1.5 billion-pound- per-year ethylene plant located adjacent to the company's Sweeny, Texas, refinery. During third quarter 1995, SOLP entered into a second subordinated loan agreement with American Olefins, Inc., a wholly owned subsidiary of Phillips, for $120 million to fund three new furnaces for the ethylene plant. This debottlenecking project will increase SOLP's annual capacity to approximately 2 billion pounds upon completion, scheduled for the third quarter of 1996. During 1995, SOLP borrowed $19 million under the second subordinated loan agreement and in January 1996 another $11 million. The loan agreement has essentially the same terms as the company's first subordinated loan to SOLP. The company and its subsidiary, American Olefins, Inc., the managing general partner of SOLP, are currently being sued for injunctive and declaratory relief by First Olefins Limited Partnership, the other general partner of SOLP. The suit is pending in the Delaware Chancery Court. The plaintiff alleges that it is entitled to a veto right over the debottlenecking project and that construction activities and the capacity expansion will expose it to a variety of risks that it claims it did not agree to assume when it became a general partner of SOLP. The company and its subsidiary believe the partnership agreement allows the debottlenecking project and, thus, believe the claims to be wholly without merit. Most of the company's foreign operations use the local currency as the functional currency. The local currency reflects the expected economic effect of exchange rate fluctuations on cash flows and equity, since cash flows of the company's foreign operations are largely denominated in the local currency. Phillips Petroleum Company and certain of its subsidiaries use financial and commodity-based derivative contracts to limit the risks inherent in foreign currency fluctuations and crude oil, natural gas and related product price changes. In the past the company has, on occasion, hedged interest rates, and may do so in the future should certain circumstances or transactions warrant. In 1995 and 1994, the net realized and unrealized gains and losses from derivative contracts used by Phillips were not material. 44 In 1995, Phillips' Board of Directors issued a policy governing the use of derivative instruments, which requires every derivative used by the company to relate to an underlying, offsetting position, anticipated transaction or firm commitment and prohibits the use of speculative, highly complex or leveraged derivatives. The policy also requires review and approval by the Chief Executive Officer and Chief Operating Officer of all risk management programs using derivatives. These programs are also periodically reviewed by the Audit Committee of the company's Board of Directors. To meet its liquidity requirements, including funding its capital program, the company will look primarily to cash generated from operations and financing. Over the next few years, the company plans to maintain its long-term debt level in the range of $3.0 billion to $3.5 billion. Capital Spending Capital Expenditures and Investments Millions of Dollars --------------------------------- Estimated 1996 1995 1994 1993 --------------------------------- E&P $ 855 856 707 821 GPM 80 274 172 120 RM&T 175 150 100 82 Chemicals 240 148 144 174 Corporate and Other 50 28 31 29 - ----------------------------------------------------------------- $1,400 1,456 1,154 1,226 ================================================================= United States $ 734 923 733 901 Foreign 666 533 421 325 - ----------------------------------------------------------------- $1,400 1,456 1,154 1,226 ================================================================= Phillips' 1996 capital budget promotes the company's growth strategy by supporting an aggressive worldwide exploration program, an extensive retail marketing expansion program, and volume expansion and cost control programs throughout the company. More of the company's capital spending is being directed toward payout projects--projects to generate income and increase shareholder value, as opposed to maintenance or environmental-compliance projects, which often provide limited returns. While 43 percent of the company's capital spending went for payout projects in 1993, the percentage increased to about 65 percent in both 1994 and 1995, and is expected to reach 74 percent in 1996. 45 In addition to the $1.4 billion of planned spending shown above, the company is helping to fund the debottlenecking at SOLP by advancing a loan to the 50-percent-owned partnership (See page 44), and the company intends to utilize an operating lease program to partially support its planned retail marketing expansion. E&P Capital spending for E&P during the three-year period ended December 31, 1995, supported several major development projects including J-Block, Armada and Britannia in the U.K. North Sea; the Ekofisk water injection program and redevelopment in Norway; the Seastar and Mahogany developments in the Gulf of Mexico; and the Xijiang fields, offshore China. Additional expenditures of $127 million were incurred in 1993 for construction of two liquefied natural gas tankers. Acquisition of an additional interest in the Britannia development in the U.K. North Sea was also a portion of capital spending in 1994 and 1995. The 1996 E&P capital budget is approximately the same as 1995, with increased emphasis on projects that will contribute to Phillips' growth strategies. Exploratory drilling is focused on prospects with large reserve potential, including several subsalt prospects in the Gulf of Mexico; a 100 percent-interest block in the Borj Messouda area of eastern Algeria; and a multiwell exploratory program in the Norwegian and U.K. sectors of the North Sea. Appraisal of Phillips' 1995 Bayu discovery in the Timor Sea between Australia and Indonesia will also continue in 1996. Additional funding is allocated to new growth opportunities that capitalize on Phillips' existing technological expertise. These include international opportunities in reservoir management, improved oil recovery and LNG projects. The balance of 1996 capital spending is allocated to ongoing development projects in the North Sea (Ekofisk II, Armada, Britannia) and the United States (Mahogany). About $300 million, nearly 35 percent of the 1996 funds, are to be spent on the Ekofisk redevelopment project in Norway. The project includes construction of a new wellhead platform and a new processing and transportation platform projected to be operational in 1996 and 1998, respectively. It is anticipated that the Ekofisk, Eldfisk, Embla and Tor fields will be connected to the new facilities. Several third-party fields will also be connected to the new Ekofisk facilities. 46 Capital funding is also earmarked for the Armada and Britannia gas condensate fields, in the U.K. sector of the North Sea, scheduled for first production in 1997 and 1998, respectively. In late 1995, Phillips increased its interest in Britannia by 1.76 percent, bringing its total interest to 6.78 percent. GPM As a result of an acquisition program aimed at increasing throughput volumes and maintaining the company's leadership in domestic NGL production, capital spending for GPM increased significantly in 1995, up 59 percent over 1994 and more than double that of 1993. Late in 1995, GPM Gas Corporation acquired the stock of two Enron Corp. subsidiaries that owned gathering facilities predominately located in the Texas and Oklahoma Panhandles. The assets acquired included 3,200 miles of gathering pipeline and 21 compressor units, providing GPM with additional opportunities in current operating areas, as well as new opportunities in adjacent areas. In addition to the acquisition program, projects to streamline operations, reduce operating costs, and increase profitability were funded in 1995. These projects included major technological upgrades to the Eunice and Goldsmith plants, and conversion of the Linam Ranch facility to a cryogenic process. In addition, at each of these facilities, old inefficient compression was replaced with modern turbines. The 1996 budget returns to a more traditional level as a result of GPM's completing the aggressive acquisition program and plant improvements previously mentioned. The 1996 spending program provides for cost containment programs utilizing technological upgrades, and streamlining of operations through consolidation of assets and increased capacity utilization. The budget also provides funds to increase throughput volumes with new well connections and acquisition opportunities. In January 1996, GPM Gas Corporation signed a definitive agreement to acquire gathering systems located in Oklahoma, which will increase GPM's assets by 1,570 miles of gathering pipeline and 14 compression stations. The acquisition is contingent upon governmental approval, which is anticipated to occur in late 1996. 47 RM&T Capital expenditures for RM&T during the three-year period ended December 31, 1995, included safety projects; upgrades at the Sweeny and Borger, Texas, refineries to meet new environmental standards; and renovation of the refineries' feedstock pipelines and product terminals. As part of a continuing effort to increase profitability, RM&T's 1996 capital budget provides for a 140 percent increase in expenditures for marketing over 1995. RM&T's enhanced marketing strategy for 1996 focuses on expanding its retail marketing business. Construction is planned for more than 200 outlets over the next three to five years, increasing the number of company- operated outlets to more than 500. The company will build most of the new outlets, primarily in the Southwest and Rocky Mountain regions of the United States. The new outlets will feature larger convenience stores, with the name "Kicks," which will be displayed along with the Phillips shield. As part of RM&T's continuing efforts to reduce costs and increase profits, significant expenditures are also planned during 1996 to continue upgrading to advanced process control technology at the Sweeny and Borger Complexes. Chemicals For the three-year period ended December 31, 1995, capital spending for Chemicals focused on production expansion projects utilizing improved technology and debottlenecking techniques. In June 1995, the company began using the Aromax catalytic reforming technology at its Puerto Rico Core facility. The new aromatic technology broadens the range of hydrocarbon feedstocks that can be used, and produces higher value end-products, resulting in lower feedstock costs and increased profitability. Capital spending for 1996 targets growth through domestic and foreign production expansion projects. A joint venture, called Shanghai Golden Phillips Petrochemical Company Limited, was formed with Shanghai Petrochemical Company Limited (SPC) to build and operate a 220 million-pound-per-year linear polyethylene plant near Shanghai, China. Phillips' proprietary technology will be used at the new facility to produce polyethylene, which will be marketed worldwide. Construction is expected to begin in 1996, with completion during 1998. Phillips will have a 40 percent equity interest in the facility. 48 Domestically, previously idled assets are being upgraded at the company's Sweeny facility to increase ethylene production by 400 million pounds per year. The assets are expected to be restarted and producing in the fourth quarter 1996. Also, 400 million pounds of high-density polyethylene capacity will be added through debottlenecking projects at Phillips' Houston Chemical Complex polyethylene manufacturing facility, increasing the production capacity there from 1.8 billion pounds to 2.2 billion pounds a year. This project is expected to be completed in late 1997. Contingencies Legal and Tax Matters In November 1995, the U.S. Court of Appeals for the Tenth Circuit affirmed the U.S. Tax Court's previous decisions related to the company's sales of liquefied natural gas in Japan. The Tax Court's decisions supported the company's position that more than 50 percent of the income at issue was from a foreign source. The U.S. Government's last court of appeal on the issue is the U.S. Supreme Court and a writ of certiorari, if made, must be requested by February 26, 1996. A favorable resolution of the issue would have a positive effect on Phillips' net income of approximately $565 million, and would improve the company's cash position over time by approximately $300 million after-tax, the majority of which would be received in 1996. In addition, the company has a number of issues outstanding with the Internal Revenue Service that can proceed toward final settlement as a result of resolving the Kenai issue. Although a favorable resolution of these issues would have a positive effect on net income and cash flow, it is too early to determine the outcome, when the issues will be resolved, or the final financial effects. An unfavorable outcome of these issues would not impact the company's net income or cash position. Phillips accrues for contingencies when a loss is probable and the amounts can be reasonably estimated. Based on currently available information, the company believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the company's financial statements. 49 Environmental Most aspects of the businesses in which the company engages are subject to various federal, state, local and foreign environmental laws and regulations. Similar to other companies in the petroleum and chemical industries, the company incurs costs for preventive and corrective actions at facilities and waste disposal sites. Phillips may be obligated to take remedial action as the result of the enactment of laws, such as the federal Superfund law, the issuance of new regulations, or as a result of leaks and spills. In addition, an obligation may arise when a facility is closed or sold. Most of the expenditures to fulfill these obligations relate to facilities and sites where past operations followed practices and procedures that were considered appropriate under regulations, if any, existing at the time, but may now require investigatory or remedial work to adequately protect the environment or address new regulatory requirements. At year-end 1994, Phillips reported 56 sites where it had information indicating that it might have been identified as a Potentially Responsible Party (PRP). Since then, 15 of these sites have been resolved through consent decrees, deposits into trust funds or otherwise. Seven sites were also added during the year. Of the 48 sites remaining at December 31, 1995, the company believes it has a legal defense or its records indicate no involvement for 16 sites. At eight other sites, present information indicates that it is probable that the company's exposure is less than $100,000 per site. At 11 sites, Phillips has had no communication or activity with government agencies or other PRPs in more than two years. Of the 13 remaining sites, the company has provided for any probable costs that can be reasonably estimated. Phillips does not consider the number of sites at which it has been designated potentially responsible by state or federal agencies as a relevant measure of liability. Some companies may be involved in few sites but have much larger liabilities than companies involved in many more sites. Although liability of those potentially responsible is generally joint and several for federal sites and frequently so for state sites, the company is usually but one of many companies cited at a particular site. It has, to date, been successful in sharing cleanup costs with other financially sound companies. Many of the sites at which the company is potentially responsible are still under investigation by the Environmental Protection Agency (EPA) or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess site conditions, apportion responsibility and determine the appropriate remediation. In 50 some instances, Phillips may have no liability or attain a settlement of liability. Actual cleanup costs generally occur after the parties obtain EPA or equivalent state agency approval. At December 31, 1995, accruals of $7 million had been made for the company's unresolved PRP sites. In addition, the company has accrued $92 million for other planned remediation activities, including resolved state, PRP, and other federal sites, as well as sites where no claims have been asserted, and $10 million for other environmental contingent liabilities, for total environmental accruals of $109 million. No one site represents more than 10 percent of the total. Expensed environmental costs were $198 million in 1995 and are expected to be approximately $175 million in 1996 and 1997. The estimates for 1996 and 1997 do not include any amounts related to the federal Superfund tax. The Superfund tax expired December 31, 1995, and Congress has currently not extended the law providing for its collection. Capitalized environmental costs were $75 million in 1995, and are expected to be approximately $70 million per year in both 1996 and 1997. After an assessment of environmental exposures for cleanup and other costs, the company makes accruals on an undiscounted basis for planned investigation and remediation activities for sites where it is probable that future costs will be incurred and these costs can be reasonably estimated. These accruals have not been reduced for possible insurance recoveries. Based on currently available information, the company believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the company's financial statements. Other Phillips has deferred tax assets for the alternative minimum tax, certain accrued liabilities, and loss carryforwards. Valuation allowances have been established for certain foreign and state net operating loss carryforwards that reduce deferred tax assets to an amount that will more likely than not be realized. Uncertainties that may affect the realization of these assets include tax law changes and the future level of product prices, costs and tax rates. Based on the company's historical taxable income, management expects that the net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as reductions in future taxable operating income. The alternative minimum tax credit can be carried forward indefinitely to reduce the company's regular tax liability. The changes in other loss carryforwards resulted in a net increase in the valuation allowance of $13 million during 1995. 51 New Accounting Standards Effective April 1, 1995, the company adopted FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which resulted in a before-tax addition of $95 million to depreciation, depletion and amortization expense in second quarter 1995. After-tax, the additional charge was $49 million, $.19 per share. In October 1995 the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock-based employee compensation plans. Effective for fiscal years beginning after December 15, 1995, the Statement provides the option to continue under the accounting provisions of APB Opinion 25, while requiring pro forma footnote disclosures of the effects on net income and earnings per share, calculated as if the new method had been implemented. Phillips expects to elect to continue under APB Opinion 25, but the company is studying the various option pricing models available and the assumptions required to calculate the fair value amounts that would be disclosed, but it is too early to determine the pro forma effect. OUTLOOK During the second quarter of 1995, Phillips and its co-venturers declared that the Mahogany field in the Gulf of Mexico is commercial and will be developed. Initial production is expected in late 1996. Phillips holds a 37.5 percent working interest in the Mahogany field. In addition to the Mahogany field subsalt operations, the company continues to evaluate its subsalt acreage position in the Gulf of Mexico. Exploratory drilling is currently under way on the Alexandrite, Agate and Monazite prospects. Phillips holds an interest in these prospects of 37.5 percent, 50 percent, and 33 percent, respectively. In 1996, the company plans to concentrate its resources on projects that will expand its current business lines. The company is pursuing new opportunities including discoveries in the Danish North Sea and the Timor Sea between Australia and Indonesia, as well as expanding the licensing of Phillips' proprietary liquefied natural gas technology and continuing efforts to increase reserves through exploration and acquisitions. 52 Late in 1995, in the Danish sector of the North Sea, Phillips and its co-venturers, drilled an exploratory well that tested at 5,800 gross barrels of oil per day. Appraisal wells are planned to evaluate the significance of the find. Phillips has a 12.5 percent interest in the field through a farm-in. The Danish government has approved the farm-in but, because Norwegian acreage is involved, approval of the Norwegian Government is also required. It is expected in the first quarter of 1996. Exploratory drilling in the Timor Sea, located offshore northwest Australia in the Zone of Cooperation A, led to a major gas discovery in early 1995. The initial well tested at 90 million cubic feet of gas per day and 5,250 barrels of condensate per day. A second successful well, completed in early 1996, tested at 35 million cubic feet of gas per day and 2,100 barrels of condensate per day. Phillips is the operator of the license and holds a 37.5 percent interest. Phillips plans to start another appraisal well in the second quarter of 1996. Three successful appraisal wells have also been drilled by the owners of an adjacent block, with results indicating that this is an extension of the discovery on the company's block. Phillips is working closely with the owners of the adjacent block to evaluate the development potential, including the possible use of an onshore LNG facility using the company's proprietary technology. Currently, Phillips' liquefied natural gas plant in Kenai, Alaska, is the only facility in the world that uses the company's proprietary Cascade technology to liquefy natural gas; however, it was recently selected for use by a third party. There is interest in the process because it is designed for smaller-scale facilities, unlike competing technology that is geared for larger plants. As a result, Phillips' process allows economic development of smaller gas discoveries--a key advantage for many producers. Phillips has enjoyed over 25 years of safe, reliable operating experience using the technology, and is actively pursuing the licensing of this technology to others. Phillips plans to enter the methyl mercaptan market by constructing a facility at its Borger Complex. The facility will be capable of producing up to 100 million pounds of the sulphur- based chemical annually. Construction could begin in 1996, with a target start-up date late in 1998. At the company's Puerto Rico Core facility, a paraxylene capacity increase from 675 million to 880 million pounds per year is now scheduled to be completed during 1997. 53 Discussions continue with Phillips' co-venturer in the Sunfish prospect regarding the transfer of the co-venturer's lease interests in the South Cook Inlet to the company. The next appraisal well is included in the 1996 exploration capital budget. At December 31, 1995, Phillips had approximately $48 million invested in three exploratory wells on this prospect. Average oil production volumes from the Point Arguello field increased to approximately 10,350 net barrels per day in the fourth quarter, up from approximately 9,600 net barrels per day in the third quarter of 1995. However, production volumes remain below the same period one year ago, which was approximately 13,700 net barrels per day. The recent increases are the result of well redrills and workover activity which continue pursuant to initiatives to further improve production. In September 1995, the company announced that, for commercial reasons, start-up volumes from the J-Block, operated by its Phillips Petroleum Company United Kingdom Limited subsidiary, would be delayed or lower than had been estimated. The long-term economics of the project remain favorable, but delays in production are expected to reduce Phillips' net earnings and cash flows in the near-term. The gas reserves in blocks 30/7a and 30/12a (J-Block) are dedicated to a single gas purchaser, Enron Europe Limited (EEL), under long-term take-or-pay gas sales agreements guaranteed by its parent, Enron Corp. Under the agreements, EEL is required to pay for gas at a predetermined rate even if it elects not to take actual deliveries. EEL has advised that its present non-binding, bona fide estimate of future total daily nominations for delivery of J-Block gas is zero through September 1997. The commissioning date of the facilities and commencement of the periods during which EEL's obligations to take or pay are yet to be finally determined. In view of EEL's present estimate of takes under the gas sales agreements, the J-Block owners are actively pursuing alternative arrangements to commence production. Since liquids production is dependent on the amount of natural gas that can be produced, the company intends, subject to governmental approval, to install gas injection facilities, which would allow for the production of liquids while the natural gas production is reinjected for later delivery. The J-Block owners also own the rights to the reserves in a block (block 30/6b) immediately adjacent to J-Block, which are in communication with J-Block reserves but not dedicated under the above contract. The J-Block owners are actively pursuing transportation, processing and sales of natural gas from this 54 block to enable start-up of liquids production prior to completion of gas injection facilities. In order to maximize the value of its J-Block infrastructure, the company has initiated an active drilling program to explore and appraise the reserves in blocks 30/2c and 30/13. The J-Block production, processing and transportation facilities, located in block 30/7a of the U.K. North Sea, were completed in mid-February and are available for production and delivery of gas. The J-Block and block 30/13 are operated by Phillips Petroleum Company United Kingdom Limited, which has a 36.5 percent interest. The company owns 32.5 percent and 35 percent interest in blocks 30/2c and 30/13, respectively. The company has non-operating interests in production licenses in Nigeria, which accounted for 11 percent of the company's daily crude oil production in 1995. Nigerian crude oil also is part of the feedstock for the company's Sweeny refinery. As a result of recent alleged actions by the Nigerian government, several countries, including the United States, have discussed whether or not to impose economic and other sanctions against that country. The Nigerian government has stated it may take retaliatory actions if any sanctions are imposed. Because the situation is unsettled and is constantly changing, it is not possible at this time to determine whether or not any sanctions will be imposed, and if imposed, if they would have any effect on the company's operations. The company recently completed a review of the estimated useful lives of its major domestic RM&T and Chemicals facilities and made certain changes to those estimates, effective January 1, 1996. This change in estimate will reduce depreciation expense in 1996 by approximately $40 million. Chemicals' earnings improved substantially in 1995 and a stable economy should continue to support the economic fundamentals in this business. Although Chemicals' profits weakened late in the year, the company continues to be optimistic about this business, since sales volumes remain strong and the company anticipates a full year's production at its Puerto Rico Core facility, following the recently completed expansion and technology improvements. Throughout the company, Phillips intends to work to improve its financial performance by expanding volumes and constraining costs. For 1996, aggressive goals have been established to lower controllable costs and increase profitability within GPM and the refining operations of RM&T. 55 Should the Kenai tax litigation be resolved favorably (See page 49), the increase in net income, stockholders' equity and cash would substantially improve the company's financial position and provide the company with greater financial flexibility to fund its strategic growth plans. Operating earnings for 1996 would also benefit from the lower effective tax rate on Kenai LNG income and lower net interest expense. 56 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PHILLIPS PETROLEUM COMPANY INDEX TO FINANCIAL STATEMENTS Page ---- Report of Management............................... 58 Report of Independent Auditors..................... 59 Consolidated Statement of Income for the years ended December 31, 1995, 1994 and 1993........... 60 Consolidated Balance Sheet at December 31, 1995 and 1994......................................... 61 Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993........... 62 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993.................................... 63 Accounting Policies................................ 64 Notes to Financial Statements...................... 67 Supplementary Information Oil and Gas Operations........................ 92 Selected Quarterly Financial Data............. 110 INDEX TO FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation Accounts and Reserves....... 115 All other schedules are omitted because they are either not required, not significant, not applicable or the information is shown in another schedule, the financial statements or in the notes to financial statements. 57 - ---------------------------------------------------------------- Report of Management Management prepared, and is responsible for, the consolidated financial statements and the other information appearing in this annual report. The consolidated financial statements present fairly the company's financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In preparing its consolidated financial statements, the company includes amounts that are based on estimates and judgments that Management believes are reasonable under the circumstances. The company maintains an internal control structure designed to provide reasonable assurance that the company's assets are protected from unauthorized use and that all transactions are executed in accordance with established authorizations and recorded properly. The internal control structure is supported by written policies and guidelines and is complemented by a staff of internal auditors. Management believes that the system of internal controls in place at December 31, 1995, provides reasonable assurance that the books and records reflect the transactions of the company and there has been compliance with its policies and procedures. The company's financial statements have been audited by Ernst & Young LLP, independent auditors selected by the Audit Committee of the Board of Directors and approved by the stockholders. Management has made available to Ernst & Young LLP all the company's financial records and related data, as well as the minutes of stockholders' and directors' meetings. The Audit Committee, composed solely of non-employee directors, meets periodically with the independent auditors, financial and accounting management, and the internal auditors to review and discuss the company's internal control structure, results of internal audits, the independent auditors' findings and opinion, financial information, and related matters. Both the independent auditors and the company's General Auditor have unrestricted access to the Audit Committee, without Management present, to discuss any matter that they wish to call to the Committee's attention. /s/ W. W. Allen /s/ T. C. Morris W. W. Allen T. C. Morris Chairman of the Board and Senior Vice President and Chief Executive Officer Chief Financial Officer February 21, 1996 58 - ----------------------------------------------------------------- Report of Independent Auditors The Board of Directors and Stockholders Phillips Petroleum Company We have audited the accompanying consolidated balance sheets of Phillips Petroleum Company as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the Index in Item 8. These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Phillips Petroleum Company at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the financial statements, effective April 1, 1995 the company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." /s/ Ernst & Young LLP ERNST & YOUNG LLP Tulsa, Oklahoma February 21, 1996 59 - ------------------------------------------------------------------ Consolidated Statement of Income Phillips Petroleum Company Years Ended December 31 Millions of Dollars --------------------------- 1995 1994 1993 --------------------------- Revenues Sales and other operating revenues $13,368 12,211 12,309 Equity in earnings of affiliated companies 127 84 66 Other revenues 26 72 170 - ------------------------------------------------------------------ Total Revenues 13,521 12,367 12,545 - ------------------------------------------------------------------ Costs and Expenses Purchased crude oil and products 8,182 7,292 7,391 Production and operating expenses 2,143 2,192 2,329 Exploration expenses 198 226 256 Selling, general and administrative expenses 500 478 597 Depreciation, depletion and amortization 871 794 841 Taxes other than income taxes 266 271 283 Interest and expense on indebtedness 265 250 278 Preferred dividend requirements of subsidiary 32 32 32 - ------------------------------------------------------------------ Total Costs and Expenses 12,457 11,535 12,007 - ------------------------------------------------------------------ Income before income taxes, subsidiary stock transaction and extraordinary item 1,064 832 538 Gain on subsidiary stock transaction - 20 - - ------------------------------------------------------------------ Income before income taxes and extraordinary item 1,064 852 538 Provision for income taxes 595 368 293 - ------------------------------------------------------------------ Income before Extraordinary Item 469 484 245 Extraordinary item - - (2) - ------------------------------------------------------------------ Net Income $ 469 484 243 ================================================================== Per Share of Common Stock Income before extraordinary item $ 1.79 1.85 .94 Extraordinary item - - (.01) - ------------------------------------------------------------------ Net Income $ 1.79 1.85 .93 ================================================================== Average Common Shares Outstanding (in thousands) 261,989 261,529 261,015 - ------------------------------------------------------------------ See Accounting Policies and Notes to Financial Statements. 60 - ----------------------------------------------------------------- Consolidated Balance Sheet Phillips Petroleum Company At December 31 Millions of Dollars ------------------- 1995 1994 ------------------- Assets Cash and cash equivalents $ 67 193 Accounts and notes receivable (less allowances: 1995--$15; 1994--$20) 1,522 1,462 Inventories 505 527 Deferred income taxes 229 203 Prepaid expenses and other current assets 86 97 - ----------------------------------------------------------------- Total Current Assets 2,409 2,482 Investments and long-term receivables 841 708 Properties, plants and equipment (net) 8,493 8,042 Deferred income taxes 121 122 Deferred charges 114 99 - ----------------------------------------------------------------- Total $11,978 11,453 ================================================================= Liabilities Accounts payable $ 1,494 1,371 Long-term debt due within one year 19 18 Accrued income and other taxes 922 847 Other accruals 380 285 - ----------------------------------------------------------------- Total Current Liabilities 2,815 2,521 Long-term debt 3,097 3,106 Accrued dismantlement, removal and environmental costs 657 564 Deferred income taxes 948 961 Employee benefit obligations 400 341 Other liabilities and deferred credits 522 656 - ----------------------------------------------------------------- Total Liabilities 8,439 8,149 - ----------------------------------------------------------------- Preferred Stock of Subsidiary and Other Minority Interests 351 351 - ----------------------------------------------------------------- Stockholders' Equity Common stock--500,000,000 shares authorized at $1.25 par value Issued (306,380,511 shares) Par value 383 346 Capital in excess of par 1,966 996 Treasury stock (at cost: 1995--15,047,246 shares; 1994--15,542,074 shares) (827) (859) Compensation and Benefits Trust (CBT) (at cost: 1995--29,200,000 shares; 1994--0 shares) (989) - Foreign currency translation adjustments 39 16 Unearned employee compensation--Long-Term Stock Savings Plan (LTSSP) (414) (451) Retained earnings 3,030 2,905 - ----------------------------------------------------------------- Total Stockholders' Equity 3,188 2,953 - ----------------------------------------------------------------- Total $11,978 11,453 ================================================================= See Accounting Policies and Notes to Financial Statements. 61 - ----------------------------------------------------------------- Consolidated Statement of Cash Flows Phillips Petroleum Company Years Ended December 31 Millions of Dollars ------------------------- 1995 1994 1993 ------------------------- Cash Flows from Operating Activities Net income $ 469 484 243 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 871 794 841 Dry hole costs and leasehold impairment 66 95 122 Deferred taxes 9 (51) (48) Extraordinary item - - 2 Sale of accounts receivable 200 - - Other changes in accounts and notes receivable (245) (82) (20) Decrease (increase) in inventories 25 (10) 80 Decrease (increase) in prepaid expenses and other current assets 12 22 (11) Increase in accounts payable 130 15 28 Increase (decrease) in taxes and other accruals 136 (26) (34) Other (77) (38) 105 - ----------------------------------------------------------------- Net Cash Provided by Operating Activities 1,596 1,203 1,308 - ----------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures and investments, including dry hole costs (1,456) (1,154) (1,226) Proceeds from asset dispositions 142 266 821 Long-term advances to affiliates and other investments (39) (20) - - ----------------------------------------------------------------- Net Cash Used for Investing Activities (1,353) (908) (405) - ----------------------------------------------------------------- Cash Flows from Financing Activities Issuance of debt 610 1,335 2,613 Repayment of debt (619) (1,447) (3,209) Issuance of company stock 9 12 19 Purchase of company stock - (1) (4) Dividends paid (313) (293) (292) Other (56) 173 (42) - ----------------------------------------------------------------- Net Cash Used for Financing Activities (369) (221) (915) - ----------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (126) 74 (12) Cash and cash equivalents at beginning of year 193 119 131 - ----------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 67 193 119 ================================================================= See Accounting Policies and Notes to Financial Statements. 62 - ------------------------------------------------------------------- Consolidated Statement of Changes Phillips Petroleum Company in Stockholders' Equity Shares of Common Stock ------------------------------------- Held in Held in Issued Treasury CBT ------------------------------------- December 31, 1992 277,180,511 16,949,496 - Net income Cash dividends paid on common stock Distributed under incentive compensation plans (1,249,217) Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other - ------------------------------------------------------------------- December 31, 1993 277,180,511 15,700,279 - Net income Cash dividends paid on common stock Distributed under incentive compensation plans (158,205) Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other - ------------------------------------------------------------------- December 31, 1994 277,180,511 15,542,074 - Net income Cash dividends paid on common stock Distributed under incentive compensation plans (494,828) Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Establishment of CBT 29,200,000 29,200,000 Other - ------------------------------------------------------------------- December 31, 1995 306,380,511 15,047,246 29,200,000 =================================================================== - ------------------------------------------------------------------- Consolidated Statement of Changes Phillips Petroleum Company in Stockholders' Equity Millions of Dollars -------------------------------------- Common Stock -------------------------------------- Par Capital in Treasury Value Excess of Par Stock CBT -------------------------------------- December 31, 1992 $346 950 (960) - Net income Cash dividends paid on common stock Distributed under incentive compensation plans 22 75 Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other 5 - ------------------------------------------------------------------- December 31, 1993 346 977 (885) - Net income Cash dividends paid on common stock Distributed under incentive compensation plans 15 26 Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Other 4 - ------------------------------------------------------------------- December 31, 1994 346 996 (859) - Net income Cash dividends paid on common stock Distributed under incentive compensation plans 16 32 Recognition of LTSSP unearned compensation Tax benefit of dividends on unallocated LTSSP shares Current period translation adjustment Establishment of CBT 37 952 (989) Other 2 - ------------------------------------------------------------------- December 31, 1995 $383 1,966 (827) (989) =================================================================== - ------------------------------------------------------------------- Consolidated Statement of Changes Phillips Petroleum Company in Stockholders' Equity Millions of Dollars ------------------------------------- Foreign Unearned Currency Employee Translation Compensation Retained Adjustments --LTSSP Earnings ------------------------------------- December 31, 1992 19 (523) 2,866 Net income 243 Cash dividends paid on common stock (292) Distributed under incentive compensation plans (74) Recognition of LTSSP unearned compensation 36 Tax benefit of dividends on unallocated LTSSP shares 8 Current period translation adjustment (33) Other - ------------------------------------------------------------------- December 31, 1993 (14) (487) 2,751 Net income 484 Cash dividends paid on common stock (293) Distributed under incentive compensation plans (45) Recognition of LTSSP unearned compensation 36 Tax benefit of dividends on unallocated LTSSP shares 8 Current period translation adjustment 30 Other - ------------------------------------------------------------------- December 31, 1994 16 (451) 2,905 Net income 469 Cash dividends paid on common stock (313) Distributed under incentive compensation plans (38) Recognition of LTSSP unearned compensation 37 Tax benefit of dividends on unallocated LTSSP shares 7 Current period translation adjustment 23 Establishment of CBT Other - ------------------------------------------------------------------- December 31, 1995 39 (414) 3,030 =================================================================== See Accounting Policies and Notes to Financial Statements. 63 - ----------------------------------------------------------------- Accounting Policies Phillips Petroleum Company o Consolidation Principles and Investments--Majority-owned, controlled subsidiaries are consolidated. Investments in affiliates in which the company owns 20 percent to 50 percent of voting control are generally accounted for under the equity method. Undivided interests in oil and gas joint ventures are consolidated on a pro rata basis. Other securities and investments are generally carried at cost. o Reclassification--Certain amounts in the 1994 and 1993 financial statements have been reclassified to conform with the 1995 presentation. o Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from the estimates and assumptions used. o Cash Equivalents--Cash equivalents are highly liquid short-term investments that are readily convertible to known amounts of cash and generally have original maturities within three months from their date of purchase. o Inventories--Crude oil and petroleum and chemical products are valued at cost, which is lower than market in the aggregate, primarily on the last-in, first-out (LIFO) basis. Materials and supplies are valued at, or below, average cost. o Derivative Contracts--Forward foreign currency contracts, commodity option contracts, and futures contracts are recorded at market value, either through monthly adjustments for unrealized gains and losses (forwards and options) or through daily settlements in cash (futures); however, swaps and forward commodity contracts are not marked to market. Gains and losses are recognized during the same period in which the gains and losses from the underlying exposures being hedged are recognized. Occasionally, the company will use derivative contracts to hedge foreign currency exposures on firm commitments to purchase or build long-lived assets, in which case the gain or loss on the forward is deferred and reported as an adjustment to the carrying value of the long-lived asset when the firm commitment is paid. Deferred gains and losses, 64 along with deferred premiums paid for commodity option contracts, are reported on the balance sheet with other current assets or other current liabilities. o Oil and Gas Exploration and Development--Oil and gas exploration and development costs are accounted for using the successful efforts method of accounting. Property Acquisition Costs--Oil and gas leasehold acquisition costs are capitalized. Leasehold impairment is recognized based on exploratory experience and management judgment. Upon discovery of commercial reserves, leasehold costs are transferred to proved properties. Exploratory Costs--Geological and geophysical costs and the costs of carrying and retaining undeveloped properties are expensed as incurred. Exploratory drilling costs are capitalized when incurred. If, based on management judgment, exploratory wells are determined to be commercially unsuccessful or dry holes, applicable costs are expensed. Development Costs--Costs incurred to drill and equip development wells, including unsuccessful development wells, are capitalized. Depletion and Amortization--Leasehold costs of producing properties are depleted using the unit-of-production method based on estimated proved oil and gas reserves. Amortization of intangible development costs is based on the unit-of-production method using the estimated proved developed oil and gas reserves. o Depreciation and Amortization--Depreciation and amortization of properties, plants and equipment are determined by the group straight-line method, the individual unit straight-line method or the unit-of-production method, applying the method considered most appropriate for each type of property. o Property Dispositions--When complete units of depreciable property are retired or sold, the asset cost and related accumulated depreciation are eliminated with any gain or loss reflected in income. When less than complete units of depreciable property are disposed of or retired, the difference between asset cost and salvage value is charged or credited to accumulated depreciation. o Dismantlement, Removal and Environmental Costs--The estimated undiscounted costs, net of salvage values, of dismantling and removing major facilities, including necessary site restoration, are accrued using either the unit-of-production or the straight-line method. 65 Environmental expenditures are expensed or capitalized as appropriate, depending upon their future economic benefit. Expenditures that relate to an existing condition caused by past operations, and that do not have future economic benefit, are expensed. Liabilities for these expenditures are recorded on an undiscounted basis when environmental assessments or cleanups are probable and the costs can be reasonably estimated. These liabilities have not been reduced for probable recoveries from third parties. o Foreign Currency Translation--Adjustments resulting from the process of translating foreign functional currency financial statements into U.S. dollars are accumulated as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in current earnings. Most of the company's foreign operations use the local currency as the functional currency. o Income Taxes--Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial reporting basis and the tax basis of the company's assets and liabilities, except for temporary differences related to investments in certain foreign subsidiaries and corporate joint ventures that are essentially permanent in duration. Allowable tax credits are applied currently as reductions of the provision for income taxes. o Income Per Share of Common Stock--Income per share of common stock is calculated based upon the daily weighted-average number of common shares outstanding during the year, including shares held by the company's Long-Term Stock Savings Plan (LTSSP). Treasury stock and shares held by the Compensation and Benefits Trust are excluded from the daily weighted-average number of common shares outstanding. 66 - ----------------------------------------------------------------- Notes to Financial Statements Phillips Petroleum Company Note 1--Accounting Change and Extraordinary Item Effective April 1, 1995, the company adopted Financial Accounting Standards Board (FASB) Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which resulted in a before-tax addition of $95 million to depreciation, depletion and amortization expense in 1995. Under the new Statement, the company now evaluates impairment of exploration and production assets on a field-by- field basis rather than using one worldwide cost center for its proved properties. After-tax, the additional charge was $49 million, $.19 per share. The before-tax charges for the above items by segment were Exploration and Production (E&P), $78 million; Corporate, $13 million; and Chemicals, $4 million. The after-tax charges were $39 million, $7 million, and $3 million, respectively. The fair values of the impaired E&P assets were determined by using the present value of expected future cash flows. The fair values of idle Corporate and Chemicals assets considered to be impaired were determined based on information about sales and purchases of similar assets. During 1993, the company incurred a before-tax extraordinary loss of $3 million, attributed to call premiums paid on the early retirement of debt. The after-tax loss was $2 million, $.01 per share. Note 2--Inventories Inventories at December 31 were: Millions of Dollars ------------------- 1995 1994 ------------------- Crude oil and petroleum products $173 228 Chemical products 245 204 Materials, supplies and other 87 95 - ----------------------------------------------------------------- $505 527 ================================================================= Inventories valued on a LIFO basis totaled $336 million and $366 million at December 31, 1995 and 1994, respectively, and would have been approximately $443 million and $427 million higher, respectively, had they been valued using the first-in, first-out (FIFO) method. 67 Note 3--Investments and Long-Term Receivables Components of investments and long-term receivables at December 31 were: Millions of Dollars ------------------- 1995 1994 ------------------- Investments in and advances to affiliated companies $661 573 Long-term receivables 104 90 Other investments 76 45 - ----------------------------------------------------------------- $841 708 ================================================================= Equity Investments The company owns investments in chemicals, oil and gas transportation, coal mining, and other industries. In the ordinary course of business, Phillips has related party transactions with most of these equity companies including sales and purchases of feedstocks and finished products, as well as, operating and marketing services. Summarized financial information for all entities accounted for using the equity method, follows: Millions of Dollars -------------------------- 1995 1994 1993 -------------------------- Revenues $2,776 2,603 2,280 Income before income taxes 680 579 586 Net income 470 360 353 Current assets 758 689 534 Other assets 3,236 2,994 2,639 Current liabilities 889 622 461 Other liabilities 1,031 1,439 1,480 - ----------------------------------------------------------------- At December 31, 1995, retained earnings included $92 million related to the undistributed earnings of these affiliated companies, and distributions received from them were $122 million, $103 million and $88 million in 1995, 1994 and 1993, respectively. At December 31, 1995, the company's 50 percent interest in Sweeny Olefins Limited Partnership (SOLP), which owns and operates a 1.5 billion-pound-per-year ethylene plant located adjacent to the company's Sweeny, Texas, refinery, was carried at a net investment of $110 million. During construction of this facility, the company made advances to the partnership under a 68 subordinated loan agreement (SLA) to fund certain costs related to completing the project. In 1992, the company sold participating interests in the SLA to a syndicate of banks for $211 million under a participation agreement. The sale of this receivable is subject to recourse, in that the company has a contingent obligation to pay the amounts due the participating banks if SOLP fails to pay. It is not economically practicable to estimate the fair value of the company's obligations to SOLP or to the participating banks. The balance of the subordinated loan at December 31, 1995, was $164 million. During third quarter 1995, SOLP entered into a second subordinated loan agreement with the company, with essentially the same terms as the SLA, for $120 million to fund three new furnaces for the ethylene plant. During 1995, SOLP borrowed $19 million under this agreement, all of which was outstanding at December 31, 1995. Note 4--Properties, Plants and Equipment The company's investment in properties, plants and equipment (PP&E), with accumulated depreciation, depletion and amortization (DD&A), at December 31 was: Millions of Dollars --------------------------------------------- 1995 1994 ---------------------- --------------------- Gross Net Gross Net PP&E DD&A PP&E PP&E DD&A PP&E ---------------------- --------------------- E&P $10,516 6,556 3,960 10,203 6,472 3,731 GPM 1,890 1,015 875 1,614 942 672 RM&T 3,463 1,573 1,890 3,368 1,461 1,907 Chemicals 2,646 1,140 1,506 2,570 1,104 1,466 Corporate and Other 573 311 262 538 272 266 - ------------------------------------------------------------------ $19,088 10,595 8,493 18,293 10,251 8,042 ================================================================== Note 5--Accrued Dismantlement, Removal and Environmental Costs At December 31, 1995 and 1994, the company had accrued $548 million and $449 million, respectively, of dismantlement and removal costs, primarily related to worldwide offshore production facilities and to production facilities at Prudhoe Bay. Total probable dismantlement and removal costs estimated at December 31, 1995, were $948 million. These costs are accrued primarily on the unit-of-production method. 69 Phillips had accrued environmental costs, primarily related to cleanup of ponds and pits at domestic refineries and underground storage tanks at U.S. service stations, and other various costs, of $58 million and $62 million at December 31, 1995 and 1994, respectively. Phillips had also accrued $34 million and $31 million of environmental costs associated with discontinued or sold operations at December 31, 1995 and 1994, respectively. Also, $7 million and $13 million were included at December 31, 1995 and 1994, respectively, for sites where the company has been named a Potentially Responsible Party. At the same dates, $10 million and $9 million, respectively, had been accrued for other environmental litigation. At December 31, 1995 and 1994, total environmental accruals were $109 million and $115 million, respectively. Note 6--Debt Long-term debt due after one year at December 31 was: Millions of Dollars --------------------- 1995 1994 --------------------- 9 1/2% Notes Due 1997 $ 300 299 9 3/8% Notes Due 20ll 349 349 9.18% Notes Due September 15, 2021 300 300 9% Notes Due 2001 250 250 8.86% Notes Due May 15, 2022 250 250 8.49% Notes Due January 1, 2023 250 250 7.92% Notes Due April 15, 2023 250 250 7.20% Notes Due November 1, 2023 250 250 6.65% Notes Due March 1, 2003 100 100 5 5/8% Marine Terminal Revenue Bonds, Series 1977 Due 2007 20 20 Revolving debt due to banks and others through 2001 at 6 1/8% - 6 31/32% 220 202 Guarantees of LTSSP bank loans payable at 4 7/8% - 6 3/8% 457 485 Medium-term notes due various years at 7 1/2% - 8% 100 100 Other obligations 1 1 - ----------------------------------------------------------------- $3,097 3,106 ================================================================= Maturities of long-term debt in 1996 through 2000 are: $19 million (included in current liabilities), $346 million, $32 million, $84 million and $201 million, respectively. 70 The company's LTSSP has two term loan agreements: one requiring repayment in annual installments through the year 1998, and a second that was amended late in 1995 to extend its term from 15 years to 25 years with repayment required in annual installments beginning in 2005. The outstanding balance of the loans at December 31, 1995, were $79 million and $397 million, respectively. Under the LTSSP $397 million 25-year term bank loan, any participating bank in the syndicate of lenders may cease to participate on November 30, 2001, by giving not less than 180 days' prior notice to the LTSSP and the company. The company does not anticipate a cessation of participation by the lenders, and plans to commence scheduled repayments beginning in 2005. Each bank participating in the LTSSP loan has the optional right, if the current directors or their approved successors cease to be a majority of the Board, and upon not less than 90 days' notice, to cease to participate in the loan. Under the above conditions, such banks' rights and obligations under the loan agreement must be purchased by the company if not transferred to a bank of the company's choice. (See Note 12 for additional discussion of the LTSSP.) During 1995, the company replaced its commercial paper program, which had been supported by a direct-pay irrevocable bank letter of credit, with a $250 million commercial paper program supported by a portion of the company's unused revolving lines of credit equal to 100 percent of the commercial paper outstanding. To facilitate the change in programs and to maintain liquidity for other uses, the company increased its revolving bank credit facility from $800 million to $1,100 million during 1995. At December 31, 1995, $77 million of this facility was outstanding, and $123 million of this facility supported the commercial paper program. Also outstanding at December 31, 1995, was $20 million of Phillips Petroleum Company Norway's $500 million revolving bank credit facility from a group of international banks. The revolving debt, including the commercial paper, has been classified as non-current based on the company's ability and intent to refinance it on a long-term basis. Depending on the credit facility, borrowings may bear interest at a margin above rates offered by certain designated banks in the London interbank market or at margins above certificate of deposit or prime rates offered by certain designated banks in the United States. The agreements call for commitment fees on available, but unused, amounts. The agreements also contain early termination rights if the company's current directors or their approved successors cease to be a majority of the Board. 71 Note 7--Contingencies In the case of all known contingencies, the company accrues a charge for a loss when it is probable and the amount is reasonably estimable. These accruals are not discounted for delays in future payment and are not reduced for potential insurance recoveries. Based on currently available information, the company believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on the company's financial statements. As facts concerning contingencies become known to the company, the company reassesses its position both with respect to gain contingencies and accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of the company's liability in proportion to other responsible parties. Estimated future tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation process. Environmental--The company is subject to federal, state and local environmental laws and regulations. These may result in obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various sites. The company is currently participating in environmental assessments and cleanup under these laws at federal Superfund and comparable state sites. In the future, the company may be involved in additional environmental assessments, cleanups and proceedings. Kenai LNG Tax Proceeding--In November 1995, the U.S. Court of Appeals for the Tenth Circuit affirmed the U.S. Tax Court's previous decisions related to the company's sales of liquefied natural gas in Japan. The Tax Court's decisions supported the company's position that more than 50 percent of the income at issue was from a foreign source. The U.S. Government's last court of appeal on the issue is the U.S. Supreme Court and a writ of certiorari, if made, must be requested by February 26, 1996. A favorable resolution of the issue would have a positive effect on Phillips' net income of approximately $565 million, and would improve the company's cash position over time by approximately $300 million after-tax, the majority of which would be received in 1996. 72 In addition, the company has a number of issues outstanding with the Internal Revenue Service that can proceed toward final settlement as a result of resolving the Kenai issue. Although a favorable resolution of these issues would have a positive effect on net income and cash flow, it is too early to determine the outcome, when the issues will be resolved, or the final financial effects. An unfavorable outcome of these issues would not impact the company's net income or cash position. Other Legal Proceedings--The company is a party to a number of other legal proceedings pending in various courts or agencies for which, in some instances, no provision has been made. Other Contingencies--The company has contingent liabilities resulting from throughput agreements with pipeline and processing companies in which it holds stock interests. Under these agreements, Phillips may be required to provide any such company with additional funds through advances against future charges for the shipping or processing of petroleum liquids, natural gas and refined products. Note 8--Financial Instruments and Derivative Contracts Derivative Instruments and Other Contracts Held for Purposes Other Than Trading The company and certain of its subsidiaries use financial and commodity-based derivative contracts to manage exposures to currency and commodity price fluctuations. For every derivative contract used, there is an offsetting physical or financial position, firm commitment or anticipated transaction. Neither Phillips nor its subsidiaries hold or issue derivative financial instruments with leveraged features. In 1995 and 1994, the net realized and unrealized gains and losses from derivative contracts were not material to the company's financial statements. Financial Derivative Contracts--The company uses forward exchange contracts to manage exposures to currency exchange rate fluctuations associated with certain assets, liabilities and firm commitments. The following table summarizes the company's major currency hedging activities. The notional amounts represent only the amounts hedged, not the net market exposure, which is significantly less. Any gains and losses from these positions will offset gains or losses on the underlying exposures. 73 Notional U.S. Dollar Positions ------------------------------ Millions of Dollars ------------------------------ 1995 ------------------------------ Year-End Average Month-End ----------- ----------------- Source of Foreign Currency Risk Sales of pounds sterling forward to hedge sterling-denominated receivables from a U.K. subsidiary $523 416 Purchases of U.S. dollars forward by a U.K. subsidiary to hedge purchases of crude oil in U.S. dollars 27 24 Purchases of U.S. dollars forward by a Norwegian subsidiary to hedge dollar-denominated debt - 60 Sales of Belgian francs forward to hedge foreign-currency- denominated sales of chemical products 1 5 - ----------------------------------------------------------------- Commodity Derivative Contracts--Phillips uses commodity-based swaps, options and futures to manage exposures to commodity price fluctuations. The following table summarizes the company's major commodity hedging activities. Again, the notional volumes represent only the amounts hedged, not the net market exposure, which is significantly less. 74 Notional Volume Positions -------------------- 1995 -------------------- Class of Average Derivative Year-End Month-End ---------- -------- --------- Source of Commodity Price Risk Natural gas (billions of British thermal units) Sales of domestic natural gas production Swaps 36,162 4,057 Futures 350 86 Pricing difference between purchases and sales Swaps 610 451 - ------------------------------------------------------------------- Crude oil (thousands of barrels) Timing differences between purchases and sales Swaps - 37 Futures 244 255 - ------------------------------------------------------------------- Refined products (thousands of barrels) Feedstock-to-product margins on gasoline and distillates Swaps 2,859 575 Futures 638 228 - ------------------------------------------------------------------- In the case of anticipated transactions, expected product sales or margins are hedged up to twelve months into the future. Except for an immaterial amount which will close in January 1997, all of the company's derivative contracts will close in 1996. At December 31, 1994, the aggregate notional value of the company's forward exchange contracts and the aggregate notional amount of all of the company's commodity-based derivative contracts were $347 million and 1,626,000 barrels-of-oil equivalent, respectively. Credit Risk The company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, trade receivables and over-the-counter derivative contracts. Phillips' cash equivalents are placed in high-quality time deposits with major international banks and financial institutions, limiting its exposure to concentrations of credit risk. The company's trade receivables result primarily from its petroleum and chemicals operations and reflect a broad customer base, both nationally and internationally. The company also routinely assesses the financial strength of its customers. 75 The credit risk from the company's over-the-counter derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction, typically a major bank or financial institution. Phillips does not anticipate non- performance by any of these counterparties, none of whom does sufficient volume with the company to create a significant concentration of credit risk. Futures contracts have a negligible credit risk because they are traded on the New York Mercantile Exchange (NYMEX) or International Petroleum Exchange of London Limited (IPE). Fair Values of Financial Instruments The following methods and assumptions were used by the company in estimating the fair value of its financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value. Long-term debt: The carrying amount of the company's floating- rate debt approximates fair value. The fair value of the fixed- rate debt is estimated based on quoted market prices. Forward exchange contracts and swaps: Fair value is estimated based on quoted market prices of comparable contracts, and approximates the net gains and losses which would have been realized if the contracts had been closed out at year-end. Commodity futures: Fair value is based on quoted market prices obtained from NYMEX and IPE. Options: Fair value is based on quoted market prices. 76 Certain company financial instruments at December 31 were: Millions of Dollars ------------------------------ Carrying Amount Fair Value --------------- ------------- 1995 1994 1995 1994 --------------- ------------- Financial assets Forward exchange contracts $ 5 1 5 1 Futures * * * * Swaps - * * * Financial liabilities Long-term debt, including current maturities 3,116 3,124 3,397 3,050 Forward exchange contracts 2 * 2 * Futures 1 * 1 * Swaps - - 13 * Options - * - * - ----------------------------------------------------------------- *Indicates amounts were less than $1 million. Note 9--Preferred Stock of Subsidiary The company's subsidiary, Phillips Gas Company (PGC), has outstanding 13,800,000 shares of Series A 9.32% Cumulative Preferred Stock, carried at redemption value. The shares are redeemable in whole, or in part, at the option of PGC, on or after December 14, 1997, at a redemption price of $25 per share, plus accrued and unpaid dividends. The company has a commitment to make equity infusions to keep the consolidated tangible net worth of PGC at or above specified levels. Phillips is also committed to make a liquidity facility available in an amount sufficient to enable PGC to meet its payment obligations, including those with respect to dividends on the Series A Preferred Stock. It has not been necessary for Phillips to make equity infusions, nor has PGC utilized the liquidity facility. Note 10--Preferred Share Purchase Rights The company has outstanding one Preferred Share Purchase Right (Right) for each outstanding share of the company's common stock. The Rights enable holders to either acquire additional shares of Phillips common stock or purchase the stock of an acquiring company at a discount, depending on specific circumstances. The Rights, which expire July 31, 1999, will be exercisable only if a person or group acquires 20 percent or more of the company's common stock or announces a tender offer that would result in ownership of 20 percent or more of the common stock. The Rights 77 may be redeemed by the company in whole, but not in part, for one cent per Right. Note 11--Non-Mineral Operating Leases The company leases ocean transport vessels, tank and hopper railcars, corporate aircraft, service stations, computers, office buildings and other facilities and equipment. At December 31, 1995, future minimum payments due under non-cancelable operating leases were: Millions of Dollars ---------- 1996 $ 93 1997 75 1998 60 1999 46 2000 32 Remaining years 209 - ----------------------------------------------------------------- $515 ================================================================= During 1995, the company and a co-venturer extended the lease terms on two liquefied natural gas tankers through 2000. The company's 70 percent share of the guaranteed residual value of the tankers is $196 million. Operating lease rental expense for years ended December 31 was: Millions of Dollars ------------------------ 1995 1994 1993 ------------------------ Total rentals $112 102 97 Less sublease rentals 3 6 6 - ----------------------------------------------------------------- $109 96 91 ================================================================= Note 12--Employee Benefit Plans Defined Benefit Plans The company has defined benefit retirement plans covering substantially all employees. The plans are generally non- contributory, with benefit formulas based on employee earnings and credited service. 78 Net pension cost was: Millions of Dollars --------------------------------------- U.S. Plans Foreign Plans ------------------ ------------------ 1995 1994 1993 1995 1994 1993 ------------------ ------------------ Service cost $ 26 30 32 14 14 12 Interest cost 48 43 42 18 15 16 Return on assets Actual (86) 2 4 (36) (2) (41) Deferred gains (losses) 57 (30) (36) 14 (14) 24 Amortization of Net asset (7) (7) (7) - - - Net losses (gains) 8 12 8 (1) 1 - Prior service cost 3 2 2 1 - 1 - ----------------------------------------------------------------- Net pension cost $ 49 52 45 10 14 12 ================================================================= In determining net pension cost, Phillips has elected to amortize net gains and losses on a straight-line basis over 10 years. A table showing the funded status of the plans and a reconciliation with accrued pension cost and deferred gain on reversion at December 31 follows: Millions of Dollars ------------------------------ U.S. Plans Foreign Plans -------------- ------------- 1995 1994 1995 1994 -------------- ------------- Plan assets at fair value $ 380 261 300 246 - ----------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefits 439 306 193 161 Non-vested benefits 31 18 - - - ----------------------------------------------------------------- Accumulated benefit obligation 470 324 193 161 Effect of projected future salary increases 290 179 77 69 - ----------------------------------------------------------------- Projected benefit obligation 760 503 270 230 - ----------------------------------------------------------------- Excess asset (obligation) (380) (242) 30 16 Unrecognized net asset (34) (41) (1) (1) Unrecognized net (gains) losses 191 51 (16) (9) Unrecognized prior service cost 35 38 9 9 - ----------------------------------------------------------------- Prepaid (accrued) pension cost and deferred gain on reversion $(188) (194) 22 15 ================================================================= Assumptions--Weighted Average at December 31 Rate of compensation increase 4.25% 4.25 4.00 4.20 Discount rate 7.25 8.75 7.50 7.70 Long-term rate of return on assets 10.75 11.25 8.20 8.50 - ----------------------------------------------------------------- 79 The plan assets reflected in the above table include a participating annuity contract, commingled funds, real estate, stocks, bonds and insurance contracts. A foreign plan also holds employee home mortgage loans. The accumulated benefit obligation reflected above includes $50 million and $36 million at December 31, 1995 and 1994, respectively, for supplemental retirement plans that are not qualified under the Employee Retirement Income Security Act of 1974 (ERISA). These non-qualified plans are funded by an irrevocable grantor trust, not out of the plan assets reflected in the above schedule. The plan assets shown above do not reflect contributions in 1996 and 1995 for plan years 1995 and 1994, respectively. After adding plan asset contributions of $42 million for the 1995 plan year and $30 million for the 1994 plan year, which are paid in the following year, and eliminating the non-qualified plan obligations that are not payable from plan assets, the plan assets exceed accumulated plan liabilities for both years. For U.S. plans that are qualified under ERISA, which includes the company's primary retirement plan for employees, the company's funding policy is to contribute at least the minimum required by ERISA. The contribution requirements are determined by an independent actuary using actuarial assumptions and asset valuation techniques allowed by ERISA and generally accepted in the actuarial profession as appropriate for funding purposes. These ERISA funding calculations differ in some important respects from the assumptions and techniques required by financial accounting rules used to prepare the information in the above table. However, the company's qualified U.S. retirement plans have assets that exceed the value of the liabilities accumulated to date when valued under either set of requirements. For the foreign plans, the value of plan assets is also generally larger than the accumulated benefit obligation. Contributions to foreign plans are dependent upon local laws and tax regulations and, in most cases, are shared by co-venturers. Other Postretirement Plans Company plans provide certain health care and life insurance benefits for substantially all retired U.S. employees. The health care plan is contributory, while the life insurance plan is non-contributory. Retirees covered by the health care plan essentially pay their own way, except those persons who retired prior to March 1986 and early retirees not yet eligible for Medicare. The company's policy is to fund the health care plan in amounts sufficient to cover current claims. The life insurance plan is funded based on actuarial determinations. 80 Net postretirement benefit cost was: Millions of Dollars ---------------------------------- Health Life ---------------- ---------------- 1995 1994 1993 1995 1994 1993 ---------------- ---------------- Service cost $ 2 2 2 1 1 1 Interest cost 6 8 9 4 4 4 Return on assets Actual - - - (2) (2) (2) Deferred losses - - - - (1) (1) Amortization of Net losses 1 - 2 1 - 1 Prior service cost (4) - - (1) - - - ----------------------------------------------------------------- Net postretirement benefit cost $ 5 10 13 3 2 3 ================================================================= In determining net postretirement benefit cost, the company has elected to amortize net gains and losses on a straight-line basis over 10 years. The following table shows the funded status of the plans and a reconciliation with accrued postretirement benefit cost at December 31. Millions of Dollars ----------------------------- Health Life ------------- ------------- 1995 1994 1995 1994 ------------- ------------- Accumulated postretirement benefit obligation (APBO) Retirees $ 68 53 52 35 Fully eligible active participants 9 11 4 3 Other active participants 11 10 4 2 - ----------------------------------------------------------------- 88 74 60 40 Plan assets at fair value, held under a reserve deposit contract - - 34 35 - ----------------------------------------------------------------- APBO in excess of plan assets (88) (74) (26) (5) Unrecognized net (gains) losses 9 (2) 15 (2) Unrecognized prior service cost (17) (21) (4) (4) - ----------------------------------------------------------------- Accrued postretirement benefit cost $(96) (97) (15) (11) ================================================================= Financial Assumptions Discount rate 7.00% 8.75 7.00 8.75 Long-term rate of return on assets (non-taxable) - - 7.00 7.00 Rate of compensation increase - - 4.25 4.25 - ----------------------------------------------------------------- 81 At December 31, 1995, the health care cost trend rate is assumed to decrease gradually from 8 percent in 1996 to 5 percent in 2003 and 2004. No increases in medical costs are assumed for years beginning in 2005 because of a provision in the health plan which freezes the company's contribution at 2004 levels. The same health care cost trend rate was used at December 31, 1994. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the APBO by $4 million at both December 31, 1995 and 1994, and the aggregate of the service and interest cost components by $1 million for both 1995 and 1994. For both defined benefit plans and other postretirement plans, certain financial assumptions are utilized in determining the company's projected benefit obligation. These assumptions are examined periodically by the company, and any required changes are incorporated in the subsequent determination of projected benefit obligations. Termination Benefits The company recorded charges of $69 million, $59 million and $40 million for severance benefits in connection with work force reductions in 1995, 1994 and 1993, respectively. Defined Contribution Plans Most employees may elect to participate in the company-sponsored Thrift Plan by contributing a portion of their earnings to any of several investment funds. A percentage of the employee contribution is matched by the company. Company contributions charged to expense were $6 million each in 1995, 1994 and 1993. The company LTSSP is a leveraged employee stock ownership plan. Most employees may elect to participate in the LTSSP by contributing 1 percent of their earnings and receiving an allocation of shares of common stock proportionate to their contributions. In 1990 and 1988, the LTSSP borrowed funds that were used to purchase previously unissued shares of company common stock. Since the company guarantees the LTSSP's borrowings, the unpaid balance is reported as a liability of the company and unearned compensation is shown as a reduction of stockholders' equity. Dividends on all shares are charged against retained earnings. The debt is serviced by the LTSSP from company contributions and dividends received on certain shares of common stock held by the plan. The shares held by the LTSSP are released for allocation to participant accounts based on debt service payments on LTSSP borrowings. In addition, during the period from 82 1998 through 2005, when no debt principal payments are scheduled to occur, the company has committed to make direct contributions to the LTSSP to ensure a certain minimum level of stock allocation to participant accounts. The company recognizes interest expense as incurred and compensation expense based on the cost of shares released, using the shares-allocated method. The company recognized total LTSSP expense of $33 million, $23 million and $18 million in 1995, 1994 and 1993, respectively. This included compensation expense of $29 million, $22 million and $17 million in 1995, 1994 and 1993, respectively. Company contributions to the LTSSP in 1995, 1994 and 1993 were $21 million, $12 million and $7 million, respectively. Dividends used to service debt were $36 million, $37 million and $39 million in 1995, 1994 and 1993, respectively. These dividends reduce the amount of expense recognized each period. Interest incurred on the LTSSP debt in 1995, 1994 and 1993 was $31 million, $24 million and $20 million, respectively. The total LTSSP shares as of December 31, 1995, were: Unallocated shares 16,405,787 Allocated shares 15,684,621 - ----------------------------------------------------------------- Total LTSSP shares 32,090,408 ================================================================= Incentive Compensation Plans The company has an Annual Incentive Compensation Plan to provide awards to certain employees, and a Performance Incentive Program, which began in 1993, that provides most non-executive employees with additional compensation if key safety, operating and financial objectives are met. In anticipation of awards under both of these plans and the Omnibus Securities Plan, provisions of $52 million, $45 million and $36 million were charged against earnings in 1995, 1994 and 1993, respectively. Under the Omnibus Securities Plan (the Plan) approved by shareholders, stock options and stock awards for certain employees are authorized for up to eight-tenths of 1 percent (.8 percent) of the total issued and outstanding shares as of December 31 of the year preceding the awards. Any shares not issued in the current year are available for future grant. The Plan could result in an 8 percent dilution of stockholders' interest if all available shares are awarded over the 10-year life of the Plan. The Plan also provides for non-stock-based awards. Stock options granted under provisions of the Plan and earlier plans permit purchase of the company's common stock at exercise prices equivalent to the average market price of the stock on the 83 date the options were granted. The options have terms of 10 years and normally become exercisable in increments up to 25 percent on each anniversary date following the date of grant. Stock Appreciation Rights (SARs) may from time to time be affixed to the options. Options exercised in the form of SARs permit the holder to receive stock, or a combination of cash and stock, subject to a declining cap on the exercise price. A comparative summary of stock options and SARs granted under the Plan and previous plans follows: 1995 1994 1993 -------------------------------- Shares under option at January 1 6,325,036 5,614,501 5,170,280 Options granted at $25.07 to $35.00 per share 1,331,972 1,528,200 1,671,502 Options exercised at $12.63 to $30.32 per share (529,094) (672,509)(1,192,015) Options forfeited (45,193) (145,156) (35,266) - ----------------------------------------------------------------- Shares under option at December 31 (at exercise prices from $12.63 to $35.00 per share) 7,082,721 6,325,036 5,614,501 ================================================================= Options exercisable at December 31 (at exercise prices from $12.63 to $35.00 per share) 3,915,145 3,330,508 2,939,548 - ----------------------------------------------------------------- Shares available for grant at January 1 2,719,317 2,311,292 2,081,851 - ----------------------------------------------------------------- Shares available for grant at December 31 1,169,719 626,210 219,451 - ----------------------------------------------------------------- SARs under option at January 1 96,550 196,616 332,588 SARs forfeited (25,588) (100,066) (135,972) - ----------------------------------------------------------------- SARs under option at December 31 (at exercise prices from $12.63 to $16.25 per share) 70,962 96,550 196,616 ================================================================= SARs exercisable at December 31 (at exercise prices from $12.63 to $16.25 per share) 70,962 96,550 196,616 - ----------------------------------------------------------------- In October 1995 the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock-based employee compensation plans. Effective for fiscal years beginning after December 15, 1995, the Statement provides the option to continue under the accounting provisions of APB Opinion 25, while 84 requiring pro forma footnote disclosures of the effects on net income and earnings per share, calculated as if the new method had been implemented. Phillips expects to elect to continue under APB Opinion 25, but the company is studying the various option pricing models available and the assumptions required to calculate the fair value amounts that would be disclosed. It is too early to determine the pro forma effect. Compensation and Benefits Trust In December 1995, the company established the Compensation and Benefits Trust (CBT). The CBT, an irrevocable grantor trust, is administered by an independent trustee and is designed to acquire, hold and distribute shares of the company's common stock to fund certain future compensation and benefit obligations of the company. The CBT does not increase or alter the amount of benefits or compensation which will be paid under existing plans, but offers the company enhanced financial flexibility in providing the funding requirements of those plans. Phillips also has flexibility in determining the timing of distributions of shares from the CBT to fund compensation and benefits, subject to a minimum distribution schedule. The trustee will vote shares held by the CBT in accordance with voting directions from eligible employees, as specified in a trust agreement with the trustee. The company sold 29.2 million shares of previously unissued Phillips common stock, $1.25 par value, to the CBT in exchange for cash previously contributed to the CBT by Phillips in the amount of $37 million and a promissory note from the CBT to Phillips of $952 million. The CBT is consolidated by Phillips, therefore the cash contribution and promissory note are eliminated in consolidation. Shares held by the CBT are valued at cost and do not affect earnings per share or total stockholders' equity until after they are transferred out of the CBT. All shares are required to be transferred out of the CBT by January 1, 2021. 85 Note 13--Taxes Taxes charged to income before extraordinary item were: Millions of Dollars ----------------------- 1995 1994 1993 ----------------------- Taxes Other Than Income Taxes Property $ 83 91 89 Production 54 56 65 Payroll 59 56 58 Environmental 58 57 56 Other 12 11 15 - ----------------------------------------------------------------- 266 271 283 - ----------------------------------------------------------------- Income Taxes Federal Current 95 74 60 Deferred 18 (41) (105) Foreign Current 520 340 312 Deferred (43) (14) 26 State and local Current 7 6 1 Deferred (2) 3 (1) - ----------------------------------------------------------------- 595 368 293 - ----------------------------------------------------------------- Total taxes charged to income before extraordinary item $861 639 576 ================================================================= Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were: 86 Millions of Dollars ------------------- 1995 1994 ------------------- Deferred Tax Liabilities Depreciation, depletion and amortization $1,786 1,685 Other 36 39 - ----------------------------------------------------------------- Total deferred tax liabilities 1,822 1,724 - ----------------------------------------------------------------- Deferred Tax Assets Contingency accruals 154 144 Benefit plan accruals 200 208 Accrued dismantlement, removal and environmental costs 238 180 Other financial accruals and deferrals 116 108 Alternative minimum tax and other credit carryforwards 316 288 Loss carryforwards 327 247 Depreciation, depletion and amortization 6 16 Other 22 29 - ----------------------------------------------------------------- Total deferred tax assets 1,379 1,220 Less valuation allowance 155 142 - ----------------------------------------------------------------- Net deferred tax assets 1,224 1,078 - ----------------------------------------------------------------- Net deferred tax liabilities $ 598 646 ================================================================= Valuation allowances have been established for certain foreign and state net operating loss carryforwards that reduce deferred tax assets to an amount that will more likely than not be realized. Uncertainties that may affect the realization of these assets include tax law changes and the future level of product prices, costs and tax rates. Based on the company's historical taxable income, management expects that the net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as reductions in future taxable operating income. The alternative minimum tax credit can be carried forward indefinitely to reduce the company's regular tax liability. The changes in other loss carryforwards resulted in a net increase in the valuation allowance of $13 million during 1995. Deferred taxes have not been provided on temporary differences related to investments in certain foreign subsidiaries and corporate joint ventures that are essentially permanent in duration. At December 31, 1995 and 1994, these temporary differences were $349 million and $275 million, respectively. Determination of the amount of unrecognized deferred taxes on these temporary differences is not practicable due to foreign tax credits and exclusions. The amounts of U.S. and foreign income before income taxes and extraordinary item, with a reconciliation of tax at the federal statutory rate with the provision for income taxes, were: 87 Percent of Millions of Dollars Pretax Income ------------------- -------------------- 1995 1994 1993 1995 1994 1993 ------------------- -------------------- Income (loss) before income taxes and extraordinary item United States $ 332 346 (4) 31.2% 40.6 (.7) Foreign 732 506 542 68.8 59.4 100.7 - --------------------------------------------------------------------- $1,064 852 538 100.0% 100.0 100.0 ===================================================================== Federal statutory income tax $ 372 298 188 35.0% 35.0 35.0 Foreign taxes in excess of federal statutory rate 267 169 171 25.0 19.8 31.8 Credit for producing fuel from a non-conventional source (31) (44) (37) (2.9) (5.2) (6.9) Capital-loss carryforward - (50) (27) - (5.8) (5.0) Other (13) (5) (2) (1.2) (.6) (.4) - --------------------------------------------------------------------- $ 595 368 293 55.9% 43.2 54.5 ===================================================================== Excise taxes accrued on the sale of petroleum products were $1,150 million, $1,121 million and $844 million for the years ended December 31, 1995, 1994 and 1993, respectively. These taxes are excluded from reported revenues and expenses. Note 14--Cash Flow Information Millions of Dollars ------------------------ 1995 1994 1993 ------------------------ Non-Cash Investing and Financing Activities Treasury stock awards issued (canceled) under incentive compensation plans $ 2 (15) 7 Capitalized process license fee payable in installments from 1993 to 1999 - - 16 Contribution of non-cash net assets to equity-method affiliates 55 109 27 Common stock issued to establish CBT 989 - - - ----------------------------------------------------------------- Cash Payments Interest Debt $224 235 224 Taxes and other 19 48 45 - ----------------------------------------------------------------- $243 283 269 ================================================================= Income taxes $576 451 487 - ----------------------------------------------------------------- 88 Note 15--Other Financial Information Millions of Dollars Except Per Share Amounts ------------------------ 1995 1994 1993 ------------------------ Interest Incurred Debt $ 228 237 234 Other 67 28 55 - ----------------------------------------------------------------- 295 265 289 Capitalized (30) (15) (11) - ----------------------------------------------------------------- Expensed $ 265 250 278 ================================================================= Maintenance and Repairs--expensed $ 413 441 481 - ----------------------------------------------------------------- Research and Development Expenditures--expensed $ 66 71* 80* - ----------------------------------------------------------------- Foreign Currency Transaction Gains (Losses)--after-tax $ (3) 3 (2) - ----------------------------------------------------------------- Cash Dividends paid per common share $1.195 1.12 1.12 - ----------------------------------------------------------------- *Restated to exclude technical service expenses. Note 16--Segment and Geographic Information The company is primarily involved in four business segments: 1) Exploration and Production (E&P)--explores for and produces crude oil, natural gas and natural gas liquids on a worldwide basis; 2) Gas Gathering, Processing and Marketing (GPM)--gathers and processes both natural gas produced by others and natural gas produced from the company's own reserves, primarily in Oklahoma, Texas and New Mexico; 3) Refining, Marketing and Transportation (RM&T)--refines, markets and transports crude oil and petroleum products, primarily in the United States; 4) Chemicals-- fractionates natural gas liquids and manufactures and markets a broad range of petroleum-based chemical products on a worldwide basis. Corporate and Other includes general corporate overhead, net interest expense and various other operations. Sales and other operating revenues to outside customers and sales within Phillips by business segment and by geographic area are at market value. Operating profit excludes general corporate revenue and expense, interest, minority interest, equity in earnings of affiliates, and income taxes. Income taxes are allocated based upon each segment's taxable income reduced by applicable tax credits. Corporate assets include all cash and cash equivalents. 89 Analysis of Results by Business Segment Millions of Dollars ----------------------------------- E&P GPM RM&T ----------------------------------- 1995 Sales and Other Operating Revenues Outside customers $2,224 481 7,674 Sales within Phillips 1,096 641 366 - ----------------------------------------------------------------------- Segment sales $3,320** 1,122 8,040 ======================================================================= Operating Profit $ 901 13 38 Equity in earnings of affiliates 39 - 17 Minority interest (1) (32) - Corporate/non-operating items Interest expense - - - Other - - - Income taxes (549) (3) (15) - ----------------------------------------------------------------------- Net income (loss) $ 390 (22) 40 ======================================================================= Assets Identifiable assets $4,828 1,048 2,543 Investments in and advances to affiliated companies 225 5 87 - ----------------------------------------------------------------------- Total assets $5,053 1,053 2,630 ======================================================================= Depreciation, Depletion, and Amortization $ 520 73 133 - ----------------------------------------------------------------------- Capital Expenditures and Investments $ 856 274 150 - ----------------------------------------------------------------------- 1994 Sales and Other Operating Revenues Outside customers $1,787 595 7,029 Sales within Phillips 948 596 366 - ----------------------------------------------------------------------- Segment sales $2,735 1,191 7,395 ======================================================================= Operating Profit $ 708 45 187 Equity in earnings of affiliates 36 3 15 Minority interest (2) (32) - Corporate/non-operating items Interest expense - - - Other - - - Income taxes (400) (17) (66) - ----------------------------------------------------------------------- Net income (loss) $ 342 (1) 136 ======================================================================= Assets Identifiable assets $4,445 829 2,726 Investments in and advances to affiliated companies 252 6 24 - ----------------------------------------------------------------------- Total assets $4,697 835 2,750 ======================================================================= Depreciation, Depletion and Amortization $ 446 70 128 - ----------------------------------------------------------------------- Capital Expenditures and Investments $ 707 172 100 - ----------------------------------------------------------------------- 1993 Sales and Other Operating Revenues Outside customers $1,741 607 7,032 Sales within Phillips 1,104 639 392 - ----------------------------------------------------------------------- Segment sales $2,845 1,246 7,424 ======================================================================= Operating Profit $ 785 114 77 Equity in earnings of affiliates 38 - 15 Minority interest (5) (32) - Corporate/non-operating items Interest expense - - - Other - - - Income taxes (429) (40) (27) Extraordinary item - - - - ----------------------------------------------------------------------- Net income (loss) $ 389 42 65 ======================================================================= Assets Identifiable assets $4,181 750 2,627 Investments in and advances to affiliated companies 277 5 26 - ----------------------------------------------------------------------- Total assets $4,458 755 2,653 ======================================================================= Depreciation, Depletion and Amortization $ 450 73 121 - ----------------------------------------------------------------------- Capital Expenditures and Investments $ 821 120 82 - ----------------------------------------------------------------------- Analysis of Results by Business Segment Millions of Dollars ----------------------------------- Corporate Chemicals and Other* Consolidated ----------------------------------- 1995 Sales and Other Operating Revenues Outside customers $2,984 5 13,368 Sales within Phillips 541 48 - - ----------------------------------------------------------------------- Segment sales $3,525 53 13,368 ======================================================================= Operating Profit $ 482 16 1,450 Equity in earnings of affiliates 71 - 127 Minority interest - - (33) Corporate/non-operating items Interest expense - (265) (265) Other - (215) (215) Income taxes (167) 139 (595) - ----------------------------------------------------------------------- Net income (loss) $ 386 (325) 469 ======================================================================= Assets Identifiable assets $2,222 676 11,317 Investments in and advances to affiliated companies 344 - 661 - ----------------------------------------------------------------------- Total assets $2,566 676 11,978 ======================================================================= Depreciation, Depletion, and Amortization $ 108 37 871 - ----------------------------------------------------------------------- Capital Expenditures and Investments $ 148 28 1,456 - ----------------------------------------------------------------------- 1994 Sales and Other Operating Revenues Outside customers $2,793 7 12,211 Sales within Phillips 507 45 - - ----------------------------------------------------------------------- Segment sales $3,300 52 12,211 ======================================================================= Operating Profit $ 323 (7) 1,256 Equity in earnings of affiliates 30 - 84 Minority interest - - (34) Corporate/non-operating items Interest expense - (250) (250) Other - (204) (204) Income taxes (94) 209 (368) - ----------------------------------------------------------------------- Net income (loss) $ 259 (252) 484 ======================================================================= Assets Identifiable assets $2,102 778 10,880 Investments in and advances to affiliated companies 291 - 573 - ----------------------------------------------------------------------- Total assets $2,393 778 11,453 ======================================================================= Depreciation, Depletion and Amortization $ 106 44 794 - ----------------------------------------------------------------------- Capital Expenditures and Investments $ 144 31 1,154 - ----------------------------------------------------------------------- 1993 Sales and Other Operating Revenues Outside customers $2,920 9 12,309 Sales within Phillips 421 39 - - ----------------------------------------------------------------------- Segment sales $3,341 48 12,309 ======================================================================= Operating Profit $ 113 (18) 1,071 Equity in earnings of affiliates 13 - 66 Minority interest 2 - (35) Corporate/non-operating items Interest expense - (278) (278) Other - (286) (286) Income taxes (37) 240 (293) Extraordinary item - (2) (2) - ----------------------------------------------------------------------- Net income (loss) $ 91 (344) 243 ======================================================================= Assets Identifiable assets $2,345 729 10,632 Investments in and advances to affiliated companies 94 1 403 - ----------------------------------------------------------------------- Total assets $2,439 730 11,035 ======================================================================= Depreciation, Depletion and Amortization $ 156 41 841 - ----------------------------------------------------------------------- Capital Expenditures and Investments $ 174 29 1,226 - ----------------------------------------------------------------------- *Includes certain intersegment eliminations. **Certain crude oil marketing activities were transferred from RM&T to E&P in 1995. This had the effect of increasing E&P segment sales by $319 million in 1995. The effect on E&P's net income was not material. 90 Analysis of Results by Geographic Area Millions of Dollars ----------------------------------- United United States Norway Kingdom Africa ----------------------------------- 1995 Sales and Other Operating Revenues Outside customers $11,107 470 1,037 168 Sales within Phillips 203 651 3 28 - ----------------------------------------------------------------------- Segment sales $11,310 1,121 1,040 196 ======================================================================= Operating Profit $ 784 500 (8) 102 - ----------------------------------------------------------------------- Equity in Earnings of Affiliates $ 104 15 4 - - ----------------------------------------------------------------------- Assets Identifiable assets $ 7,604 1,552 950 227 Investments in and advances to affiliated companies 454 92 24 - - ----------------------------------------------------------------------- Total assets $ 8,058 1,644 974 227 ======================================================================= 1994 Sales and Other Operating Revenues Outside customers $10,233 426 979 165 Sales within Phillips 141 483 2 47 - ----------------------------------------------------------------------- Segment sales $10,374 909 981 212 ======================================================================= Operating Profit $ 784 352 16 64 - ----------------------------------------------------------------------- Equity in Earnings of Affiliates $ 64 14 3 - - ----------------------------------------------------------------------- Assets Identifiable assets $ 7,602 1,292 734 206 Investments in and advances to affiliated companies 362 102 24 - - ----------------------------------------------------------------------- Total assets $ 7,964 1,394 758 206 ======================================================================= 1993 Sales and Other Operating Revenues Outside customers $10,334 466 923 117 Sales within Phillips 120 456 2 143 - ----------------------------------------------------------------------- Segment sales $10,454 922 925 260 ======================================================================= Operating Profit $ 549 380 19 70 - ----------------------------------------------------------------------- Equity in Earnings of Affiliates $ 48 15 3 - - ----------------------------------------------------------------------- Assets Identifiable assets $ 7,807 1,216 526 201 Investments in and advances to affiliated companies 269 105 24 - - ----------------------------------------------------------------------- Total assets $ 8,076 1,321 550 201 ======================================================================= Analysis of Results by Geographic Area Millions of Dollars ----------------------------------- Other Worldwide Areas Corporate Consolidated* ----------------------------------- 1995 Sales and Other Operating Revenues Outside customers $ 586 - 13,368 Sales within Phillips 64 - - - ----------------------------------------------------------------------- Segment sales $ 650 - 13,368 ======================================================================= Operating Profit $ 72 - 1,450 - ----------------------------------------------------------------------- Equity in Earnings of Affiliates $ 4 - 127 - ----------------------------------------------------------------------- Assets Identifiable assets $ 460 524 11,317 Investments in and advances to affiliated companies 91 - 661 - ----------------------------------------------------------------------- Total assets $ 551 524 11,978 ======================================================================= 1994 Sales and Other Operating Revenues Outside customers $ 408 - 12,211 Sales within Phillips 35 - - - ----------------------------------------------------------------------- Segment sales $ 443 - 12,211 ======================================================================= Operating Profit $ 40 - 1,256 - ----------------------------------------------------------------------- Equity in Earnings of Affiliates $ 3 - 84 - ----------------------------------------------------------------------- Assets Identifiable assets $ 451 595 10,880 Investments in and advances to affiliated companies 85 - 573 - ----------------------------------------------------------------------- Total assets $ 536 595 11,453 ======================================================================= 1993 Sales and Other Operating Revenues Outside customers $ 469 - 12,309 Sales within Phillips 35 - - - ----------------------------------------------------------------------- Segment sales $ 504 - 12,309 ======================================================================= Operating Profit $ 53 - 1,071 - ----------------------------------------------------------------------- Equity in Earnings of Affiliates $ - - 66 - ----------------------------------------------------------------------- Assets Identifiable assets $ 455 427 10,632 Investments in and advances to affiliated companies 5 - 403 - ----------------------------------------------------------------------- Total assets $ 460 427 11,035 ======================================================================= *After elimination of intergeographic transactions. Export sales totaled $507 million, $382 million and $346 million for 1995, 1994 and 1993, respectively. 91 - ----------------------------------------------------------------- Oil and Gas Operations In accordance with Financial Accounting Standards Board (FASB) Statement No. 69, "Disclosures about Oil and Gas Producing Activities," and regulations of the Securities and Exchange Commission (SEC), the company is making certain disclosures about its oil and gas exploration and production operations. While this information was developed with reasonable care and disclosed in good faith, it is emphasized that some of the data are necessarily imprecise and represent only approximate amounts because of the subjective judgments involved in developing such information. Accordingly, this information may not necessarily represent the present financial condition of the company or its expected future results. Contents--Oil and Gas Operations - ----------------------------------------------------------------- Proved Reserves Worldwide 93 Results of Operations 99 Statistics 101 Costs Incurred 105 Capitalized Costs 106 Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserve Quantities 107 92 o Proved Reserves Worldwide Crude Oil Years Ended --------------------------------------------- December 31 Millions of Barrels --------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------- Developed and Undeveloped End of 1992 856 315 350 39 100 52 Revisions of previous estimates (19) (16) (7) (1) (1) 6 Improved recovery 58 7 44 - 5 2 Purchases of reserves in place 7 6 - 1 - - Extensions and discoveries 25 19 - - 4 2 Production (73) (34) (26) (2) (9) (2) Sales of reserves in place (12) (4) - - (2) (6) - ------------------------------------------------------------------ End of 1993 842 293 361 37 97 54 Revisions of previous estimates 68 (1) 74 (5) - - Improved recovery 17 5 12 - - - Purchases of reserves in place 6 2 - 4 - - Extensions and discoveries 23 11 - 8 3 1 Production (76) (33) (31) (2) (8) (2) Sales of reserves in place (3) (3) - - - - - ------------------------------------------------------------------ End of 1994 877 274 416 42 92 53 Revisions of previous estimates - (7) (1) 1 8 (1) Improved recovery 77 11 64 - - 2 Purchases of reserves in place 3 1 - 2 - - Extensions and discoveries 29 20 - 6 3 - Production (82) (29) (37) (1) (9) (6) Sales of reserves in place (9) (9) - - - - - ------------------------------------------------------------------ End of 1995 895 261 442 50 94 48 ================================================================== Developed End of 1992 714 259 326 7 90 32 End of 1993 680 245 314 4 83 34 End of 1994 703 226 350 4 89 34 End of 1995 699 200 333 33 91 42 - ------------------------------------------------------------------ 93 o Proved reserves are those quantities of crude oil, natural gas and natural gas liquids (NGL) that, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operating conditions. As additional information becomes available or conditions change, estimates must be revised. o Developed reserves are those portions of proved reserves that are recoverable through existing well bores, and production equipment and facilities. o Amounts for improved recovery in Norway in 1995 are due to optimizing well locations related to the Ekofisk II redevelopment, horizontal drilling and increased water injection. 94 Proved Reserves Worldwide Natural Gas Years Ended ---------------------------------------------- December 31 Billions of Cubic Feet ---------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ---------------------------------------------- Developed and Undeveloped End of 1992 5,816 3,769 1,305 467 32 243 Revisions of previous estimates 452 579 (122) 2 - (7) Improved recovery 12 8 4 - - - Purchases of reserves in place 27 19 - 7 - 1 Extensions and discoveries 339 281 - - - 58 Production (493) (345) (107) (20) - (21) Sales of reserves in place (84) (35) - - - (49) - ------------------------------------------------------------------ End of 1993 6,069 4,276 1,080 456 32 225 Revisions of previous estimates 262 92 172 (8) - 6 Improved recovery 95 5 83 5 - 2 Purchases of reserves in place 84 5 - 79 - - Extensions and discoveries 473 132 - 233 - 108 Production (519) (370) (106) (23) - (20) Sales of reserves in place (88) (88) - - - - - ------------------------------------------------------------------ End of 1994 6,376 4,052 1,229 742 32 321 Revisions of previous estimates 420 254 (32) 19 213 (34) Improved recovery 62 4 58 - - - Purchases of reserves in place 92 34 - 48 - 10 Extensions and discoveries 317 271 - 45 - 1 Production (543) (381) (121) (18) (1) (22) Sales of reserves in place (16) (16) - - - - - ------------------------------------------------------------------ End of 1995 6,708 4,218 1,134 836 244 276 ================================================================== Developed End of 1992 4,839 3,279 1,246 108 - 206 End of 1993 5,194 3,827 1,068 148 - 151 End of 1994 5,030 3,694 989 129 32 186 End of 1995 5,362 3,875 806 465 30 186 - ------------------------------------------------------------------ 95 o Natural gas production may differ from gas production (delivered for sale) on page 101, primarily because the quantities above omit the gas equivalent of the liquids, where applicable, but include gas consumed at the lease. o Revisions of previous estimates in the United States in 1995 are mainly for the San Juan Basin in New Mexico. Amounts in Africa are related to contracted gas to supply a liquefied natural gas plant to be built by a third party in Nigeria. o Amounts for improved recovery in Norway in 1995 are due to optimizing well locations related to the Ekofisk II redevelopment, horizontal drilling and increased water injection. o Purchases of reserves in place in the United Kingdom in 1995 are for an additional interest in the Britannia field. o Natural gas reserves are computed at 14.65 pounds per square inch absolute and 60 degrees Fahrenheit. 96 Proved Reserves Worldwide Natural Gas Liquids Years Ended --------------------------------------------- December 31 Millions of Barrels --------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------- Developed and Undeveloped End of 1992 216 153 37 3 21 2 Revisions of previous estimates (10) (6) (3) - - (1) Improved recovery 1 1 - - - - Purchases of reserves in place 1 1 - - - - Extensions and discoveries 4 4 - - - - Production (16) (13) (3) - - - Sales of reserves in place (1) (1) - - - - - ------------------------------------------------------------------ End of 1993 195 139 31 3 21 1 Revisions of previous estimates 8 1 7 - - - Improved recovery 2 - 2 - - - Extensions and discoveries 7 4 - 3 - - Production (15) (12) (3) - - - Sales of reserves in place (1) (1) - - - - - ------------------------------------------------------------------ End of 1994 196 131 37 6 21 1 Revisions of previous estimates 8 8 1 - (1) - Improved recovery 4 1 3 - - - Extensions and discoveries 4 3 - 1 - - Production (15) (12) (3) - - - Sales of reserves in place (1) (1) - - - - - ------------------------------------------------------------------ End of 1995 196 130 38 7 20 1 ================================================================== Developed End of 1992 181 146 33 - - 2 End of 1993 162 132 29 - - 1 End of 1994 178 125 31 - 21 1 End of 1995 178 125 29 3 20 1 - ------------------------------------------------------------------ 97 o NGL reserves include estimates of NGL to be extracted from Phillips leasehold gas at gas processing plants and facilities. Estimates are based at the wellhead and assume full extraction. NGL extraction is attributable to Phillips' E&P operations and GPM operations. NGL production above differs from NGL production per day delivered for sale by E&P and GPM due to gas consumed at the lease and the difference between assumed full extraction and the actual amount of liquids extracted and sold. 98 o Results of Operations Millions of Dollars ---------------------------- United Total States Norway ---------------------------- 1995 Sales $1,190 547 306 Transfers 1,125 447 650 Other revenues 128 99 22 - ----------------------------------------------------------------- Total revenues 2,443 1,093 978 Production costs 746 402 244 Exploration expenses 200 92 26 Depreciation, depletion and amortization* 488 258 147 Other related expenses 127 65 46 - ----------------------------------------------------------------- 882 276 515 Provision for income taxes 530 66 376 - ----------------------------------------------------------------- Results of operations for producing activities 352 210 139 Other earnings 38 39 - - ----------------------------------------------------------------- E&P net income $ 390 249 139 ================================================================= 1994 Sales $1,166 640 261 Transfers 944 450 478 Other revenues 111 72 29 - ----------------------------------------------------------------- Total revenues 2,221 1,162 768 Production costs 815 449 269 Exploration expenses 228 106 32 Depreciation, depletion and amortization 423 258 103 Other related expenses 61 59 (1) - ----------------------------------------------------------------- 694 290 365 Provision for income taxes 366 47 280 - ----------------------------------------------------------------- Results of operations for producing activities 328 243 85 Other earnings 14 14 - - ----------------------------------------------------------------- E&P net income $ 342 257 85 ================================================================= 1993 Sales $1,148 703 261 Transfers 1,065 476 455 Other revenues 139 35 61 - ----------------------------------------------------------------- Total revenues 2,352 1,214 777 Production costs 831 463 266 Exploration expenses 256 140 16 Depreciation, depletion and amortization 424 267 95 Other related expenses 60 47 5 - ----------------------------------------------------------------- 781 297 395 Provision for income taxes 414 66 288 - ----------------------------------------------------------------- Results of operations for producing activities 367 231 107 Other earnings 22 22 - - ----------------------------------------------------------------- E&P net income $ 389 253 107 ================================================================= o Results of Operations Millions of Dollars ----------------------------- United Other Kingdom Africa Areas ----------------------------- 1995 Sales $ 70 120 147 Transfers - 28 - Other revenues 1 2 4 - ----------------------------------------------------------------- Total revenues 71 150 151 Production costs 31 29 40 Exploration expenses 22 17 43 Depreciation, depletion and amortization* 24 12 47 Other related expenses 7 (11) 20 - ----------------------------------------------------------------- (13) 103 1 Provision for income taxes (3) 87 4 - ----------------------------------------------------------------- Results of operations for producing activities (10) 16 (3) Other earnings - - (1) - ----------------------------------------------------------------- E&P net income $ (10) 16 (4) ================================================================= 1994 Sales $ 89 124 52 Transfers - 16 - Other revenues 1 1 8 - ----------------------------------------------------------------- Total revenues 90 141 60 Production costs 33 38 26 Exploration expenses 25 28 37 Depreciation, depletion and amortization 35 10 17 Other related expenses (1) 3 1 - ----------------------------------------------------------------- (2) 62 (21) Provision for income taxes (2) 56 (15) - ----------------------------------------------------------------- Results of operations for producing activities - 6 (6) Other earnings - - - - ----------------------------------------------------------------- E&P net income $ - 6 (6) ================================================================= 1993 Sales $ 88 23 73 Transfers - 134 - Other revenues 2 (8) 49 - ----------------------------------------------------------------- Total revenues 90 149 122 Production costs 31 41 30 Exploration expenses 32 21 47 Depreciation, depletion and amortization 26 13 23 Other related expenses 1 3 4 - ----------------------------------------------------------------- - 71 18 Provision for income taxes (19) 68 11 - ----------------------------------------------------------------- Results of operations for producing activities 19 3 7 Other earnings - - - - ----------------------------------------------------------------- E&P net income $ 19 3 7 ================================================================= *Includes before-tax property impairments in the United States and Norway of $51 million and $27 million, respectively, due to the adoption of Financial Accounting Standards Board Statement No. 121. 99 o Results of operations for producing activities consist of all the activities within the E&P organization except for a liquefied natural gas (LNG) operation, minerals operations, a gas marketing company, crude oil marketing operations and a U.S. natural gas pipeline operation, which are included in other earnings. Also excluded are non-E&P activities, including NGL extraction facilities in Phillips' GPM organization, as well as downstream petroleum and chemical activities. In addition, there is no deduction for general corporate administrative expenses or interest. o Transfers are valued at prices that approximate market. o Other revenues include gains and losses from asset sales, equity in earnings from certain transportation and processing operations that directly support the company's producing operations, some revenue resulting from the purchase and sale of hydrocarbons and other miscellaneous income. o Production costs consist of costs incurred to operate and maintain wells and related equipment and facilities used in the production of petroleum liquids and natural gas. These costs also include taxes other than income taxes, depreciation of support equipment, cost of retirements, and administrative expenses related to the production activity. Excluded are depreciation, depletion and amortization of capitalized acquisition, exploration and development costs. o Exploration expenses include dry hole, leasehold impairment, geological and geophysical expenses and the cost of retaining undeveloped leaseholds. Also included are taxes other than income taxes, depreciation of support equipment and administrative expenses related to the exploration activity. o Depreciation, depletion and amortization differs from that shown in Analysis of Results by Business Segment on page 90, as cost of retirements and depreciation of support equipment are included with production or exploration expenses, as applicable, in Results of Operations. o Other related expenses are primarily third party transportation expense, foreign currency gains and losses and other miscellaneous expenses. o The provision for income taxes is computed by adjusting each country's income before income taxes for permanent differences related to the oil and gas producing activities that are reflected in the company's consolidated income tax expense for the period, multiplying the result by the country's statutory tax rate and adjusting for applicable tax credits. 100 o Statistics Net Production 1995 1994 1993 --------------------------- Thousands of Barrels Daily --------------------------- Crude Oil United States 79 90 93 Norway 100 82 72 United Kingdom 3 5 6 Africa 24 23 24 Other areas 16 6 8 - ----------------------------------------------------------------- 222 206 203 ================================================================= Natural Gas Liquids United States* 5 5 5 Norway 8 8 8 Other areas 2 1 - - ----------------------------------------------------------------- 15 14 13 ================================================================= *Represents amounts extracted attributable to E&P operations. Additional quantities of NGL are extracted at GPM gas processing plants (see NGL reserves page 98 for further discussion). Millions of Cubic Feet Daily Natural Gas ---------------------------- United States (less gas equivalent of liquids shown above)* 1,078 1,035 973 Norway (dry basis) 299 272 272 United Kingdom (dry basis) 46 58 54 Other areas 58 49 56 - ----------------------------------------------------------------- 1,481 1,414 1,355 ================================================================= *Represents quantities available for sale. Natural gas sold from the lease to third parties and to the company's GPM organization is on a wet basis. Quantities of gas from which NGL have been extracted, attributable to E&P operations, are included on a dry basis. Average Sales Prices 1995 1994 1993 ---------------------------- Crude Oil--Per Barrel United States $14.98 13.37 14.20 Norway 17.08 15.77 17.33 United Kingdom 17.17 16.06 17.53 Africa 17.60 16.10 17.75 Other areas 16.92 12.92 15.16 Total foreign 17.16 15.75 17.30 Worldwide 16.43 14.74 15.92 - ----------------------------------------------------------------- Natural Gas Liquids--Per Barrel United States 11.01 11.60 12.18 Norway 9.73 8.59 8.55 - ----------------------------------------------------------------- Natural Gas (Lease)--Per Thousand Cubic Feet United States 1.37 1.69 1.93 Norway 2.66 2.34 2.49 United Kingdom 2.78 2.75 2.44 Other areas 1.12 1.53 1.37 Total foreign 2.50 2.31 2.37 Worldwide 1.77 1.92 2.10 - ----------------------------------------------------------------- 101 Statistics 1995 1994 1993 ------------------------- Average Production Costs*-- Per Barrel-of-Oil-Equivalent United States $4.17 4.58 4.86 Norway 4.24 5.46 5.86 United Kingdom 7.39 5.98 5.64 Africa 3.19 4.55 4.62 Other areas 4.16 5.00 4.74 Worldwide 4.22 4.90 5.15 - ----------------------------------------------------------------- *Production costs consist of costs incurred to operate and maintain wells and related equipment and facilities used in the production of petroleum liquids and natural gas. These costs also include taxes other than income taxes, depreciation of support equipment, cost of retirements, and administrative expenses associated with the production activity. Excluded are depreciation, depletion and amortization of capitalized acquisition, exploration and development costs. o Per unit costs in 1995, compared with 1994, were lower in the United States, Norway, Africa and Other areas. Lower per unit costs in the United States and Africa were caused primarily by lower costs. The reduction in Norway resulted from higher production and lower costs, while the decline in per unit costs in Other areas was caused by higher production. The increase in per unit costs in the United Kingdom was due to lower production. 102 Acreage at December 31, 1995 Thousands of Acres ------------------ Gross Net ------------------ Developed United States 1,652 1,202 Norway 45 17 United Kingdom 199 70 Africa 81 16 Other areas 288 99 - ----------------------------------------------------------------- 2,265 1,404 ================================================================= Undeveloped United States 2,706 1,823 Norway 1,208 257 United Kingdom 1,141 435 Africa* 29,495 13,057 Canada 1,481 299 Other areas 12,229 7,555 - ----------------------------------------------------------------- 48,260 23,426 ================================================================= *Includes two Somalia concessions where operations have been suspended by declarations of force majeure totaling 21,865 gross and 8,135 net acres. 103 Statistics Net Wells Completed* Productive Dry ---------------- ---------------- 1995 1994 1993 1995 1994 1993 ---------------- ---------------- Exploratory United States 4 6 8 8 11 10 Norway - - ** 1 ** ** United Kingdom - 2 - ** 1 1 Africa ** - - 1 ** 1 Other areas 4 1 3 3 2 3 - ------------------------------------------------------------------ 8 9 11 13 14 15 ================================================================== Development United States 87 88 115 6 7 10 Norway 2 - 1 - - - United Kingdom 3 ** 2 - - ** Africa ** 1 1 - - ** Other areas 14 3 23 1 1 1 - ------------------------------------------------------------------ 106 92 142 7 8 11 ================================================================== *Excludes farmout arrangements. **Phillips' total proportionate interest was less than one. Wells at Year-End 1995 Productive** ---------------------------- In Progress* Oil Gas ------------ ------------- ------------ Gross Net Gross Net Gross Net ------------ ------------- ------------ United States 46 25 13,492 3,033 5,387 2,907 Norway - - 142 51 34 9 United Kingdom 32 7 19 6 73 15 Africa - - 183 37 11 2 Other areas 15 8 871 371 239 83 - ------------------------------------------------------------------ 93 40 14,707 3,498 5,744 3,016 ================================================================== *Includes wells that have been temporarily suspended. **Includes 1,198 gross and 458 net multiple completion wells. 104 o Costs Incurred Millions of Dollars -------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas -------------------------------------------------- 1995 Acquisition $ 78 45 - 28 1 4 Exploration 218 85 33 27 21 52 Development 668 233 192 204 6 33 - ------------------------------------------------------------------ $964 363 225 259 28 89 ================================================================== 1994 Acquisition $ 99 48 - 48 - 3 Exploration 202 95 18 25 31 33 Development 515 207 67 166 17 58 - ------------------------------------------------------------------ $816 350 85 239 48 94 ================================================================== 1993 Acquisition $ 51 45 - 4 - 2 Exploration 275 158 16 34 22 45 Development 482 213 58 123 38 50 - ------------------------------------------------------------------ $808 416 74 161 60 97 ================================================================== o Costs incurred include capitalized and expensed items. o Acquisition costs include the costs of acquiring undeveloped oil and gas leaseholds. It includes proved properties of $27 million, $2 million and $8 million in the United States for 1995, 1994 and 1993, respectively, and $28 million, $48 million and $4 million in the United Kingdom for 1995, 1994 and 1993, respectively. o Exploration costs include geological and geophysical expenses, the cost of retaining undeveloped leaseholds, and exploratory drilling costs. o Development costs include the cost of drilling and equipping development wells and building related production facilities for extracting, treating, gathering and storing petroleum liquids and natural gas. 105 o Capitalized Costs At December 31 Millions of Dollars ----------------------------------------------- United United Other Total States Norway Kingdom Africa Areas ----------------------------------------------- 1995 Proved properties $10,164 5,403 2,717 1,283 387 374 Unproved properties 357 271 8 38 8 32 - ------------------------------------------------------------------ 10,521 5,674 2,725 1,321 395 406 Accumulated depreciation, depletion and amortization 6,468 4,036 1,482 577 211 162 - ------------------------------------------------------------------ $ 4,053 1,638 1,243 744 184 244 ================================================================== 1994 Proved properties $ 9,699 5,546 2,381 1,056 384 332 Unproved properties 369 297 - 39 9 24 - ------------------------------------------------------------------ $10,068 5,843 2,381 1,095 393 356 Accumulated depreciation, depletion and amortization 6,334 4,197 1,263 556 199 119 - ------------------------------------------------------------------ $ 3,734 1,646 1,118 539 194 237 ================================================================== o Capitalized costs include the cost of equipment and facilities for oil and gas producing activities. These costs include the activities of Phillips' E&P organization, excluding the Kenai LNG operation, minerals operations, a gas marketing company, crude oil marketing operations and a U.S. natural gas pipeline operation. o Proved properties include capitalized costs for oil and gas leaseholds holding proved reserves, development wells and related equipment and facilities (including uncompleted development well costs) and support equipment. o Unproved properties include capitalized costs for oil and gas leaseholds under exploration (even where petroleum liquids and natural gas were found but not in sufficient quantities to be considered proved reserves) and uncompleted exploratory well costs, including exploratory wells under evaluation. 106 o Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserve Quantities Amounts are computed using year-end prices and costs (adjusted only for existing contractual changes), appropriate statutory tax rates and a prescribed 10 percent discount factor. Continuation of year-end economic conditions also is assumed. The calculation is based on estimates of proved reserves, which are revised over time as new data becomes available. Probable or possible reserves, which may become proved in the future, are not considered. The calculation also requires assumptions as to the timing of future production of proved reserves, and the timing and amount of future development and production costs. While due care was taken in its preparation, the company does not represent that this data is the fair value of the company's oil and gas properties, or a fair estimate of the present value of cash flows to be obtained from their development and production. 107 Discounted Future Net Cash Flows Millions of Dollars --------------------------------------------------- United United Other Total States Norway Kingdom Africa Areas --------------------------------------------------- 1995 Future cash inflows $31,155 13,368 11,269 3,376 2,049 1,093 Less: Future production costs 8,508 3,988 3,061 689 355 415 Future development costs 2,437 811 1,133 349 78 66 Future income tax provisions 9,631 2,400 5,284 607 1,272 68 - ------------------------------------------------------------------------------ Future net cash flows 10,579 6,169 1,791 1,731 344 544 10% annual discount 4,912 2,792 843 858 166 253 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 5,667 3,377 948 873 178 291 ============================================================================== 1994 Future cash inflows $25,219 10,532 9,594 2,282 1,634 1,177 Less: Future production costs 9,079 4,290 3,229 620 436 504 Future development costs 2,694 839 1,126 559 42 128 Future income tax provisions 6,429 1,319 3,951 233 897 29 - ------------------------------------------------------------------------------ Future net cash flows 7,017 4,084 1,288 870 259 516 10% annual discount 3,204 1,811 628 427 121 217 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 3,813 2,273 660 443 138 299 ============================================================================== 1993 Future cash inflows $23,693 11,661 7,940 1,485 1,513 1,094 Less: Future production costs 9,048 4,713 3,096 345 468 426 Future development costs 2,818 1,008 1,175 457 50 128 Future income tax provisions 5,025 1,375 2,668 159 763 60 - ------------------------------------------------------------------------------ Future net cash flows 6,802 4,565 1,001 524 232 480 10% annual discount 3,227 2,198 437 257 107 228 - ------------------------------------------------------------------------------ Discounted future net cash flows $ 3,575 2,367 564 267 125 252 ============================================================================== 108 Sources of Change in Discounted Future Net Cash Flows Millions of Dollars --------------------------- 1995 1994 1993 --------------------------- Discounted future net cash flows at the beginning of the year $ 3,813 3,575 4,021 - ------------------------------------------------------------------ Changes during the year Revenues less production costs for the year (1,569) (1,295) (1,382) Net change in prices and production costs 2,917 786 (1,183) Extensions, discoveries and improved recovery, less estimated future costs 1,215 345 537 Development costs for the year 668 515 482 Changes in estimated future development costs (214) (49) (574) Purchases of reserves in place, less estimated future costs 108 19 44 Sales of reserves in place, less estimated future costs (77) (55) (98) Revisions of previous quantity estimates (113) 10 13 Accretion of discount 668 592 722 Net change in income taxes (1,747) (630) 996 Other (2) - (3) - ------------------------------------------------------------------ Total changes 1,854 238 (446) - ------------------------------------------------------------------ Discounted future net cash flows at year-end $ 5,667 3,813 3,575 ================================================================== o The net change in prices and production costs is the beginning of the year reserve production forecast multiplied by the net annual change in the per unit sales price and production cost, discounted at 10 percent. o Purchases and sales of reserves in place, and extensions, discoveries and improved recovery are production forecasts of the applicable reserve quantities for the year multiplied by the end of the year sales price, less future estimated costs, discounted at 10 percent. o The accretion of discount is 10 percent of the prior year's discounted future cash inflows, less future production and development costs. o The net change in income taxes is the annual change in the discounted future income tax provisions. 109 - ------------------------------------------------------------------ Selected Quarterly Financial Data Millions of Dollars --------------------------------------------- Income Before Income Taxes Sales and and Other Subsidiary Net Net Income Operating Stock Net Operating Per Share of Revenues Transaction Income Income Common Stock --------------------------------------------- ------------ 1995 First $3,087 283 111 121 .43 Second 3,591 256 113 178 .42 Third 3,369 291 136 151 .52 Fourth 3,321 234 109 130 .42 - ------------------------------------------------------------------- 1994 First $2,884 208 127 109 .49 Second 2,995 161 76 60 .29 Third 3,315 234 119 141 .45 Fourth 3,017 229 162 97 .62 - ------------------------------------------------------------------- In the above table, amounts for net income include certain special items. The impact of such items have been excluded in arriving at net operating income. These special items are shown in the following table. 110 Special Items by Quarter ---------------------------------------------- Millions of Dollars ---------------------------------------------- First Second Third Fourth ---------- ---------- ---------- ---------- 1995 1994 1995 1994 1995 1994 1995 1994 ---- ---- ---- ---- ---- ---- ---- ---- Property impairments* $ - - (49) - - - (2) - Net gains (losses) on asset sales - - - - - (2) - 15 Gain on subsidiary stock transaction - 20 - - - - - - Capital-loss carryforwards - - - - - - - 50 Work force reduction charges (5) (5) (8) - (5) (22) (13) (9) Foreign currency gains (losses) 1 - - 1 (2) - (2) 2 Pending claims and settlements - - - 14 (11) 7 (1) (4) Incinerator project writedown - - - - (1) - (1) - Other items (6) 3 (8) 1 4 (5) (2) 11 - -------------------------------------------------------------------- Total special items $(10) 18 (65) 16 (15) (22) (21) 65 =================================================================== *Effective April 1, 1995, the company adopted FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." See Note 1 to the financial statements for additional discussion. 111 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 112 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information presented under the heading "Nominees for Election as Directors" in the company's definitive proxy statement for the Annual Meeting of Stockholders on May 13, 1996, is incorporated herein by reference.* Information regarding the executive officers appears in Part I of this report on pages 21 and 22. Item 11. EXECUTIVE COMPENSATION Information presented under the following headings in the company's definitive proxy statement for the Annual Meeting of Stockholders on May 13, 1996, is incorporated herein by reference: Compensation Committee Interlocks and Insider Participation Executive Compensation Options/SAR Grants in Last Fiscal Year Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Value Long-Term Incentive Plan Awards in Last Fiscal Year Termination of Employment and Change-in-Control Arrangements Pension Plan Table Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information presented under the headings "Voting Securities and Principal Holders," "Nominees for Election as Directors," "Security Ownership of Certain Beneficial Owners," and "Security Ownership of Management" in the company's definitive proxy statement for the Annual Meeting of Stockholders on May 13, 1996, is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. - --------------------- *Except for information or data specifically incorporated herein by reference under Items 10 through 13, other information and data appearing in the company's definitive proxy statement for the Annual Meeting of Stockholders on May 13, 1996, are not deemed to be a part of this Annual Report on Form 10-K or deemed to be filed with the Commission as a part of this report. 113 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements and Financial Statement Schedules ------------------------------------------------------ The financial statements and schedules listed in the Index to Financial Statements and Financial Statement Schedules, which appears on page 57, are filed as part of this annual report. 2. Exhibits -------- The exhibits listed in the Index to Exhibits, which appears on pages 116 through 119, are filed as a part of this annual report. (b) Reports on Form 8-K ------------------- During the three months ended December 31, 1995, the registrant filed one report on Form 8-K. The Form 8-K was filed December 20, 1995. An Item 5 was reported, disclosing the company's establishment of a Compensation and Benefits Trust. 114 PHILLIPS PETROLEUM COMPANY (Consolidated) SCHEDULE II--VALUATION ACCOUNTS AND RESERVES Millions of Dollars ----------------------------------------------------- Additions Balance ----------------- Balance at Charged to at Description January 1 Expense Other Deductions December 31 - ------------------------------------------------------------------------------ (a) (b) 1995 Deducted from asset accounts: Allowance for doubtful accounts and notes receivable $ 20 2 - 7 15 Deferred tax asset valuation allowance 142 10 3 - 155 - ------------------------------------------------------------------------------ 1994 Deducted from asset accounts: Allowance for doubtful accounts and notes receivable $ 14 11 - 5 (c) 20 Deferred tax asset valuation allowance 181 (39) (4) (4)(d) 142 - ------------------------------------------------------------------------------ l993 Deducted from asset accounts: Allowance for doubtful accounts and notes receivable $ 16 4 - 6 (c) 14 Deferred tax asset valuation allowance 219 18 (3) 53 (d) 181 - ------------------------------------------------------------------------------ (a) Accounts charged to income less reversal of amounts previously charged to income. (b) Represents effect of translating foreign financial statements. (c) Accounts charged off less recoveries of accounts previously charged off. (d) Adjustment in valuation allowance for net operating losses. 115 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 3(i) Restated Certificate of Incorporation, as filed with the State of Delaware July 17, 1989. (ii) Bylaws of Phillips Petroleum Company, as amended effective February 13, 1995 (incorporated by reference to Exhibit 3(ii) to Quarterly Report on Form 10-Q for the three months ended September 30, 1995). 4(a) Indenture dated as of September 15, 1990, between Phillips Petroleum Company and First Trust National Association (formerly Bank of America Illinois), relating to the 9 1/2% Notes due 1997 and the 9 3/8% Notes due 2011 (incorporated by reference to Exhibit 4(c) to Annual Report on Form 10-K for the year ended December 31, 1990). (b) Indenture dated as of September 15, 1990, as supplemented by Supplemental Indenture No. 1 dated May 23, 1991, between Phillips Petroleum Company and First Trust National Association (formerly Bank of America Illinois), relating to the 9.18% Notes due September 15, 2021, the 9% Notes due 2001, the 8.86% Notes due May 15, 2022, the 8.49% Notes due January 1, 2023, the 7.92% Notes due April 15, 2023, the 7.20% Notes due November 1, 2023 and the 6.65% Notes due March 1, 2003 (incorporated by reference to Exhibit 4(d) to Annual Report on Form 10-K for the year ended December 31, 1991). (c) Preferred Share Purchase Rights as described in the Rights Agreement dated as of July 10, 1989, between Phillips Petroleum Company and Chemical Bank (formerly Manufacturers Hanover Trust Company). (d) Amendment dated May 16, 1990, to the Rights Agreement dated July 10, 1989, between Phillips Petroleum Company and Chemical Bank (formerly Manufacturers Hanover Trust Company) (incorporated by reference to Exhibit 1 to Current Report on Form 8-K dated May 16, 1990). 116 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- The company incurred during 1995 certain long-term debt not registered pursuant to the Securities Exchange Act of 1934. No instrument with respect to such debt is being filed since the total amount of the securities authorized under any such instrument did not exceed 10 percent of the total assets of the company on a consolidated basis. The company hereby agrees to furnish to the Securities and Exchange Commission upon its request a copy of such instrument defining the rights of the holders of such debt. Material Contracts 10(a) Agreement dated December 23, 1984, among Mesa Partners and related entities and Phillips Petroleum Company and the schedules, annexes and exhibit thereto. (b) Letter Agreement dated December 23, 1984, among Mesa Partners and related entities and Phillips Petroleum Company. (c) Trust Agreement dated December 12, 1995, between Phillips Petroleum Company and Vanguard Fiduciary Trust Company, as Trustee of the Phillips Petroleum Company Compensation and Benefits Arrangements Stock Trust. Management Contracts and Compensatory Plans or Arrangements (d) 1986 Stock Plan of Phillips Petroleum Company (Incorporated by reference to Exhibit 10(d) to Annual Report on Form 10-K for the year ended December 31, 1992). (e) 1990 Stock Plan of Phillips Petroleum Company. (f) Annual Incentive Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(f) to Annual Report on Form 10-K for the year ended December 31, 1992). (g) Incentive Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(g) to Annual Report on Form 10-K for the year ended December 31, 1994). 117 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- 10(h) Principal Corporate Officers Supplemental Retirement Plan of Phillips Petroleum Company. (i) Phillips Petroleum Company Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10(i) to Annual Report on Form 10-K for the year ended December 31, 1993). (j) Key Employee Deferred Compensation Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10(j) to Annual Report on Form 10-K for the year ended December 31, 1994). (k) Non-Employee Director Retirement Plan of Phillips Petroleum Company. (l) Omnibus Securities Plan of Phillips Petroleum Company (incorporated by reference to Exhibit 10 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). (m) Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company. 12 Computation of Ratio of Earnings to Fixed Charges. 21 List of Subsidiaries of Phillips Petroleum Company. 23 Consent of Independent Auditors. 27 Financial Data Schedule. 99(a) Form 11-K, Annual Report, of the Thrift Plan of Phillips Petroleum Company for the fiscal year ended December 31, 1995 (to be filed by amendment pursuant to Rule 15d-21). (b) Form 11-K, Annual Report, of the Long-Term Stock Savings Plan of Phillips Petroleum Company for the fiscal year ended December 31, 1995 (to be filed by amendment pursuant to Rule 15d-21). 118 PHILLIPS PETROLEUM COMPANY INDEX TO EXHIBITS (Continued) Exhibit Number Description - ------- ----------- 99(c) Form 11-K, Annual Report, of the Retirement Savings Plan of Phillips Petroleum Company Subsidiaries for the fiscal year ended December 31, 1995 (to be filed by amendment pursuant to Rule 15d-21). Copies of the exhibits listed in this Index to Exhibits are available upon request for a fee of $3.00 per document. Such request should be addressed to: Secretary Phillips Petroleum Company 1234 Adams Building Bartlesville, OK 74004 119 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. PHILLIPS PETROLEUM COMPANY February 21, 1996 /s/ W. W. Allen ---------------------------------- W. W. Allen Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the registrant by the following officers in the capacity indicated and by a majority of directors in response to Instruction D to Form 10-K on February 21, 1996. Signature Title --------- ----- /s/ W. W. Allen - --------------------------- Chairman of the Board of Directors W. W. Allen and Chief Executive Officer (Principal executive officer) /s/ T. C. Morris - --------------------------- Senior Vice President T. C. Morris and Chief Financial Officer (Principal financial officer) /s/ L. F. Francis - --------------------------- Controller L. F. Francis (Principal accounting officer) /s/ J. J.Mulva - --------------------------- President and Chief Operating J. J. Mulva Officer and Director /s/ C. L. Bowerman - --------------------------- Executive Vice President C. L. Bowerman and Director 120 Signature Title --------- ----- /s/ David L. Boren - --------------------------- Director David L. Boren /s/ Robert E. Chappell, Jr. - --------------------------- Director Robert E. Chappell, Jr. /s/ Larry D. Horner - --------------------------- Director Larry D. Horner /s/ Randall L. Tobias - --------------------------- Director Randall L. Tobias /s/ Kathryn C. Turner - --------------------------- Director Kathryn C. Turner 121 EX-3 2 Exhibit 3(i) RESTATED CERTIFICATE OF INCORPORATION OF PHILLIPS PETROLEUM COMPANY Adopted in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware ----------------------------------------- Phillips Petroleum Company, a corporation existing under the laws of the State of Delaware, does hereby certify: FIRST: That the name of the corporation is Phillips Petroleum Company. SECOND: That the Certificate of Incorporation of the corporation was filed by the Secretary of State, Dover, Delaware, on the 13th day of June 1917. THIRD: That the text of the Certificate of Incorporation of said Phillips Petroleum Company, as amended, is hereby restated, without further amendment or change, to read as follows: RESTATED CERTIFICATE OF INCORPORATION OF PHILLIPS PETROLEUM COMPANY *** WE, THE UNDERSIGNED, being associated to establish a corporation for the purposes hereinafter set forth, under the General Corporation Laws of the State of Delaware, do hereby make and file a certificate of incorporation in writing certifying: FIRST: The name of the corporation is PHILLIPS PETROLEUM COMPANY. SECOND: The registered office of the corporation is to be located at 229 South State Street, City of Dover, in the County of Kent, in the State of Delaware; and the name of its registered agent is UNITED STATES CORPORATION COMPANY. THIRD: The nature of the business of the corporation and the objects or purposes proposed to be transacted, promoted or carried on, are: (a) To carry on the business of buying, selling, or otherwise acquir- ing, taking, owning, holding, developing, leasing, managing, manufactur- ing, importing and exporting, utilizing, marketing, trading, dealing in, and otherwise turning to account, any and all kinds and grades of oil and gas, petroleum, asphalt, bitumen and bituminous substances of all kinds, carbon and hydrocarbon products, and any and all elements, constituents, products, by-products, compounds, blends and combinations thereof; (b) To purchase, take, hold, own, lease, exchange, or otherwise acquire, and to develop, sell, mortgage, let and deal in gas-bearing, oil-bearing and other mineral-bearing properties, leases, mines, wells and rights, and any and all interest whatsoever therein or thereto, and to engage in the business of producing, mining and selling gas, oil and other minerals; (c) To purchase, obtain by contract or concession, or otherwise acquire, take, hold, own, develop, explore, exploit, improve, operate, lease, enjoy, control, manage, or otherwise turn to account, mortgage, grant, sell, exchange, deal in, convey, or otherwise dispose of, any and all lands, real estate, leases, concessions, licenses, immunities, powers, privileges, grants, rights, land patents, franchises, deposits, wells, mines, quarries, locations, claims, easements, tenements, hereditaments and interests, of every description and nature whatsoever; (d) In connection with and incidental to any of the foregoing, to purchase, or otherwise acquire, take, own, hold, mortgage, pledge, create liens upon, convey, sell, lease, enjoy, or otherwise turn to account, assign and transfer, and to invest, trade and deal in goods, wares and merchandise and real and personal property, and to exercise any and all powers connected with or relating to each and every of the foregoing businesses; (e) To construct, build, purchase, lease, or otherwise acquire, take, own, hold, equip, improve, develop, maintain, manage, control, operate, mortgage, create liens upon, deal in, and otherwise dispose of and turn to account, any and all kinds of plants, works, factories, buildings, structures, stores, storehouses, warehouses, houses, extracting plants, waterworks and plants, tanks, reservoirs, containers, pumps, stills, condensers, absorbers, tubes, engines, boilers, turbines, generators, converters, machines and machinery of all kinds, electrical and other- wise, switchboards, meters and all kind of measuring devices, tools, implements, equipment, apparatus and things or property, real or personal, of every kind and description, cars, tank cars, tanks, pipe lines, transmission lines, distribution lines and plants, mains, pipes, conduits, ducts, services, pumping and compressing stations, terminals, storage plants and equipment, systems, vehicles, however propelled, -2- ships, docks, boats, barges, floats, vessels and craft of any and all kinds, however operated or propelled, docks, wharves, drydocks, repair shops, elevators, piers and any and all facilities, connections, installations, appliances, apparatus, appurtenances, things or property, real and personal, of every kind and description connected with, incidental to, necessary, suitable, useful, convenient or appertaining to the producing, drilling for, mining, manufacturing, buying, acquir- ing, securing, transporting, refining, reducing, condensing, evaporating, vaporizing, blending, analyzing, compressing, liquefying, absorbing, cracking, extracting, separating, purifying, combining, mixing, marketing, utilizing, dealing in, storing, or otherwise disposing of and turning to account, oil of any and all kinds and grades, gas, either natural or artificial, gasoline, naptha, alcohol, benzine, kerosene, carbon and hydrocarbon products, nitrates, petroleum, asphalt, bitumen and bituminous substances of all kinds, and the elements, constituents, products and by-products, mixtures, combinations and blends thereof, and for any of the purposes enumerated in this certificate; (f) To apply for, obtain, register, purchase, lease, acquire, secure, own, hold, use, operate, contract or negotiate for, take licenses or other rights in respect of, sell, transfer, grant licenses and rights in respect of, manufacture under, introduce, sell, assign, collect the royalties on, mortgage, pledge, create liens upon, or otherwise dispose of, deal in and turn to account letters patent, patents, patent rights, patents applied for or to be applied for, trade marks, trade names and symbols, distinction marks and indications of origin or ownership, copyrights, syndicate rights, inventions, discoveries, devices, machines, improvements, processes, data, formulae of any and all kinds granted by or recognized under or pursuant to the laws of the United States of America, or of any other country or countries whatsoever; (g) To acquire all or any part of the good will, rights, property and business of any person, firm, association, heretofore or hereafter engaged in any business similar to the business of this corporation, and to pay for the same in cash or in stock or bonds of this corporation or otherwise, and to hold, utilize, enjoy and in any manner dispose of the whole, or any part of the rights and property so acquired, and to assume in connection therewith, any liabilities of any such person, firm, association or corporation, and to conduct in any lawful manner and in any country, state or locality herein enumerated, the whole or any part of the business thus acquired, provided such business is within the authorization of the General Corporation Laws of the State of Delaware; (h) To purchase, own, hold, sell, assign, transfer, mortgage, pledge, create liens upon, or otherwise dispose of, so far as may be done under the laws of the State of Delaware, any of the shares of the capital stock of, or any bonds, debentures, notes, securities or other evidences of indebtedness, created, issue or incurred by any public, municipal, quasi public or private corporations or associations, wherever organized -3- or created, and as owner thereof to exercise all rights, powers and privileges of ownership, including the right to vote upon any stock thus owned; and to aid in any manner which shall be lawful any corporation or association of which any bonds, stocks or other securities or evidences of indebtedness shall be held by this corporation, and to do any acts and things permitted by law and designed to protect, preserve, improve or enhance the value of any such bonds, stocks or other securities or evidences of indebtedness; (i) To have one or more offices and to carry on any and all of its businesses and operations without restriction or limit as to amount, either within or without the State of Delaware, in the other states, the District of Columbia, the territories, colonies and dependencies of the United States of America, and in all or any foreign countries or in any part of the world; (j) To do all and everything necessary, suitable and proper for the accomplishment of any of the purposes or attainment of any of the objects or exercise of any of the powers herein set forth, whether herein specified or not, either alone or in connection with other firms, individuals or corporations, both in this State and throughout the United States and elsewhere, and to do any other act or acts, thing or things, incidental or appurtenant to or growing out of or connected with said businesses or powers, or any part thereof, if not inconsistent with the laws under which this corporation is organized; (k) It is declared that the objects and powers specified in the various paragraphs contained in this clause shall be in no wise limited or restricted by reference to or inference from the term of any other of the paragraphs of this or any other clause of this certificate of incorporation. FOURTH: (a) Capital Stock. The corporation shall have the authority to issue 500 million shares of common stock, $1.25 par value, and 300 million shares of preferred stock, $1.00 par value. (b) Common Stock. The shares of authorized common stock of the corporation shall be identical in all respects and shall have equal rights and privileges. (c) Preferred Stock. The board of directors shall have authority to issue the shares of preferred stock from time to time on such terms as it may determine, and to divide the preferred stock into one or more classes or series and in connection with the creation of any such class or series to fix by the resolution or resolutions providing for the issue of shares thereof the designations, voting powers, preferences and relative, participating, optional, or other special rights of such class or series, and the qualification, limitations, or restrictions thereof, to the full extent now or hereafter permitted by law. -4- FIFTH: The corporation is to have perpetual existence. SIXTH: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatsoever. SEVENTH: The provisions which the incorporators hereby insert in the certificate of incorporation of the corporation for the regulation of the business and for the conduct of the affairs of the corporation and creating, defining, limiting and regulating the powers thereof and of the directors, and stockholders, the same being in furtherance of and in addition to, and not in limitation of the powers now or hereafter conferred by the present or any future law or laws of the State of Delaware are as follows: 1. The number of directors of the corporation, none of whom need be a stockholder, shall be fixed and may be altered from time to time as may be provided by the By-laws; and in case of any increase in the number of directors, the additional directors shall be elected as provided by the By-Laws; 2. The board of directors shall have power to fix the amount of the accumulated profits of this corporation to be reserved as working capital, or for any other lawful purpose, prior to the declaration of any dividend upon the corporation's stock; 3. Subject to the provisions of Article NINTH hereof, the corporation shall have power, acting through its board of directors, except that in cases where the action of the stockholders shall be required by statute or this certificate of incorporation, such action shall also be obtained, (a) The board of directors shall have power to issue its stocks, bonds, or other obligations, from time to time, for such consideration as may be fixed, from time to time, by the board of directors; (b) To borrow money and to make and issue notes, bonds, debentures, obligations and evidences of indebtedness, whether secured by mortgage, pledge or otherwise, and to secure the same by mortgage, pledge or otherwise of all or any part of its property or assets; and generally to make and perform agreements and contracts of every kind and description; (c) The stockholders of this corporation shall have power to make, alter, amend and repeal the By-Laws of this corporation in whole or in part by majority vote of the stockholders at any annual meeting or special meeting called for that purpose, and the board of directors shall have power to make, alter, amend and repeal in whole or in part the By-laws of this corporation at any regular or special meeting of the board of directors, except those By-Laws adopted by the stockholders of this corporation; -5- (d) To guarantee the payment of dividends or the principal and interest on the property, stocks, bonds, debentures, or other securities issued by or the performance of any other contract or obligation of any other person, corporation, association or partnership whatso- ever, so far as the same is not contrary to law, whenever, in the judgment of the board of directors or executive committee, it shall be necessary or proper for the business of the corporation or in the furtherance of its interest so to do; (e) The board of directors shall have power, from time to time, to appoint an executive committee consisting of two or more of their number, which committee shall for the time being, as may be provided in a resolution of the board of directors, or in the By-Laws of this corporation, have or exercise any and all of the powers of the board of directors in the management of the business and affairs of this corporation; (f) Both the stockholders and directors shall have power to hold their meetings either within or without the State of Delaware; and to keep the books, documents and records of this corporation, except as may be otherwise required by the laws of this State, outside of the State of Delaware; (g) The board of directors shall have power to determine, from time to time, whether and to what extent and under what conditions and regulations the accounts, books and records of this corporation, other than as may be provided by the laws of Delaware, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account or book or document of this corporation, except as conferred by the Statutes of the State of Delaware, unless and until authorized to do so by a resolution of the directors or stockholders of this corporation; (h) The corporation 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 law, and all rights conferred on stockholders herein are subject to this reserved power; (i) The directors and officers of this corporation may be directors and officers in other corporations, and transactions and contracts of this corporation with said other corporations shall not be affected by the fact that the officers hereof are interested in or are directors or officers of such other corporation or corporations; (j) This corporation shall have the power to procure itself to be licensed or organized in any state or subdivision thereof of the United States, the District of Columbia, the territories, colonies or possessions of the United States, and in any foreign country. -6- EIGHTH: No holder of any security of the corporation now or hereafter authorized shall have any right as such holder to subscribe for, purchase or otherwise acquire any other or additional security of the corporation whether now or hereafter authorized, unissued or issued and thereafter acquired by the corporation; provided, any such right as is outstanding on April 28, 1970, and was created or granted pursuant to an express authorization of the Board of Directors and/or the stockholder of the corporation shall be unaffected by the provisions of this Article; and, provided further, the Board of Directors may, in its sole and absolute discretion, at any time and from time to time, by expressly so doing, create any such right upon such terms and conditions and with such limitations and restrictions as it considers appropriate, in which event the holders of securities of the corporation shall have such rights, but only such rights, as have been expressly so created. As used above, the word "security' includes any and all rights or interests in or arising cut of any type, class or series of any shares of capital stock in the corporation or any warrant, option, conversion privilege, or other right to subscribe to, purchase, convert into, exchange for or otherwise acquire any such rights or interests in or arising out of such shares. NINTH: The affirmative vote of the holders of not less than 75 percent of the Voting Stock shall be required for the approval or authorization of any Business Transaction with a Related Person, or any Business Transaction in which a Related Person has an interest (except proportionately as a stockholder of the corporation); provided, however, that the 75 percent voting requirement shall not be applicable if (i) Continuing Directors at the time constitute at least a majority of the entire Board of Directors of the corporation and have expressly approved the Business Transaction by at least a majority vote of such Continuing Directors, or (ii) all of the following conditions are satisfied: 1. the Business Transaction is a merger or consolidation or sale, lease, exchange, transfer or other disposition of substantially all of the assets of the corporation, and the cash or fair market value of the property, securities or other consideration to be received per share by holders of common stock of the corporation (other than such Related Person) in connection with such Business Transaction is at least equal in value to such Related Person's Highest Purchase Price and such per share consideration is in cash or the same form as such Related Person has previously paid to acquire the largest number of shares of common stock of the corporation acquired by such Related Person prior to such Business Transaction; and 2. after such Related Person has become the Beneficial Owner of not less than 15 percent of the Voting Stock and prior to the consummation of such Business Transaction, such Related Person shall not have become the Beneficial Owner of any additional shares of Voting Stock, except (i) as a part of the transaction which resulted in such Related Person becoming the Beneficial Owner of not less than 10 percent of the Voting -7- Stock or (ii) as a result of a pro rata stock dividend or stock split; and 3. prior to the consummation of such Business Transaction, such Related Person shall not have, directly or indirectly, (i) received the benefit (except proportionately as a stockholder of the corporation) of any loans, advances, guarantees, pledges or other financial assistance or tax credits or other tax advantages provided by the corporation or any of its subsidiaries, or (ii) caused any material change in the corporation's business, capital structure, including, without limitation, the issuance of shares of capital stock of the corporation to any third party, or common stock dividend rate or policy (except as approved by a majority of the Continuing Directors). For the purpose of this Article NINTH: 1. The term "Business Transaction" shall mean (a) any merger or consolidation involving the corporation or a subsidiary of the corporation, (b) any sale, lease, exchange, transfer or other disposition (in one transaction or a series of transactions), including, without limitation, a mortgage or any other security device, of all or any Substantial Part of the assets either of the corporation or of a subsidiary of the corporation, (c) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of an entity to the corporation or a subsidiary of the corporation, (d) the issuance, sale exchange, transfer or other disposition by the corporation or a subsidiary of the corporation of any securities of the corporation or any subsidiary of the corporation, except proportionately to the stockholders of the corporation or of such subsidiary, (e) any recapitalization or reclassification of the securities of the corporation (including, without limitation, any reverse stock split) or other transaction that would have the effect of increasing the proportionate voting power of a Related Person, (f) any liquidation, spinoff, splitoff, splitup or dissolution of the corporation, and (g) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Transaction. 2. The term "Related Person" shall mean and include (a) any individual, corporation, partnership, group, association or other person or entity which, together with its Affiliates and Associates, is the Beneficial owner of not less than 10 percent of the Voting Stock or was the Beneficial Owner of not less than 10 percent of the Voting Stock (i) at the time the definitive agreement providing for the Business Transaction (including any amendment thereof) was entered into, (ii) at the time a resolution approving the Business Transaction was adopted by the Board of Directors of this corporation or (iii) as of the record date of this corporation for the determination of stockholders entitled to notice of and to vote on, or consent to, the Business Transaction, and (b) any Affiliate or Associate of any such individual, corporation, partnership, group, association or other person or entity; provided, however, and -8- notwithstanding anything in the foregoing to the contrary, the term "Related Person" shall not include this corporation, a wholly owned subsidiary of this corporation, any employee stock ownership or other employee benefit plan of this corporation or of any wholly owned subsidiary of this corporation, or any trustee of, or fiduciary with respect to, any such plan when acting in such capacity. 3. The term "Beneficial Owner" shall be defined by reference to Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on March 1, 1984; provided, however, that any individual, corporation, partnership, group, association or other person or entity which has the right to acquire any voting stock at any time in the future is contingent or absolute, pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or option, or otherwise, shall be deemed the Beneficial Owner of such Voting Stock. 4. The term "Highest Purchase Price" shall mean the highest amount of consideration paid by such Related Person for a share of common stock of the corporation (including any brokerage commissions, transfer taxes and soliciting dealers' fees) at any time within two years prior to the date such Related Person became a Related Person and during any time while such Related Person was a Related Person; provided, however, that the Highest Purchase Price shall be appropriately adjusted to reflect the occurrence of any reclassification, recapitalization, stock split, reverse stock split or other readjustment in the number of outstanding shares of common stock of the corporation, or the payment of a stock dividend thereon, between the last date upon which such Related Person paid the Highest Purchase Price and the effective date of the merger or consolidation or the date of the distribution to stockholders of the corporation of the proceeds from the saler lease, exchange, transfer or other disposition of substantially all of the assets of the corporation referred to in the first subparagraph 1 of this Article NINTH. 5. The term Substantial Part" shall mean more than 5 percent of the book value of the total assets of the entity in question, as reflected on the most recent fiscal year-end consolidated balance sheet of such entity existing at the time the stockholders of the corporation would be required to approve or authorize the Business Transaction involving the assets constituting any such Substantial Part. 6. In the event of a merger in which the corporation is the surviving corporation, for the purpose of the first subparagraph 1 of this Article NINTH, the phrase "property, securities or other consideration to be received' shall include, without limitation, common stock of the corporation retained by its stockholders (other than such Related Person). 7. The term "Voting Stock" shall mean all outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, considered for the purpose of this Article NINTH as one -9- class; provided, however, that if the corporation has shares of Voting Stock entitled to more or less than one vote for any such share, each reference in this Article NINTH to a proportion of shares of Voting Stock shall be deemed to refer to such proportion of the votes entitled to be cast by such shares. 8. The term 'Continuing Director" shall mean a director who either was a member of the Board of Directors of the corporation prior to the time such Related Person became a Related Person or who subsequently became a director of the corporation and whose election, or nomination for election by the corporation's stockholders, was approved by a vote of at least three-quarters of the Continuing Directors then on the Board; provided, however, that in no event shall a director be considered a "Continuing Director' if such director is a Related Person and the Business Transaction to be voted upon is with such Related Person or is one in which such Related Person otherwise has an interest (except proportionately as a stockholder of the corporation). 9. The term "Affiliate', used to indicate a relationship to a specified person, shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person. 10. The term "Associate", used to indicate a relationship with a specified person, shall mean (a) any corporation, partnership or other organization of which such specified person is an officer or partner or is, directly or indirectly the Beneficial Owner of 10 percent or more of any class of equity securities, (b) any trust or other estate in which such specified person has a substantial beneficial interest or as to which such specified person serves as a trustee or in a similar fiduciary capacity, (c) any relative or spouse of such specified person, or any relative of such spouse, who has the same home as such specified person or who is a director or officer of the corporation or any of its parents or subsidiaries and (d) any person who is a director or officer of such specified person or any of its parents or subsidiaries (other than the corporation or any wholly owned subsidiary of the corporation). For the purpose of this Article NINTH, if the Continuing Directors constitute at least a majority of the entire Board of Directors of the corporation, then a majority of such Continuing Directors shall have the power to make a good faith determination, on the basis of information known to them, of: (a) the number of shares of Voting Stock of which any person is the Beneficial Owner, (b) whether a person is an Affiliate or Associate of another, (c) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of Beneficial Owner herein, (d) whether the assets subject to any Business Transaction constitute a Substantial Part, (e) whether any Business Transaction is one in which a Related Person has an interest (except proportionately as a stockholder of the corporation), (f) whether a Related Person has, directly or indirectly, received the benefits or caused any of the changes referred to -10- in to the first subparagraph 3 of this Article NINTH, (g) whether the cash and/or the fair market value of the consideration other than cash to be received per share by holders of common stock of the corporation in connection with a Business Transaction described in the first subparagraph 1 of this Article NINTH is at least equal in value to the Related Person's Highest Purchase Price, and (h) such other matters with respect to which a determination is required under this Article NINTH. Nothing contained in this Article NINTH shall be construed to relieve any Related Person of any fiduciary obligation imposed by law. Notwithstanding any other provisions of this certificate of incorporation or the bylaws of the corporation (and notwithstanding that a lesser percentage may be specified by law, this certificate of incorporation or the bylaws of the corporation), the provisions of this Article NINTH may not be repealed or amended in any respect, nor may any provision of the certificate of incorporation or bylaws be adopted inconsistent with this Article NINTH, unless such action is approved by the affirmative vote of the holders of not less than 75 percent of the Voting Stock. TENTH: A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article TENTH shall be prospective only, and shall not adversely affect any elimination or limitation of the personal liability of a director of the corporation existing at the time of such repeal or modification. ELEVENTH: Subject to the rights of the holders of any class or series of preferred stock, any action required or permitted to be taken by the stockholders of the corporation 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 preferred stock, special meetings of stockholders of the corporation may be called only by the Chairman of the Board, or the President, or by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all outstanding shares of the corporation entitled to vote generally in the election of directors shall be required to alter, amend or adopt any provision inconsistent with, modify or repeal this Article ELEVENTH or Section 9 of Article II of the Bylaws. -11- ***** FOURTH: That the restatement of the Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware and that the Restated Certificate only restates and integrates and does not further amend the provisions of the corporation's Certificate of Incorporation as theretofore amended or supplemented, and that there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. IN WITNESS WHEREOF, PHILLIPS PETROLEUM COMPANY has caused this Certificate to be signed and attested by its duly authorized officers this 12th day of July, 1989. PHILLIPS PETROLEUM COMPANY By: /s/ William G. Paul -------------------------- Senior Vice President and General Counsel ATTEST: /s/ D.L. Cone ---------------------- Assistant Secretary [SEAL] -12- EX-4 3 Exhibit 4(c) - ----------------------------------------------------------------- PHILLIPS PETROLEUM COMPANY and MANUFACTURERS HANOVER TRUST COMPANY Rights Agent Rights Agreement Dated as of July 10, 1989 - ----------------------------------------------------------------- TABLE OF CONTENTS Page ---- Section 1. Certain Definitions ............................. 2 Section 2. Appointment of Rights Agent ..................... 10 Section 3. Issue of Right Certificates ..................... 10 Section 4. Form of Right Certificates ...................... 14 Section 5. Countersignature and Registration ............... 14 Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates ..................... 16 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights ..................... 17 Section 8. Cancellation and Destruction of Right Certificates ............................ 20 Section 9. Availability of Preferred Shares ................ 21 Section 10. Preferred Shares Record Date .................... 22 Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights .................... 23 Section 12. Certificate of Adjusted Purchase Price or Number of Shares ........................... 38 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power .................... 39 Section 14. Fractional Rights and Fractional Shares ......... 41 Section 15. Rights of Action ................................ 44 Section 16. Agreement of Right Holders ...................... 45 Section 17. Right Certificate Holder Not Deemed a Stockholder ................................... 46 -i- Page ---- Section 18. Concerning the Rights Agent ..................... 47 Section 19. Merger or Consolidation or Change of Name of Rights Agent .......................... 48 Section 20. Duties of Rights Agent .......................... 49 Section 21. Change of Rights Agent .......................... 53 Section 22. Issuance of New Right Certificates .............. 55 Section 23. Redemption ...................................... 55 Section 24. Exchange ........................................ 61 Section 25. Notice of Certain Events ........................ 64 Section 26. Notices ......................................... 66 Section 27. Supplements and Amendments ...................... 67 Section 28. Successors ...................................... 68 Section 29. Benefits of this Agreement ...................... 68 Section 30. Severability .................................... 68 Section 31. Governing Law ................................... 69 Section 32. Counterparts .................................... 69 Section 33. Descriptive Headings ............................ 69 Signatures .................................................. 70 Exhibit A - Form of Certificate of Designations of PHILLIPS PETROLEUM COMPANY Exhibit B - Form of Right Certificate Exhibit C - Summary of Rights to Purchase Preferred Shares -ii- RIGHTS AGREEMENT ---------------- Agreement, dated as of July 10, 1989, between PHILLIPS PETROLEUM COMPANY, a Delaware corporation (the "Company"), and MANUFACTURERS HANOVER TRUST COMPANY (the "Rights Agent"). The Board of Directors of the Company has authorized and declared a dividend of one preferred share purchase right (a "Right") for each Common Share (as hereinafter defined) of the Company outstanding on July 31, 1989 (the "Record Date"), each Right representing the right to purchase one one-hundredth of a Preferred Share (as hereinafter defined), upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each Common Share that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are hereinafter defined). Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this ------------------- Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 20% or more of the Common Shares of the Company then outstanding, but shall not include the Company, any Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 20% or more of the Common Shares of the Company then outstanding; provided, however, that if a Person shall -------- ------- become the Beneficial Owner of 20% or more of the Common Shares of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial -2- Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an "Acquiring Person". (b) "Affiliate" and "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 amended (the "Exchange Act"), as in effect on the date of this Agreement. (c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange -3- rights, rights (other than these Rights), warrants or options, or otherwise; provided, however, that a Person -------- ------- shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or under- -4- standing (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section l(c)(ii)(B)) or disposing of any securities of the Company. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder. (d) "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in New York are authorized or obligated by law or executive order to close. (e) "Close of business" on any given date shall mean 5:00 P.M., New York time, on such date; provided, however, -------- ------- that if such date is not a Business Day it shall mean 5:00 P.M., New York City time, on the next succeeding Business Day. -5- (f) "Common Shares" when used with reference to the Company shall mean the shares of common stock, par value $1.25 per share, of the Company. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. (g) "Distribution Date" shall have the meaning set forth in Section 3 hereof. (h) "Final Expiration Date" shall have the meaning set forth in Section 7 hereof. (i) An "Offer" shall mean a written proposal delivered to the Company by any Person who both beneficially owns 1% or less of the outstanding Common Shares as of the date such proposal is delivered and who has not within one year prior to the delivery of such written proposal beneficially owned in excess of 1% of the then outstanding Common Shares of the Company and (at a time when such Person beneficially owned such greater than 1% stake) disclosed, or caused the disclosure of, any intention which relates to or would result in the acquisition, or influence of control, of the Company (an "Offeror"), and which proposal: -6- (i) provides for the acquisition of all of the outstanding shares of each class or series of Voting Stock (as hereinafter defined) held by any Person other than the Offeror and its Affiliates for cash, with all shares of any particular class or series of Voting Stock to be acquired at the same price; (ii) is accompanied by a written opinion of a nationally recognized investment banking firm, which opinion is addressed to the holders of shares of Voting Stock other than the Offeror and its Affiliates and states that the price to be paid to the holders (other than the Offeror and its affiliates) of each individual class or series of Voting Stock pursuant to the offer is fair to such holders; (iii) states that the Offeror has obtained written financing commitments from recognized financing sources, and/or has on hand cash or cash equivalents, for the full amount of all financing necessary to consummate the Offer; and (iv) requests the Company to call a special meeting of the holders of Voting Stock for the purpose of voting on a resolution requesting the Board of Directors to accept such Offer and contains a -7- written agreement of the Offeror to pay (or share with any other Offeror) at least one-half of the Company's costs of such special meeting (exclusive of the Company's costs of preparing and mailing proxy material for its own solicitation). (j) "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. (k) "Preferred Shares" shall mean shares of Series B Junior Participating Preferred Stock, par value $1.00 per share, of the Company having the rights and preferences set forth in the Form of Certificate of Designations attached to this Agreement as Exhibit A. (l) "Redemption Date" shall have the meaning set forth in Section 7 hereof. (m) "Shares Acquisition Date" shall mean the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such. (n) "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. -8- (o) "Voting Stock" shall mean (i) the Common Shares of the Company and (ii) any other shares of capital stock of the Company entitled to vote generally in the election of directors or entitled to vote together with the Common Shares in respect of any merger, consolidation, sale of all or substantially all of the Company's assets, liquidation, dissolution or winding up. Whenever any provision of this Agreement requires a determination of whether a number of shares of Voting Stock comprising a specified percentage of such Voting Stock has been voted, tendered, acquired, sold or otherwise disposed of, or a determination of whether a Person has offered or proposed to acquire a number of shares of Voting Stock comprising such specified percentage, the number of shares of Voting Stock comprising such specified percentage of Voting Stock shall in every such case be deemed to be the number of shares of Voting Stock comprising the specified percentage of the Company's entire voting power then entitled to vote generally in the election of directors or then entitled to vote together with the Common Shares in respect of any merger, consolidation, sale of all or substantially all of the Company's assets, liquidation, dissolution or winding up. -9- Section 2. Appointment of Rights Agent. The Company --------------------------- hereby appoints the Rights Agent to act as agent hereunder in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable. Section 3. Issue of Right Certificates. (a) Until the --------------------------- earlier of (i) the tenth day after the Shares Acquisition Date or (ii) the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) after the date of the commencement by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) of, or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) to commence, a tender or exchange offer the consummation of -10- which would result in any Person becoming the Beneficial Owner of Common Shares aggregating 20% or more of the then outstanding Common Shares (including any such date which is after the date of this Agreement and prior to the issuance of the Rights; the earlier of such dates being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for Common Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Right Certificates) and not by separate Right Certificates, and (y) the right to receive Right Certificates will be transferable only in connection with the transfer of Common Shares. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, insured, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing one Right for each Common Share so held. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates. -11- (b) On the Record Date, or as soon as practicable thereafter, the Company will send a copy of a Summary of Rights to Purchase Preferred Shares, in substantially the form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for Common Shares outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with a copy of the Summary of Rights attached thereto. Until the Distribution Date (or the earlier of the Redemption Date or the Final Expiration Date), the surrender for transfer of any certificate for Common Shares outstanding on the Record Date, with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. (c) Certificates for Common Shares which become outstanding (including, without limitation, reacquired Common Shares referred to in the last sentence of this paragraph (c)) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend: -12- This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between PHILLIPS PETROLEUM COMPANY and MANUFACTURERS HANOVER TRUST COMPANY, dated as of July 10, 1989 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of PHILLIPS PETROLEUM COMPANY. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. PHILLIPS PETROLEUM COMPANY will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. As described in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person (as defined in the Rights Agreement) shall become null and void. With respect to such certificates containing the foregoing legend, until the Distribution Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. -13- Section 4. Form of Right Certificates. The Right -------------------------- Certificates (and the forms of election to purchase Preferred Shares and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 22 hereof, the Right Certificates shall entitle the holders thereof to purchase such number of one one-hundredths of a Preferred Share as shall be set forth therein at the price per one one-hundredth of a Preferred Share set forth therein (the "Purchase Price"), but the number of such one one-hundredths of a Preferred Share and the Purchase Price shall be subject to adjustment as provided herein. Section 5. Countersignature and Registration. The --------------------------------- Right Certificates shall be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its President, any of its Vice Presidents, or its Treasurer either manually or by facsimile signature, shall -14- have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certifi- -15- cates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates. Section 6. Transfer, Split Up, Combination and ------------------------------------ Exchange of Right Certificates; Mutilated, Destroyed, Lost or - ------------------------------------------------------------- Stolen Right Certificates. Subject to the provisions of Section - ------------------------- 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the earlier of the Redemption Date or the Final Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Rights that have become void pursuant to Section 11(a)(ii) hereof or that have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of one one-hundredths of a Preferred Share as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the principal office of the Rights Agent. Thereupon the Rights Agent shall countersign and deliver to -16- the person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; ----------------------------------- Expiration Date of Rights. (a) The registered holder of any - ------------------------- Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to pur- -17- chase on the reverse side thereof duly executed, to the Rights Agent at the principal office of the Rights Agent, together with payment of the Purchase Price for each one one-hundredth of a Preferred Share as to which the Rights are exercised, at or prior to the earliest of (i) the close of business on July 31, 1999 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof. (b) The Purchase Price for each one one-hundredth of a Preferred Share pursuant to the exercise of a Right shall initially be $75.00, shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase duly executed, accompanied by payment of the Purchase Price for the shares to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Right Certificate in accordance with Section 9 hereof by certified check, cashier's check or money order payable to the order of the Company, the Rights Agent shall -18- thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Shares certificates for the number of Preferred Shares to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) requisition from the depositary agent depositary receipts representing such number of one one-hundredths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt, deliver such cash to or upon the order of the registered holder of such Right Certificate. (d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such -19- Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof. (e) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares or any Preferred Shares held in its treasury, the number of Preferred Shares that will be sufficient to permit the exercise in full of all outstanding Rights in accordance with this Section 7. Section 8. Cancellation and Destruction of Right ------------------------------------- Certificates. All Right Certificates surrendered for the purpose - ------------ of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Right Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Right Certificates and in such -20- case shall deliver a certificate of destruction thereof to the Company. Section 9. Availability of Preferred Shares. The -------------------------------- Company covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such Preferred Shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares. The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any Preferred Shares upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares in a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Preferred Shares upon the exercise of any Rights until any such tax shall have -21- been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such tax is due. Section 10. Preferred Shares Record Date. Each person ---------------------------- in whose name any certificate for Preferred Shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Shares represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; provided, however, that if the date of -------- ------- such surrender and payment is a date upon which the Preferred Shares transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a holder of Preferred Shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. -22- Section 11. Adjustment of Purchase Price, Number of ---------------------------------------- Shares or Number of Rights. The Purchase Price, the number of - -------------------------- Preferred Shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of Preferred Shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Company were open, he would have owned -23- upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, -------- however, that in no event shall the consideration to be paid upon - ------- the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. (ii) Subject to Section 24 of this Agreement, in the event (A) any Person shall become an Acquiring Person (other than through an acquisition described in subparagraph (iii) of this paragraph (a)) or (B) during such time as there is an Acquiring Person, there shall be any reclassification of securities (including any reverse stock split), or recapitalization or reorganization of the Company or other transaction or series of transactions involving the Company which has the effect, directly or indirectly, of increasing by more than 1% the proportionate share of the outstanding shares of any class of equity securities of the Company or any of its Subsidiaries beneficially owned by any Acquiring Person or any Affiliate or Associate thereof, each holder of a Right shall thereafter have a right to receive, upon exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of the Com- -24- pany as shall equal the result obtained by (x) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (y) 50% of the then current per share market price of the Company's Common Shares (determined pursuant to Section 11(d) hereof) on the date of the occurrence of the earlier of the events described in clauses (A) and (B) above. In the event that any Person shall become an Acquiring Person and the Rights shall then be outstanding, the Company shall not take any action which would eliminate or diminish the benefits intended to be afforded by the Rights. From and after the occurrence of the earlier of the events described in clauses (A) and (B) above, any Rights that are or were acquired or beneficially owned by any Acquiring Person (or any Associate or Affiliate of such Acquiring Person) shall be void and any holder of such Rights shall thereafter have no right to exercise such Rights under any provision of this Agreement. No Right Certificate shall be issued pursuant to Section 3 that represents Rights beneficially owned by an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof; no Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person whose Rights would be void pursuant -25- to the preceding sentence or any Associate or Affiliate thereof or to any nominee of such Acquiring Person, Associate or Affiliate; and any Right Certificate delivered to the Rights Agent for transfer to an Acquiring Person whose Rights would be void pursuant to the preceding sentence shall be cancelled. (iii) The right to buy Common Shares of the Company pursuant to Clause (A) of subparagraph (ii) of this paragraph (a) shall not arise as a result of any Person becoming an Acquiring Person through a purchase of Common Shares pursuant to a tender offer made in the manner prescribed by Section 14(d) of the Exchange Act and the rules and regulations promulgated thereunder; provided, however, that (A) such tender offer shall -------- -------- provide for the acquisition of all of the outstanding Common Shares held by any Person other than such Person and its Affiliates for cash and (B) such purchase shall cause such Person, together with all Affiliates and Associates of such Person, to be the Beneficial Owner of 85% or more of the Common Shares then outstanding. (iv) In the event that there shall not be sufficient Common Shares issued but not outstanding or authorized but unissued to permit the exercise in full of the Rights in accordance with the foregoing subparagraph -26- (ii), the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exercise of the Rights. (b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or shares having the same rights, privileges and preferences as the Preferred Shares ("equivalent preferred shares")) or securities convertible into Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into Preferred Shares or equivalent preferred shares) less than the then current per share market price of the Preferred Shares (as defined in Section 11(d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred Shares outstanding on such record date plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible -27- securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided, however, that in no event shall the -------- ------- consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. Preferred Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for the making of a distribution to all holders of the Pre- -28- ferred Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Shares) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price of the Preferred Shares on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Preferred Share and the denominator of which shall be such current per share market price of the Preferred Shares; provided, however, -------- ------- that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company to be issued upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribu- -29- tion is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) (i) For the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current per share - -------- ------- market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked -30- prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. -31- (ii) For the purpose of any computation hereunder, the "current per share market price" of the Preferred Shares shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Shares are not publicly traded, the "current per share market price" of the Preferred Shares shall be conclusively deemed to be the current per share market price of the Common Shares as determined pursuant to Section 11(d)(i) (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by one hundred. If neither the Common Shares nor the Preferred Shares are publicly held or so listed or traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. (e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, -------- ------- that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one one-millionth of a Preferred Share or one ten-thousandth of any other share or -32- security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the date of the expiration of the right to exercise any Rights. (f) If as a result of an adjustment made pursuant to Section 11(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Section 11(a) through (c), inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-hundredths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. -33- (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-hundredths of a Preferred Share (calculated to the nearest one one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number of one one-hundredths of a share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of one one-hundredths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-hundredths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of -34- Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates -35- so to be distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-hundredths of a Preferred Share issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of one one-hundredths of a Preferred Share which were expressed in the initial Right Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below one one-hundredth of the then par value, if any, of the Preferred Shares issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Preferred Shares at such adjusted Purchase Price. (1) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such -36- event the issuing to the holder of any Right exercised after such record date of the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to -------- ------- such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Preferred Shares, issuance wholly for cash of any Preferred Shares at less than the current market price, issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or issuance of rights, options or warrants referred to hereinabove in Section 11(b), hereafter made by the Company to holders of its Preferred Shares shall not be taxable to such stockholders. -37- (n) In the event that at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on the Common Shares payable in Common Shares or (ii) effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares) into a greater or lesser number of Common Shares, then in any such case (i) the number of one one-hundredths of a Preferred Share purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of one one-hundredths of a Preferred Share so purchasable immediately prior to such event by a fraction, the numerator of which is the number of Common Shares outstanding immediately before such event and the denominator of which is the number of Common Shares outstanding immediately after such event, and (ii) each Common Share outstanding immediately after such event shall have issued with respect to it that number of Rights which each Common Share outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in this Section 11(n) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. Section 12. Certificate of Adjusted Purchase Price -------------------------------------- or Number of Shares. Whenever an adjustment is made as pro- - ------------------- -38- vided in Section 11 or 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Shares or the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 25 hereof. Section 13. Consolidation, merger or Sale or Transfer ----------------------------------------- of Assets or Earning Power. In the event, directly or - -------------------------- indirectly, (a) the Company shall consolidate with, or merge with and into, any other Person, (b) any Person shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of any other Person (or the Company) or cash or any other property, or (c) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person other than the Company or one or more of its wholly-owned Subsidiaries, then, and in each such case, proper pro- -39- vision shall be made so that (i) each holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of such other Person (including the Company as successor thereto or as the surviving corporation) as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Common Shares of such other Person (determined pursuant to Section 11(d) hereof) on the date of consummation of such consolidation, merger, sale or transfer; (ii) the issuer of such Common Shares shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9 hereof) in connection with such consummation as may be nec- -40- essary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the Common Shares thereafter deliverable upon the exercise of the Rights. The Company shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Company and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement so providing. The Company shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. Section 14. Fractional Rights and Fractional Shares. -------------------------------------- (a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the -41- current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights -42- on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-hundredth of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; provided, that such agreement shall provide that -------- the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such depositary receipts. In lieu of fractional Preferred Shares that are not integral multiples of one one-hundredth of a Preferred Share, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share. For the purposes of this Section 14(b), the current market value of a Preferred Share shall be the closing price of a Preferred -43- Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above). Section 15. Rights of Action. All rights of action in ---------------- respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is spe- -44- cifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any Person subject to, this Agreement. Section 16. Agreement of Right Holders. Every holder -------------------------- of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office of the Rights Agent, duly endorsed or accompanied by a proper instrument of transfer; and (c) the Company and the Rights Agent may deem and treat the person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any -45- notations of ownership or writing on the Right Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary. Section 17. Right Certificate Holder Not Deemed a ------------------------------------- Stockholder. No holder, as such, of any Right Certificate shall - ----------- be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. -46- Section 18. Concerning the Rights Agent. The Company ---------------------------- agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. The Rights Agent shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Right Certificate or certificate for the Preferred Shares or Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, -47- verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. Section 19. Merger of Consolidation or Change of Name ----------------------------------------- of Rights Agent. Any corporation into which the Rights Agent or - --------------- any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or corporate trust business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, that such corporation would be eligible for -------- appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either -48- in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent ---------------------- undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action -49- taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. -50- (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares to be issued pursuant to this Agreement or any Right Certificate or as to whether any Preferred Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, exe- -51- cuted, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. -52- (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. Section 21. Change of Rights Agent. The Rights Agent ---------------------- or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the company shall fail to make such appointment within a -53- period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the State of New York (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of New York), in good standing, having an office in the State of New York, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it -54- hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares or Preferred Shares, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Right Certificates. ---------------------------------- Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. Section 23. Redemption. (a) The Rights may be ---------- redeemed by action of the Board of Directors pursuant to paragraph (b) of this Section 23 or by stockholder action -55- pursuant to paragraph (c) of this Section 23 and shall not be redeemed in any other manner. (b) The Board of Directors of the Company may, at its option, at any time prior to such time as any Person becomes an Acquiring Person, redeem all but not less than all the then outstanding Rights at a redemption price of $.0l per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"). The redemption of the Rights by the Board of Directors may be made effective at such time on such basis and with such conditions as the Board of Directors in its sole discretion may establish. (c) (i) In the event the Company receives an Offer from any Offeror, the Board of Directors of the Company shall call a special meeting of stockholders (the "Special Meeting") for the purpose of voting on a precatory resolution requesting the Board of Directors to accept such Offer, as such Offer may be amended or revised by the Offeror from time to time to increase the price per share in cash to be paid to holders of shares of Voting Stock (the "Resolution"). The Special Meeting shall be held on a date selected by the Board of Directors, which date shall be not less than 90 and not more than 120 days after the later of -56- (A) the date such Offer is received by the Company (the "Offer Date") and (B) the date of any meeting of stockholders already scheduled as of the Offer Date; provided, however, that if (x) -------- ------- such other meeting shall have been called for the purpose of voting on a precatory resolution with respect to another Offer and (y) the Offer Date shall be not later than fifteen days after the date such other Offer was received by the Company, then both the Resolution and such other resolution shall be voted on at such meeting and such meeting shall be deemed to be the Special Meeting. The Board of Directors shall set a date for determining the stockholders of record entitled to notice of and to vote at the Special Meeting in accordance with the Company's Certificate of Incorporation and Bylaws and with applicable law. At the Offeror's request, the Company shall include in any proxy soliciting material prepared by it in connection with the Special Meeting proxy soliciting material submitted by the Offeror; provided, however, that the Offeror shall by written agreement - -------- ------- with the Company contained in or delivered with such request have indemnified the Company against any and all liabilities resulting from any misstatements, misleading statements and omissions contained in the Offeror's proxy soliciting material and have agreed to pay the Company's incremental costs incurred as a result of including such material in the Company's proxy soliciting material. -57- Notwithstanding the foregoing, no Special Meeting shall be held from and after such time as any Person becomes an Acquiring Person, and any Special Meeting scheduled prior to such time and not theretofore held shall be cancelled. (ii) If at the Special Meeting the Resolution receives the affirmative vote of a majority of the shares of Voting Stock outstanding as of the record date of the Special Meeting, then all of the Rights shall be redeemed by such stockholder action at the Redemption Price, effective immediately prior to the consummation of any tender offer (provided that such tender offer is consummated prior to 60 days after the date of the Special Meeting) pursuant to which any Person offers to purchase all of the shares of Voting Stock held by Persons other than such Person and its Affiliates at a price per share in cash equal to or greater than the price contained in the Resolution approved at the Special Meeting; provided, however, that the Rights shall not -------- ------- be redeemed at any time from and after such time as any Person becomes an Acquiring Person. (iii) Nothing contained in this paragraph (c) shall be deemed to be in derogation of the obligation of the Board of Directors of the Company to exercise its fiduciary duty. Without limiting the foregoing, nothing contained herein shall be construed to suggest or imply that the Board -58- of Directors shall not be entitled to reject any Offer, or to recommend that holders of shares of Voting Stock reject any tender offer, or to take any other action (including, without limitation, the commencement, prosecution, defense or settlement of any litigation and the submission of additional or alternative Offers or other proposals to the Special Meeting) with respect to any Offer or any tender offer that the Board of Directors believes is necessary or appropriate in the exercise of such fiduciary duty. (iv) Nothing in this paragraph (c) shall be construed as limiting or prohibiting the Company or any Offeror from proposing or engaging, at any time, in any acquisition, disposition or other transfer of any securities of the Company, any merger or consolidation involving the Company, any sale or other transfer of assets of the Company, any liquidation, dissolution or winding-up of the Company, or any other business combination or other transaction, or any other action by the Company or such Offeror; provided, however, that the holders of -------- ------- Rights shall have the rights set forth in this Agreement with respect to any such acquisition, disposition, transfer, merger, consolidation, sale, liquidation, dissolution, winding-up, business combination, transaction or action. -59- (d) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights pursuant to paragraph (b) of this Section 23, or upon the effectiveness of the redemption of the Rights pursuant to paragraph (c) of this Section 23, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; provided, -------- however, that the failure to give, or any defect in, any such - ------- notice shall not affect the validity of such redemption. Within 10 days after such action of the Board of Directors ordering the redemption of the Rights pursuant to paragraph (b) or the effectiveness of the redemption of the Rights pursuant to paragraph (c), as the case may be, the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or -60- Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares prior to the Distribution Date. Section 24. Exchange. (a) The Board of Directors of -------- the Company may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 11(a)(ii) hereof) for Common Shares at an exchange ratio of one Common Share per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Shares then outstanding. -61- (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; provided, however, that the failure -------- ------- to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 11(a)(ii) hereof) held by each holder of Rights. -62- (c) In any exchange pursuant to this Section 24, the Company, at its option, may substitute Preferred Shares (or equivalent preferred shares, as such term is defined in Section 11(b) hereof) for Common Shares exchangeable for Rights, at the initial rate of one one-hundredth of a Preferred Share (or equivalent preferred share) for each Common Share, as appropriately adjusted to reflect adjustments in the voting rights of the Preferred Shares pursuant to the terms thereof, so that the fraction of a Preferred Share delivered in lieu of each Common Share shall have the same voting rights as one Common Share. (d) In the event that there shall not be sufficient Common Shares or Preferred Shares issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional Common Shares or Preferred Shares for issuance upon exchange of the Rights. (e) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional Common Shares would otherwise be issu- -63- able an amount in cash equal to the same fraction of the current market value of a whole Common Share. For the purposes of this paragraph (e), the current market value of a whole Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24. Section 25. Notice of Certain Events. (a) In case the ------------------------ Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Shares or to make any other distribution to the holders of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), (iv) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or -64- winding up of the Company, or (vi) to declare or pay any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares), then, in each such case, the Company shall give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares and/or Preferred Shares, whichever shall be the earlier. (b) In case any of the events set forth in Section 11(a)(ii) hereof shall occur, then the Company shall as soon as practicable thereafter give to each holder of a Right -65- Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof. Section 26. Notices. Notices or demands authorized by ------- this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: PHILLIPS PETROLEUM COMPANY Phillips Building Bartlesville, OK 74004 Attention: Corporate Secretary Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: MANUFACTURERS HANOVER TRUST COMPANY 450 West 33rd Street New York, New York 10001 Attention: Vice President - Administration -66- Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. Supplements and Amendments. The Company -------------------------- may from time to time supplement or amend this Agreement without the approval of any holders of Right Certificates in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions with respect to the Rights which the Company may deem necessary or desirable, any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent; provided, -------- however, that from and after such time as any Person becomes an - ------- Acquiring Person, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights. Without limiting the foregoing, the Company may at any time prior to such time as any Person becomes an Acquiring Person amend this Agreement to lower the thresholds set forth in Sections l(a) and 3(a) hereof from 20% to not less than the greater of (i) the least percentage greater than the largest percentage of the outstanding Common Shares then -67- known by the Company to be beneficially owned by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan) and (ii) 10%. Section 28. Successors. All the covenants and ---------- provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Benefits of this Agreement. Nothing in -------------------------- this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holder of the Right Certificates (and, prior to the Distribution Date, the Common Shares). Section 30. Severability. If any term, provision, ------------ covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall -68- remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 31. Governing Law. This Agreement and each ------------- Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 32. Counterparts. This Agreement may be ------------ executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 33. Descriptive Headings. Descriptive -------------------- headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. -69- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. PHILLIPS PETROLEUM COMPANY Attest: By /s/ G.C. Meese By /s/ William G. Paul -------------------------- ------------------------------- Name: G.C. Meese Name: William G. Paul Title: Secretary Title: Senior Vice President and General Counsel MANUFACTURERS HANOVER TRUST COMPANY Attest: By /s/ Patricia A. Hoffman By /s/ Lawrence E. Dennedy -------------------------- ------------------------------- Name: Patricia A. Hoffman Name: Lawrence E. Dennedy Title: Asst. Vice President Title: Vice President -70- Exhibit A --------- FORM of CERTIFICATE OF DESIGNATIONS of SERIES B JUNIOR PARTICIPATING PREFERRED STOCK of PHILLIPS PETROLEUM COMPANY (Pursuant to Section 151 of the Delaware General Corporation Law) ----------------------------- PHILLIPS PETROLEUM COMPANY, a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 151 of the General Corporation Law at a meeting duly called and held on July 10, 1989: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Certificate of Incorporation, the Board of Directors hereby creates a series of Preferred Stock, par value $1.00 per share (the "Preferred Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows: Series B Junior Participating Preferred Stock: Section 1. Designation and Amount. The shares of ---------------------- such series shall be designated as "Series B Junior Participating Preferred Stock" (the "Series B Preferred Stock") and the number of shares constituting the Series B Preferred Stock shall be 5,000,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no -------- decrease shall reduce the number of shares of series B Preferred Stock to a number less than the A-1 number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series B Preferred Stock. Section 2. Dividends and Distributions. --------------------------- (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series B Preferred Stock with respect to dividends, the holders of shares of Series B Preferred Stock, in preference to the holders of Common Stock, par value $1.25 per share (the "Common Stock"), of the Corporation, and of any other junior 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 first 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 B Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 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 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 B Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series B 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 Common Stock outstanding immediately A-2 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 Corporation shall declare a dividend or distribution on the Series B Preferred Stock as provided in paragraph (A) of this Section 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 $1 per share on the Series B 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 B Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, 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 B 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 B 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 B Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of ------------- Series B Preferred Stock shall have the following voting rights: A-3 (A) Subject to the provision for adjustment hereinafter set forth, each share of Series B Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series B 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, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series B Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, 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 taking any corporate action. Section 4. Certain Restrictions. -------------------- (A) Whenever quarterly dividends or other dividends or distributions payable on the Series B Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series B Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liqui- A-4 dation, dissolution or winding up) to the Series B Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Preferred Stock, except dividends paid ratably on the Series B Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series B Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series B Preferred Stock, or any shares of stock ranking on a parity with the Series B Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series B ----------------- Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired A-5 and cancelled 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 subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. -------------------------------------- Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock unless, prior thereto, the holders of shares of Series B 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, provided that the holders of shares of Series B Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Preferred Stock, except distributions made ratably on the Series B Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series B Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence 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 7. Consolidation, Merger, etc. In case the --------------------------- Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Com- A-6 mon Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series B Preferred Stock shall at the same time be similarly exchanged or changed into 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 Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series B 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. No Redemption. The shares of Series B ------------- Preferred Stock shall not be redeemable. Section 9. Rank. The Series B Preferred Stock shall ---- rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. Section 10. Amendment. The Certificate of --------- Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series B Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series B Preferred Stock, voting together as a single class. A-7 IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of the Corporation by its Chairman of the Board and attested by its Secretary this day of , ---- ----------- 1989. ------------------------------- Chairman of the Board Attest: - -------------------- Secretary A-8 Exhibit B --------- Form of Right Certificate Certificate No. R- Rights --- NOT EXERCISABLE AFTER JULY 31, 1999 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.Ol PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. Right Certificate PHILLIPS PETROLEUM COMPANY This certifies that , or registered ------------------ assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of July 10, 1989 (the "Rights Agreement"), between PHILLIPS PETROLEUM COMPANY, a Delaware corporation (the "Company"), and MANUFACTURERS HANOVER TRUST COMPANY (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., New York City time, on July 31, 1999 at the principal office of the Rights Agent, or at the office of its successor as Rights Agent, one one-hundredth of a fully paid non-assesable share of Series B Junior Participating Preferred Stock, par value $1.00 per share (the "Preferred Shares"), of the Company, at a purchase price of $75.00 per one one-hundredth of a Preferred Share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate (and the number of one one-hundredths of a Preferred Share which may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of July 31, 1989, based on the Preferred Shares as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of one one-hundredths of a Preferred Share which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned officer of the Rights Agent. This Right Certificate, with or without other Right Certificates, upon surrender at the principal office of the Rights Agent, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Preferred Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (i) may be redeemed by the Company at a redemption price of $.0l per Right or (ii) may be exchanged in whole or in part for Preferred Shares or shares of the Company's Common Stock, par value $1.25 per share. No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any B-2 corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of , 19 . - --------------- -- ATTEST: PHILLIPS PETROLEUM COMPANY By - ----------------------- ---------------------------- Countersigned: MANUFACTURERS HANOVER TRUST COMPANY By --------------------------------- Authorized Signature B-3 Form of Reverse Side of Right Certificate FORM OF ASSIGNMENT ------------------ (To be executed by the registered holder if such holder desires to transfer the Right Certificate.) FOR VALUE RECEIVED ------------------------------------ hereby sells, assigns and transfers unto ------------------------ - ----------------------------------------------------------------- (Please print name and address of transferee) - ----------------------------------------------------------------- this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint Attorney, to transfer the within ----------------------- Right Certificate on the books of the within-named Company, with full power of substitution. Dated: , 19 ---------------------- -- ------------------------------ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. - ----------------------------------------------------------------- The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ------------------------------ Signature - ----------------------------------------------------------------- B-4 Form of Reverse Side of Right Certificate -- continued FORM OF ELECTION TO PURCHASE ----------------------------- (To be executed if holder desires to exercise the Right Certificate.) To PHILLIPS PETROLEUM COMPANY The undersigned hereby irrevocably elects to exercise Rights represented by this - ----------------------------- Right Certificate to purchase the Preferred Shares issuable upon the exercise of such Rights and requests that certificates for such Preferred Shares be issued in the name of: Please insert social security or other identifying number - ----------------------------------------------------------------- (Please print name and address) - ----------------------------------------------------------------- If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number - ----------------------------------------------------------------- (Please print name and address) - ----------------------------------------------------------------- Dated: , 19 ----------------- -- ------------------------------ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. B-5 Form of Reverse Side of Right Certificate -- continued - ----------------------------------------------------------------- The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ------------------------------ Signature - ----------------------------------------------------------------- NOTICE ------ The signature in the foregoing Forms of Assignment and Election must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Assignment or Election to Purchase will be honored. B-6 Exhibit C --------- SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES On July 10, 1989, the Board of Directors of PHILLIPS PETROLEUM COMPANY (the "Company") declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, par value $1.25 per share (the "Common Shares"), of the Company. The dividend is payable on July 31, 1989 (the "Record Date") to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock, par value $1.00 per share (the "Preferred Shares"), of the Company at a price of $75.00 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Manufacturers Hanover Trust Company, as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 20% or more of the outstanding Common Shares or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20% or more of such outstanding Common Shares (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Share certificates outstanding as of the Record Date, by such Common Share certificate with a copy of this Summary of Rights attached thereto. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Common Shares. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Share certificates issued after the Record Date, upon transfer or new issuance of Common Shares will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for Common Shares, outstanding as of the Record Date, even without such notation or a copy of this Summary of Rights being attached thereto, will also constitute the transfer o the Rights associated with the Common Shares represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on July 31, 1999 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed by the Company, in each case, as described below. The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then current market price of the Preferred Shares or (iii) upon the distribution to holders of the Preferred Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Preferred Shares) or of subscription rights or warrants (other than referred to above). The number of outstanding Rights and the number of one one-hundredths of a Preferred Share issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the Common Shares or a stock dividend on the Common Shares payable in Common Shares or subdivisions, consolidations or combinations of the Common Shares occurring, in an such case, prior to the Distribution Date. Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per Common Share. In the event of liquidation, the holders of the Preferred Shares will be entitled to a minimum preferential C-2 liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per Common Share. Each Preferred Share will have 100 votes, voting together with the Common Shares. Finally, in the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Share will be entitled to receive 100 times the amount received per Common Share. These rights are protected by customary antidilution provisions. Because of the nature of the Preferred Shares' dividend, liquidation and voting rights, the value of the one one-hundredth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that (i) any person becomes an Acquiring Person (unless such person first acquires 20% or more of the outstanding Common Shares by a purchase pursuant to a tender offer for all of the Common Shares for cash, which purchase increases such person's beneficial ownership to 85% or more of the outstanding Common Shares) or (ii) during such time as there is an Acquiring Person, there shall be a reclassification of securities or a recapitalization or reorganization of the Company or other transaction or series of transactions involving the Company which has the effect of increasing by more than 1% the proportionate share of the outstanding shares of any class of equity securities of the Company or any of its subsidiaries beneficially owned by the Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right. At any time after the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 20% or more of the outstanding Common Shares and prior to the acquisition by such person or group of 50% or more of the outstanding Common Shares, the Board of C-3 Directors of the Company may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one Common Share, or one one-hundredth of a Preferred Share (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional Preferred Shares will be issued (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts) and in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Shares on the last trading day prior to the date of exercise. At any time prior to the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 20% or more of the outstanding Common Shares, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.0l per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time on such basis and with such conditions as the Board of Directors in its sole discretion may establish. In addition, if a bidder who does not beneficially own more than 1% of the Common Shares (and who has not within the past year owned in excess of 1% of the Common Shares and, at a time he held such greater than 1% stake, disclosed, or caused the disclosure of, an intention which relates to or would result in the acquisition or influence of control of the Company) proposes to acquire all of the Common Shares (and all other shares of capital stock of the Company entitled to vote with the Common Shares in the election of directors or on mergers, consolidations, sales of all or substantially all of the Company's assets, liquidations, dissolutions or windings up) for cash at a price which a nationally recognized investment banker selected by such bidder states in writing is fair, and such bidder has obtained written financing commitments (or otherwise has financing) and complies with certain procedural requirements, then the Company, upon the request of the bidder, will hold a special stockholders meeting to vote on a resolution requesting the Board of Directors to accept the bidder's proposal. If a majority of the outstanding shares entitled to vote on the proposal vote in favor of such resolution, then for a period of 60 days after such meeting the Rights will be automatically redeemed at the Redemption C-4 Price immediately prior to the consummation of any tender offer for all of such shares at a price per share in cash equal to or greater than the price offered by such bidder; provided, however, -------- ------- that no redemption will be permitted or required after the acquisition by any person or group of affiliated or associated persons of beneficial ownership of 20% or more of the outstanding Common Shares. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, including an amendment to lower the threshold for exercisability of the Rights from 20% to not less than the greater of (i) the least percentage greater than the largest percentage of the outstanding Common Shares then known to the Company to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%, except that from and after such time as any person or group of affiliated or associated persons becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated July , 1989. A copy -- of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference. C-5 EXHIBIT 2 news release - ----------------------------------------------------------------- PHILLIPS PETROLEUM COMPANY BARTLESVILLE, OKLAHOMA 74004 CORPORATE AFFAIRS Phillips Adopts New Rights Plan; Redeems Existing Rights July 10, 1989 FOR IMMEDIATE RELEASE: - --------------------- BARTLESVILLE, Okla. -- The board of directors of Phillips Petroleum Company today authorized a new rights plan and declared a distribution of one "preferred share purchase right" for each outstanding share of the company's common stock. The new rights will be distributed to stockholders of record at the close of business on July 31, 1989. The rights provide additional protection for shareholders against abusive takeover tactics. The board also authorized the redemption of the company's existing stock purchase rights which were established in July 1986. As a result, rights holders of record at the close of business on July 31, 1989 will receive $.08 1/3 for each right which is attached to each share of the company's common stock. The rights will be exercisable only if a person or group acquires 20 percent or more of the company's common stock or announces a tender offer which would result in ownership by a person or qroup of 20 percent or more of the common stock. The rights enable holders to acquire additional shares of the company's common stock or purchase the stock of the acquiring company at a discount, depending on circumstances. # # # CONTACT: Dan Harrison 918/661-5204 661-1215 EX-10 4 Exhibit 10(a) AGREEMENT --------- Agreement dated December 23, 1984 among the, persons and entities listed on Schedule A hereto (the "Mesa Entities") and Phillips Petroleum Company (the "Company"), 1. The Company will propose a recapitalization (the "Recapitalization") of its Common Stock, $1.25 par value (the "Shares"), under which (a) 38% of the presently outstanding Shares will be exchanged for debt securities of the Company ("Debt Securities") on the basis of $60 aggregate principal amount of Debt Securities for each Share; (b) the certificate of incorporation of the Company will be amended to provide for a classified board of directors and such other customary provisions as the Company may determine; (c) the Company will create an Employee Stock Ownership Plan and sell to such Plan not more than 32 million Shares at the market price thereof; and (d) within the twelve-month period following the exchange referred to in paragraph l(a), the Company will spend not less than $1 billion to purchase Shares in the open market, provided that no such purchases need be made when the market price of the Shares is more than $50 per Share; so long as the market price of the Shares is less than $50 per Share, the Company will purchase Shares pursuant to this paragraph l(d) as rapidly as practical under then market conditions. 2. The Company will use its best efforts (i) to submit the Recapitalization to its stockholders and obtain their approval an soon an practical, (ii) to register under the Securities Act of 1933 the securities to be issued in the Recapitalization, and (iii) to consummate the Recapi- talization. 3. (a) The Company will fix the terms of the Debt Securities, based on the advice of Morgan Stanley & Co. Incorporated and The First Boston Corporation (the "Investment Bankers"), immediately prior to the time the Proxy Statement relating to the meeting of the Company's stockholders called to approve the Recapitalization (the "Proxy Statement") is mailed so that the Debt Securities, in the opinion of the Investment Bankers, would on such date have an aggregate market value equal to their aggregate principal amount on the assumptions that the Recapitalization was completed and the Debt Securities were fully and widely distributed among investors, were freely transferable and were subject to only a normal trading market. (b) While the actual trading prices of the Debt Securities and Shares in the period immediately following the Recapitalization cannot be predicted (because, among other factors, the prices at which Shares will be purchased and the timing of such purchases pursuant to paragraph l(d) cannot now be determined and future market conditions cannot now be known), the Company believes, after consultation with the Investment Bankers, that, assuming (i) the Recapitalization is effected as described in paragraph 1, (ii) the Debt Securities have an aggregate market value equal to their aggregate principal amount, and (iii) current market and business conditions on the date of this Agreement, the Debt Securities and Shares should be worth approximately $53 per presently outstanding Share. 4. In the event that (a) the Recapitalization is not approved by the stockholders of the Company or (b) the Exchange Date (as defined in paragraph 6) shall not have occurred on or before April 1, 1985, the Mesa Entities will have the right, for a period of 30 days following (x) the date of the Company's stockholder meeting with respect to the Recapitalization, if clause (a) applies or (y) April 1, 1985, if clause (b) applies, to sell all, but not less than all, of their Shares to the Company for $53 per Share in cash. 5. The Mesa Entities may elect to exercise their right, pursuant to paragraph 4 hereof, to sell their Shares to the Company upon five days written notice to the Company. At the closing of such sale, the Mesa Entities shall deliver to the Company certificates representing all of their Shares, in proper form for transfer, duly endorsed in blank, and the Company shall transfer to an account at a New York City bank specified by the Mesa Entities immediately available funds in an amount equal to $53 times the number of Shares to be transferred. 6. On the date of the exchange of Shares for the Debt Securities as provided in paragraph l(a) (the "Exchange Date"), the Mesa Entities shall agree to sell to the Investment Bankers for public distribution or private placement pursuant to an agreement in substantially the form attached as Exhibit A hereto, and the Company shall cause the Investment Bankers to agree to purchase for public distribution or private placement, all of the Debt Securities and Voting Securities (as hereinafter defined) then held by the Mesa -2- Entities for an aggregate amount equal to the then market price thereof, but not less than the product of $53 times the number of Shares held by the Mesa Entities immediately prior to the Exchange Date; provided, however, that, if in the opinion of the Investment Bankers, the public distribution or private placement of any of such securities would result in the disruption of the trading markets for any of such securities or otherwise adversely affect the Company, then the Investment Bankers may request the Company to purchase (or request the Company to cause another person or persons to purchase) from them, and the Company shall purchase (or cause such other person or persons to purchase) from the Investment Bankers such securities. At the closing of such sale, the Mesa Entities shall deliver to the Investment Bankers the certificates representing such securities, in proper form for transfer, duly endorsed in blank, and the Investment Bankers shall transfer to an account at a New York City bank specified by the Mesa Entities immediately available funds in an amount equal to the purchase price therefor. The Company agrees to issue and deliver to the Mesa Entities certificates for all such Debt Securities prior to the closing contemplated by the agreement referred to in the first sentence of this paragraph 6. 7. Each of the Mesa Entities represents and warrants to the Company that: such Mesa Entity is duly authorized to execute, deliver and perform this Agreement; this Agreement has been duly executed by such Mesa Entity, is a valid and binding agreement of such Mesa Entity and is en- forceable against such Mesa Entity in accordance with its terms; at the closing effected pursuant to paragraph 5 or 6, such Mesa Entity will convey good title to the securities being sold, free and clear of all liens, encumbrances, security interests and claims other than any created by the Company; Annex I hereto accurately sets forth all the voting securities and direct or indirect rights or options to acquire voting securities of the Company (together, the "Voting Securities") owned "beneficially (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, by such Mesa Entity or any of its "affiliates" or "associates" (as those terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934) on the date hereof. 8. The Company represents and warrants that: it is duly authorized to execute, deliver and perform this Agreement; and this Agreement has been duly executed by the Company, is a valid and binding agreement of the Company and is enforceable against the Company in accordance with its terms. As of the date hereof approximately 154 million Shares are issued and outstanding. -3- 9. Each of the Mesa Entities agrees that, for a period of fifteen years after the data hereof, without the Company's prior written consent, he or it will not and he or it will cause each of his or its affiliates, associates and immediate family members to not, directly or indirectly, alone or in concert with others, (a) acquire, offer to acquire, or agree to acquire, by purchase, gift or otherwise, any Voting Securities of the Company or make any proposal for or offer of any extraordinary transaction involving the Company (other than as specifically contemplated by this Agreement), (b) make, or in any way participate in, any "solicitation" of "proxies" (as such terms are used in the proxy rules of the Securities and Exchange Commission), or seek to advise or influence any person or entity with respect to the voting of, or giving of consents with respect to, any Voting Securities of the Company, or (c) otherwise act to seek to control or influence the management, board of directors, policies or affairs of the Company. The Company agrees that, for a period of fifteen years after the date hereof, without the prior written consent of Mesa Petroleum Co. ("MPC"), it will not and will cause each of its affiliates and associates to not, directly or indirectly, alone or in concert with others, take any of the actions specified in clause (a), (b) or (c) of the preceding sentence with respect to MPC. The restrictions contained in this paragraph 9 shall not inure to the benefit of (i) any corporation or other entity (other than the Company or the Mesa Entities) that beneficially owns any Voting Securities of the Company or MPC, as the case may be, or (ii) the surviving corporation or other entity following any merger, consolidation or similar reorganization of the Company or MPC, as the case may be, except that such restrictions shall inure to the benefit of any such surviving corporation or other entity, if immediately following the consummation of such merger, consolidation or similar reorganization, the persons who immediately prior thereto were stockholders of the Company or MPC, an the case may be, own securities representing at least 5O% of the aggregate voting power and 50% of the common equity of such surviving corporation or other entity. 10. Each party hereto will (to the extent he or it is a party thereto) dismiss without prejudice the lawsuits listed in Annex II hereto. Each Mesa Entity will (to the extent he or it is a party thereto) dismiss without prejudice all lawsuits in which he or it is a party which relate to state takeover statutes or similar matters. Each party hereto will use his or its best efforts to seek to cause the dismissal without prejudice of the lawsuits listed in Annex III hereto and to prevent the institution of any lawsuit or proceeding by any other person or entity in which any party here- -4- to or any advisor thereof may be or become a party which relates to or arises from (i) the acquisition or proposed acquisition of Voting Securities of the Company by the Mesa Entities, (ii) the proposal of Mesa Partners to make a tender offer for Shares (the Tender Offer") and to solicit consents (the "Consent Solicitation") from the holders of Shares, (iii) any proposal by the Mesa Entities to acquire control of the Company (the matters referred to in clauses (i), (ii) and (iii) being hereinafter referred to as the "Transaction") or any action taken by the Company in response or otherwise relating thereto, and to cause the dismissal without prejudice of any such lawsuit or proceeding which is instituted after the date hereof. The Company, on the one hand, and each other party hereto, on the other hand, hereby releases and discharges the other (and such other's present and former directors, officers, employees, agents, attorneys, parents, predecessors, successors, assigns, subsidiaries and affiliates) from all manner of claims, actions, causes of action or suits, at law or in equity, which each now has or hereafter can, shall, or may have by reason of any matter, cause or thing whatsoever from the beginning of the world to the date of this Agreement, arising out of, in connection with, or in any way related to, the Transaction and any and all actions taken by the Company in response or otherwise relating thereto, excepting only any action, cause of action or suit arising by virtue of this Agreement. The Mesa Entities, on the one hand, and the Company, on the other hand, agree not to pursue with any federal or state governmental or regulatory authority any claim or complaint against the other relating to or arising out of the Transaction or any and all actions taken by the Company in response or otherwise relating thereto. 11. The Company agrees to pay the actual expenses (certified as provided below), including, without limitation, legal fees and expenses, bank fees and expenses, printing expenses, advisory fees and expenses, travel expenses and the net cost of carrying the Shares referred to in Annex I, paid by the Mesa Entities to third parties in connection with the Transaction, including any litigation relating thereto (the "Expenses"), up until the earlier of the Exchange Date or the closing pursuant to paragraph 5; provided that the Company shall not be obligated by this paragraph to pay more than $25 million. The Company shall pay $12.5 million of the Expenses on January 4, 1985 promptly after receipt of a certificate of the principal financial officer of MPC ("Certificate") certifying the amount of the Expenses incurred to that date and the balance of the Expenses on the earlier of the Exchange Date or the closing pursuant to paragraph 5 promptly after receipt of a Certificate certifying the remaining amount of the Expenses. -5- 12. Each Mesa Entity agrees to vote all the Shares which he or it beneficially owns in favor of the Recapitalization. The parties shall issue the press release annexed hereto and no party shall make any statement that is not supportive of the Recapitalization. 13. Each of the Mesa Entities, on the one hand, and the Company, on the other hand, acknowledges that the other would not have an adequate remedy at law for money damages in the event that any or all of the covenants of any or all of the Mesa Entities, on the one hand, or of the Company, on the other hand, in this Agreement were not performed in accordance with its terms and therefore agrees that such other party shall be entitled to specific enforcement of such covenants in addition to any other remedy to which it may be entitled, at law or in equity. 14. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware. Each party hereto hereby agrees that any action, cause of action or suit which it may hereafter commence by virtue of this Agreement may only be brought in a federal or state court located in the State of Delaware, and each party hereto agrees to submit to the jurisdiction of any such court in any such action, cause of action or suit which may be commenced by any other party hereto. 15. This Agreement may be executed in two or more counterparts which together shall constitute a single agreement. PHILLIPS PETROLEUM COMPANY By /s/ W.C. Douce -------------------------- -6- MESA PARTNERS: By: Mesa Asset Co., General Partner By /s/ David H. Batchelder ----------------------------- By: Cy-7, Inc., General Partner By /s/ Joel L. Reed ----------------------------- and By: Jack-7, Inc., General Partner By /s/ Joel L. Reed ----------------------------- MESA PETROLEUM CO. By /s/ David H. Batchelder ----------------------------- MESA ASSET CO. By /s/ David H. Batchelder ----------------------------- WAGNER & BROWN WAGNER & BROWN II and BROWN & WAGNER By: Cyril Wagner, Jr., General Partner By: Jack E. Brown, General Partner By /s/ Joel L. Reed ----------------------------- Joel L. Reed, Attorney-in fact -7- JACK-7, INC. By /s/ Joel L. Reed ----------------------------- CY-7, INC. By /s/ Joel L. Reed ----------------------------- Jack E. Brown, in his individual capacity Cyril Wagner, Jr., in his individual capacity By /s/ Joel L. Reed ----------------------------- Joel L. Reed, Attorney-in-fact /s/ T. Boone Pickens, Jr. ------------------------------- T. Boone Pickens, Jr., in his individual capacity -8- SCHEDULE A MESA ENTITIES Mesa Partners Mesa Petroleum Co. Mesa Asset Co. Wagner & Brown Wagner & Brown II Brown & Wagner Jack-7, Inc. Cy-7, Inc. Jack E. Brown Cyril Wagner, Jr. T. Boone Pickens, Jr. ANNEX I ------- Mesa Partners owns 8,898,800 Shares. No other Mesa Entity owns any Voting Securities of the Company. ANNEX II -------- Mesa Partners v. Phillips Petroleum Company, Civil Action No. 7872 (Del. Ch.) Mesa Partners v. Phillips Petroleum Company and Charles M. Oberly, III, Civil Action No. 84-718 (LON) (D. Del.) Phillips Petroleum Company v. T. Boone Pickens, Jr., Mesa Petroleum Co., Mesa Partners, Mesa Asset Co., CY-7, Inc., Jack-7, Inc., Wagner & Brown, Cyril Wagner, Jr., Jack E. Brown and Harley N. Hotchkiss, Civil Action No. 84-724 (LON) (D. Del.) Mesa Partners v. Phillips Petroleum Company, C. Raymond Patton Jr., Hamp Baker, Norma Eagleton, James Townsend and Michael C. Turpen, No. CIV-84-3217-T (W.D. Okla) T. Boone Pickens, Jr., and Mesa Petroleum Co. v. Phillips Petroleum Company, William C. Douce and Bill Kish, No. 65,386-A (47th Dist. Ct., Potter Co., Tex.) Phillips Petroleum Company v. Mesa Petroleum Co., Mesa Partners, Mesa Asset Co., Cy-7, Inc. and Jack-7, Inc., No. C84-775 (Dist. Ct., Washington Co., Okla.) Mesa Partners v. Phillips Petroleum Company, Civil Action No. 7883 (Del. ANNEX III --------- Mesa Partners v. State of Louisiana through Department of Natural Resources by B. Jim Porter and The Honorable Doug Moreau, District Judge, 19th Judicial District court, Civil Action No. 84-1194 (M.D. La.) State of Louisiana, through Department of Natural Resources by B. Jim Porter v. Mesa Partners, through Mesa Petroleum Company and Wagner and Brown, Docket No. 283825 (19th Jud. Dist. Ct., E. Baton Rouge, La.) Mesa Partners v. Downing Propane & Oil, Inc., Benton Oil Company and Judge W.M. Thomas, Civil Action No. 84-C-1006E (N.D. Okla.) Downing Propane & Oil, Inc. and Benton Oil Co., individually and on behalf of a class of persons similarly situated v. Mesa Petroleum Co., Mesa Partners, Mesa Asset Co., CY-7, Inc. and Jack-7, Inc., No. C-84-584 (Dist. Ct., Mayes Co., Okla.) Exhibit A --------- Form of Agreement with Investment Bankers Agreement dated , 1985 among Mesa Partners, a Texas general partnership (the "Partnership"), Morgan Stanley & Co Incorporated, a Delaware corporation ("Morgan Stanley"), and The First Boston Corporation, a Massachusetts corp- oration ("First Boston" and together with Morgan Stanley, the "Purchasers"). WHEREAS, immediately prior to the Recapitalization referred to below, the Partnership owned not more than 8,898,800 shares of Common Stock, $1.25 par value ("Shares"), of Phillips Petroleum Corporation ("Phillips"); WHEREAS, Phillips has implemented a recapitali- zation plan (the "Recapitalization") as contemplated by an Agreement dated December 23, 1984, among the Company and certain other parties including the Partnership (the "Recap- italization Agreement") pursuant to which a portion of the previously outstanding Shares were exchanged for debt securities of Phillips ("Debt Securities"); NOW THEREFORE, in consideration of the promises contained in this Agreement and other good and valuable consideration receipt of which is acknowledged, the parties to this Agreement agree as follows: 1. The Partnership agrees to sell to the Pur- chasers, and each of the Purchasers severally agrees to purchase from the Partnership, one-half of:(a) all Debt Securities the Partnership received in exchange for Shares pursuant to the Recapitalization and (b) all shares owned by the Partnership which were not exchanged for Debt Securi- ties in the Recapitalization, for an aggregate cash price equal to the higher of (i) the aggregate market price of such Debt Securities and Shares at the close of trading on the New York Stock Exchange, Inc. on the day (the "Issue Date") the Debt Securities were originally issued pursuant to paragraph 1(a) of the Recapitalization Agreement and (ii) the product of $53 times the number of Shares held by the Partnership immediately prior to the effectiveness of the Recapitalization. 2. The closing of the sale and purchase of Debt Securities and Shares pursuant to Paragraph 1 (the "Resale Closing") shall occur on the first business day after the Issue Date. At the Resale Closing, the Partnership shall deliver (or cause to be delivered) to the Purchasers certifi- cates representing the Debt Securities and Shares to be purchased, in proper form for transfer, duly endorsed in blank; and the Purchasers shall transfer, to an account at a New York City bank specified by the Partnership, immediately available funds in an amount equal to the full purchase price for such Debt Securities and Shares pursuant to Paragraph 1. 3. The Purchasers shall acquire the Debt Securi- ties and Shares covered by this Agreement for public distri- bution or private placement; provided however, that, if in the opinion of the Purchasers, the public distribution or private placement of any of such securities would result in the disruption of the trading markets for any of such securities or otherwise adversely affect Phillips, then the Purchasers may request Phillips to purchase (or request Phillips to cause another person or persons to purchase) such securities from them. 4. The Partnership represents and warrants to the Purchasers that it is duly authorized to execute, deliver and perform this Agreement; this Agreement has been duly executed by the Partnership, is a valid and binding agreement of the Partnership and is enforceable against the Partnership in accordance with its terms; at the Resale Closing the Partnership will convey to the Purchasers good title to the Debt Securities and Shares being sold, free and clear of all liens, encumbrances, security interests and claims other than any created by Phillips; and none of the other Mesa Entities (as defined in the Recapitalization Agreement) owns any Shares. 5. Each of the Purchasers severally represents and warrants to the Partnership that it is duly authorized to execute, deliver and perform this Agreement; and this Agree- ment is a valid and binding agreement of it, enforceable against it in accordance with its terms. 6. This Agreement shall be governed by and con- strued in accordance with the internal laws of the State of New York. 7. This Agreement nay be executed in two or more counterparts which together shall constitute a single agreement. MESA PARTNERS By: Mesa Asset Co. General Partner By: -------------------------- By: CY-7, Inc. General Partner By: -------------------------- By: Jack-7, Inc. General Partner By: -------------------------- MORGAN STANLEY & CO. INCORPORATED By: ------------------------------ Managing Director THE FIRST BOSTON CORPORATION By: ------------------------------ Managing Director EX-10 5 Exhibit 10(b) December 23, 1984 Phillips Petroleum Company Phillips Building Bartlesville, OK 74004 Attn: William C. Douce, Chairman of the Board and Chief Executive Officer Gentlemen: Each of the undersigned (the "Mesa Entities") hereby agrees, on the one hand, and by acceptance hereof Phillips Petroleum Company (the "Company") hereby agrees, on the other hand, that, subject to his or its own right to pursue his or its own legitimate business objectives independently and in good faith, (i) he or it and his or its affiliates will continue to do business with the other and with the other's directors, affiliates and associates and the affiliates and associates of the other's directors (collectively, "Related Parties") in the ordinary course and that the events relating to the Mesa Entities' attempt to acquire control of the Company and the Company's response thereto that have preceded this letter agreement will not be taken into account in making decisions with respect to business relations between them and (ii) he or it will not, and will not permit his or its affiliates to, directly or indirectly, take any action to, or encourage any other person or entity to, interfere with or adversely affect the business activities, contractual relationships or business opportunities of the other and the other's Related Parties. This letter agreement shall be construed independ- ently of, and any breach hereof shall not affect any obligation of any party under, the separate agreement between us dated the date hereof. Such obligations under said separate agreement shall remain in full force and effect despite any claimed breach of this letter agreement. This letter agreement shall be governed and construed in accordance with the laws of the State of Delaware. Any actions, causes of action or suits which may hereafter be commenced by virtue of this letter agreement may only be brought in a federal or state court located in the State of Delaware and each party hereto agrees to submit to the jurisdiction of any such court in any such action, cause of action or suit which may be commenced by any other party hereto. This letter agreement may be executed in two or more counterparts which together shall constitute a single agreement. Very truly yours, MESA PARTNERS: By: Mesa Asset Co., General Partner By /s/ David H. Batchelder -------------------------------- By: Cy-7. Inc., General Partner By /s/ Joel L. Reed -------------------------------- and By: Jack-7, Inc., General Partner By /s/ Joel L. Reed -------------------------------- MESA PETROLEUM CO. By /s/ David H. Batchelder -------------------------------- MESA ASSET CO. By /s/ David H. Batchelder -------------------------------- -2- WAGNER & BROWN WAGNER & BROWN II and BROWN & WAGNER By: Cyril Wagner, Jr., General Partner By: Jack E. Brown, General Partner By /s/ Joel L. Reed -------------------------------- Joel L. Reed, Attorney-in-Fact JACK-7, INC. By /s/ Joel L. Reed -------------------------------- CY-7, INC. By /s/ Joel L. Reed -------------------------------- Jack E. Brown, in his individual capacity By /s/ Joel L. Reed -------------------------------- Joel L. Reed, Attorney-in-Fact Cyril Wagner, Jr., in his individual capacity By /s/ Joel L. Reed -------------------------------- Joel L. Reed, Attorney-in-Fact -3- /s/ T. Boone Pickens Jr. -------------------------------- T. Boone Pickens Jr., in his individual capacity ACCEPTED AND AGREED AS OF THE DATE WRITTEN ABOVE: PHILLIPS PETROLEUM COMPANY By --------------------------------- -4- -------------------------------- T. Boone Pickens Jr., in his individual capacity ACCEPTED AND AGREED AS OF THE DATE WRITTEN ABOVE: PHILLIPS PETROLEUM COMPANY By /s/ W.C. Douce --------------------------------- -4- EX-10 6 Exhibit 10(c) TRUST AGREEMENT Dated as of December 12, 1995 between PHILLIPS PETROLEUM COMPANY and VANGUARD FIDUCIARY TRUST COMPANY, as Trustee Table of Contents ----------------- ARTICLE I Establishment of Trust....................................... 3 1.1 Trust Fund.......................................... 3 1.2 Irrevocability...................................... 3 1.3 Claims of Creditors................................. 3 1.4 Acceptance by the Trustee........................... 3 1.5 Substitution of Assets.............................. 4 ARTICLE II General Powers of Trustee.................................... 4 2.1 Investment of the Trust............................. 4 2.2 Additional Powers of Trustee........................ 6 2.3 Dealings with Trustee............................... 8 ARTICLE III Information to be Furnished to Trustee....................... 8 3.1 About the Arrangements.............................. 8 3.2 About the Employees................................. 8 ARTICLE IV Voting and Tender of Company Stock Held in Trust............. 8 4.1 Construction and Definitions........................ 8 4.2 Voting of Company Stock.............................10 4.3 Tender of Company Stock.............................13 4.4 Voting and Tender Responsibilities..................16 ARTICLE V Distributions from Trust Fund................................17 5.1 Distributions from the Trust........................17 5.2 Determination of Taxability (or ERISA Application)..18 5.3 Withholding Tax.....................................19 5.4 Legal Action by Trustee.............................19 ARTICLE VI Settlement of Accounts.......................................19 6.1 Trustee Records.....................................19 6.2 Valuation of Trust Fund.............................20 6.3 Trustee Statements..................................20 6.4 Audit...............................................21 6.5 Judicial Settlement.................................21 6.6 Delivery of Records to Successor....................21 ARTICLE VII Taxes, Expenses and Compensation of Trustee..................22 7.1 Taxes...............................................22 7.2 Expenses and Compensation...........................22 ARTICLE VIII For Protection of Trustee....................................23 8.1 Evidence of Action by the Company...................23 8.2 Advice of Counsel...................................23 8.3 Fiduciary Responsibility............................23 ARTICLE IX Indemnity of Trustee.........................................24 9.1 Indemnity of Trustee................................24 ARTICLE X Resignation and Removal of Trustee...........................25 10.1 Resignation of Trustee..............................25 10.2 Removal of Trustee..................................26 10.3 Successor Trustee...................................26 10.4 Transfer of Trust Fund to Successor.................26 ARTICLE XI Duration and Termination of Trust and Amendment..............26 11.1 Duration and Termination............................26 11.2 Distribution Upon Termination.......................26 11.3 Amendment...........................................27 ARTICLE XII Claims of Creditors..........................................27 12.1 Insolvency..........................................27 12.2 Trustee's Responsibilities if Company May Be Insolvent...........................................27 ARTICLE XIII Miscellaneous................................................28 13.1 Governing Law.......................................28 13.2 Titles and Headings Not to Control..................28 13.3 Successors and Assigns..............................29 13.4 Notices.............................................29 13.5 Enforcement of Trust Agreement......................29 13.6 Limitation on Rights of Participants, Beneficiaries and Other Affiliates................................30 SCHEDULE I ARRANGEMENTS SCHEDULE........................................31 SCHEDULE II COMPANY STOCK ARRANGEMENTS SCHEDULE..........................33 SCHEDULE III MINIMUM DISTRIBUTION SCHEDULE................................34 SCHEDULE IV TRUSTEE'S COMPENSATION SCHEDULE..............................35 SCHEDULE V PERSONS AUTHORIZED TO ACT FOR THE COMPANY....................36 TRUST AGREEMENT --------------- THIS TRUST AGREEMENT made and entered into as of this 12th day of December, 1995, by and between PHILLIPS PETROLEUM COMPANY, a Delaware corporation with its executive offices at Phillips Building Bartlesville, Oklahoma (the "Company"), and VANGUARD FIDUCIARY TRUST COMPANY, a trust company incorporated under the Pennsylvania Banking Code and authorized to conduct a trust business under the laws of the Commonwealth of Pennsylvania, with its principal trust office at Valley Forge, Pennsylvania, (the "Trustee"). WITNESSETH THAT: WHEREAS, the Company and its subsidiaries have established various compensation and benefit arrangements for the benefit of some or all of the employees of the Company or certain of its subsidiaries (including without limitation, the payment of employee salaries and wages) (hereinafter referred to individually as an "Arrangement" and collectively as the "Arrangements"); and WHEREAS, the Company has and will have certain legal obligations (the "Company Obligations") under these Arrangements (including without limitation the contractual obligation to pay the legal obligations of certain subsidiaries); and WHEREAS, the Arrangements provide for the distribution of certain payments and/or benefits to individuals who are employees of the Company or subsidiaries of the Company and who are eligible to participate in one or more of the Domestic Arrangements (identified in Schedule I) and employees participating in any of the International Company Stock Arrangements (identified in Part B of Schedule II) (collectively "Employees"); and WHEREAS, the Arrangements provide for the payment of certain payments and/or benefits to, inter alia, individuals who are Employees of the Company or subsidiaries of the Company and who participate in one or more Arrangements that involve the acquisition or crediting to participant accounts of common stock of the Company, $1.25 par value ("Company Stock"); and WHEREAS, the Company wishes to establish a trust pursuant to this Trust Agreement to assist it in meeting the Company Obligations (the "Trust") and intends to make contributions and/or loans to such Trust at such time or times and in such amount or amounts as it may determine; and WHEREAS, the Company intends that such contributions shall be held by the Trustee and used for the purpose of acquiring Company Stock and making payments with respect to loans used to acquire Company Stock and distributing such Company Stock or the proceeds thereof to satisfy Company Obligations under the Arrangements, all in accordance with the provisions of this Trust Agreement; and WHEREAS, the Company intends that such loans made to the Trustee by the Company shall be used for the exclusive purpose of acquiring Company Stock in accordance with the provisions of this Trust Agreement; and WHEREAS, the Trust is intended to be a grantor trust within the meaning of Sections 671 through 679 of the Internal Revenue Code of 1986 (the "Code"), as amended, with the corpus and income of the Trust used for the exclusive purpose of discharging Company Obligations and treated as assets and income of the Company for federal income tax purposes pursuant to such Code Sections; and WHEREAS, the Company intends that the assets of the Trust will be subject to the claims of creditors of the Company as provided in Article XII; and WHEREAS, the Company intends that the existence of the Trust shall constitute an unfunded arrangement and shall not affect the status of any Arrangement which is intended by the Company to be an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated Employees for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and will not be construed to provide taxable income to any person under an Arrangement prior to actual payment thereunder; and -2- WHEREAS, the Company intends that the assets of the Trust shall not be or become plan assets of any employee benefit plan within the meaning of Title I of ERISA. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Trustee declare and agree as follows: ARTICLE I Establishment of Trust ---------------------- 1.1 Trust Fund. The Company hereby acknowledges that it has established the Trust with the Trustee, consisting of such sums of money and other property acceptable to the Trustee as from time to time shall be paid or delivered to the Trustee in accordance with the terms of the Trust. All such money and other property, all investments and reinvestments made therewith or proceeds thereof and all earnings and profits thereon, less all payments and charges as authorized herein, shall constitute the "Trust Fund". The Trust Fund shall be held by the Trustee in trust and shall be dealt with in accordance with the provisions of this Trust Agreement. The Trust Fund shall at all times be subject to the claims of general creditors of the Company as provided in Article XII. 1.2 Irrevocability. The Trust shall be irrevocable, and except as provided in Section 5.2 and Articles XI and XII, the assets of the Trust shall be held for the exclusive purpose of meeting Company Obligations and defraying expenses of the Trust in accordance with the provisions of this Trust Agreement. 1.3 Claims of Creditors. Notwithstanding anything in this Trust Agreement to the contrary, the Trust Fund shall at all times be subject to the claims in bankruptcy of general creditors of the Company as provided in Article XII hereof. No person entitled to the benefit of any Arrangement shall have any claim against the Trust Fund other than as a general unsecured creditor of the Company. 1.4 Acceptance by the Trustee. The Trustee accepts the Trust established under this Trust Agreement on the terms and subject to the provisions set forth herein, and it -3- agrees to discharge and to perform fully and faithfully all of the duties and obligations imposed upon it under this Trust Agreement. 1.5 Substitution of Assets. Notwithstanding any other provision of this Trust Agreement, when required to accomplish the purpose of any Arrangement, the Company may, at any time, by notice to the Trustee, substitute for part or all of the assets constituting the Trust Fund other assets acceptable to the Trustee of equal fair market value at the time of such substitution. The fair market value of any shares of Company Stock being substituted shall be the mean between the high and low prices of such Company Stock on the day as of which the distribution is to be effected, as reported in the New York Stock Exchange Composite tape published in the Wall Street Journal. The Trustee shall distribute to the Company the assets to be substituted as soon as practicable after receipt of a notice of substitution but in no case later than 7 days thereafter; provided, however, that in the event the Company elects to substitute Company Stock held in the Trust within 90 days prior to the record date of a meeting of the shareholders of the Company or on or after the commencement of a tender offer with respect to the Company Stock, the Trustee shall continue to hold the Company Stock to be substituted and shall make voting decisions at such meeting and shall make tender decisions with respect to such Company Stock, both pursuant to Article IV hereof. As soon as practicable after the conclusion of such meeting or the expiration of such tender offer, as the case may be, the Trustee shall distribute such shares of Company Stock from the Trust to the Company. ARTICLE II General Powers of Trustee ------------------------- 2.1 Investment of the Trust. Except as otherwise provided in this Section 2.1 or except as otherwise expressly provided in this Trust Agreement, all assets received by the Trustee shall be invested as soon as practicable in, and remain invested in, Company -4- Stock. Subject to the provisions of Section 2.2(j), all Company Stock held in the Trust shall be registered in the name of the Trustee. All shares of Company Stock purchased by the Trustee shall be purchased for cash or for a combination of cash in an amount equal to or greater than the par value of such shares and a note or notes for the balance of the purchase price, and all Company Stock held by the Trustee shall be fully paid and non-assessable. (a) The Trust shall not invest any cash contributed to the Trust (other than cash contributed to repay loans of the Trust) in any investment other than Company Stock. (b) From time to time, the Trustee shall have the ability to borrow funds for the purpose of acquiring shares of Company Stock and/or to issue one or more notes to the Company in exchange for newly issued shares of Company Stock. The Trustee shall have the ability to pledge any shares so acquired as collateral. The terms and conditions of any borrowing shall be fair and reasonable. It is contemplated that any such obligation shall be repaid using cash contributions and earnings attributable to Company Stock held by the Trust Fund. (c) The Company may contribute treasury shares of Company Stock to the Trust Fund. (d) Notwithstanding anything herein to the contrary, unless the Company otherwise directs, cash (other than cash received as contributions) or Other Assets received by the Trustee shall be retained and invested in Other Assets; provided, however, that the Trust shall make no new investment in an Other Asset other than debt securities of less than twelve months duration or money market accounts; provided further that, after payment of the costs of the Trust, including, without limitation Trustee fees and expenses and, if applicable, debt repayment described in Article V, through the end of the calendar year during which such cash or Other Assets are received by the Trustee, any such cash or Other Assets remaining shall be distributed by the Trustee to the Administrators at the end of such calendar year to fund such Arrangements as determined by the Financial -5- Administrator taking into account the best interests of a broad cross- section of employees. The term "Other Assets" refers to a non-cash asset other than Company Stock. 2.2 Additional Powers of Trustee. Subject to the provisions of Section 2.1, the Trustee shall have the following additional powers and authority with respect to all property constituting a part of the Trust Fund: (a) To purchase securities or any other kind of property and to retain such securities or other property, regardless of diversification and without being limited to investments authorized by law for the investment of trust funds. (b) Subject to Article IV hereof, to sell, exchange or transfer any such property at public or private sale for cash or on credit and grant options for the purchase or exchange thereof, provided that, with respect to any sale of shares of Company Stock (other than pursuant to Article IV hereof, and excluding any distribution of Company Stock made pursuant to this Trust Agreement), such shares shall first be offered for sale to the Company before being sold to one or more third parties. (c) Subject to Article IV hereof, to participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to any such property, and to consent to or oppose any such plan or any action thereunder, or any contract, lease, mortgage, purchase, sale or other action by any corporation or other entity any of the securities of which may at any time be held in the Trust Fund, and to do any act with reference thereto. (d) To deposit cash or any Trust assets other than Company Stock with any protective, reorganization or similar committee; to delegate discretionary power to any such committee; and to pay part of the expenses and compensation of any such committee and any assessments levied with respect to any property so deposited. (e) To exercise any conversion privilege or subscription right available in connection with any such property, and to do any act with reference thereto, including the -6- exercise of options, the making of agreements or subscriptions and the payment of expenses, assessments or subscriptions, which may be deemed necessary or advisable in connection therewith, and to hold and retain any securities or other property which it may so acquire. (f) Subject to Section 9.1 hereof, to commence or defend suits or legal proceedings and to represent the Trust in all suits or legal proceedings; to settle, compromise or submit to arbitration any claims, debts or damages, due or owing to or from the Trust. (g) Subject to Article IV hereof, to exercise, personally or by general or limited power of attorney, any right, including the right to vote, appurtenant to any securities or other such property. (h) To hold cash awaiting investment uninvested, and to maintain such additional cash balances as it shall deem reasonable or necessary to meet anticipated cash distributions from or administrative costs of the Trust. (i) To invest cash or Trust assets other than Company Stock at any such bank and trust company or national banking association as may be approved from time to time by the Company in any type of interest-bearing investment, including, without limitation, deposit accounts, certificates of deposit and repurchase agreements. (j) To register or hold any securities or other property held by it in its own name or in the name of any custodian of such property or of its nominee, including the nominee of any system for the central handling of securities, with or without the addition of words indicating that such securities are held in a fiduciary capacity, to deposit or arrange for the deposit of any such securities with such a system and to hold any securities in bearer form. (k) To make, execute and deliver, as Trustee, any and all deeds, leases, notes, bonds, guarantees, mortgages, conveyances, contracts, waivers, releases or other instruments in writing that are necessary or proper for the accomplishment of any of the -7- foregoing powers. (l) To undertake a borrowing or borrowings sufficient to enable the Trust to acquire Company Stock from the Company. 2.3 Dealings with Trustee. Persons dealing with the Trustee shall be under no obligation to see to the proper application of any money paid or property delivered to the Trustee or to inquire into the Trustee's authority as to any transaction. ARTICLE III Information to be Furnished to Trustee -------------------------------------- 3.1 About the Arrangements. The Arrangements as of the effective date of the Trust Agreement are set forth in Schedule I to this Trust Agreement (the "Arrangements Schedule"). Schedule I may be amended by the Company from time to time without the consent of the Trustee. Upon the Trustee's request, the Company shall provide the Trustee with such information about any Arrangement with respect to which the Company gives any direction to make any distribution from the Trust Fund otherwise than to the Company or to a person administering the Arrangement on the Company's behalf as will enable the Trustee to carry out the direction. 3.2 About the Employees. The Company shall provide the Trustee with all information about Employees necessary to enable the Trustee to discharge its duties hereunder, including particularly the information necessary to enable the Trustee to solicit voting and tender directions pursuant to Article IV hereof. ARTICLE IV Voting and Tender of Company Stock Held in Trust ------------------------------------------------ 4.1 Construction and Definitions. (a) Notwithstanding anything contained in this Trust Agreement to the contrary, this Article IV shall govern the procedures to be -8- followed in connection with the Voting of Company Stock and the disposition of Company Stock pursuant to any tender or exchange Offer therefor. In the event of any conflict or inconsistency between the provisions of this Article IV and any other provisions of this Trust Agreement, the provisions of this Article IV shall control. (b) Definitions. For purposes of this Article only: (1) "Accept" shall mean a direction to the Trustee to take whatever action (including, without limitation, the sale, exchange or transfer of Company Stock) as may be necessary to accept an Offer pursuant to its terms. (2) "Appointed Person" shall mean for purposes of Voting (i) each Employee who is listed on the Company's personnel and U.S. dollar domestic payroll records as of a Record Date or Initial Date as a "regular full-time" or "regular part-time employee", and (ii) each trustee of an International Company Stock Arrangement, and for purposes of responding to an Offer shall mean each Employee. (3) "Company Stock Arrangements" shall mean the Arrangements identified in Schedule II to this Trust Agreement (the "Company Stock Arrangements Schedule"). Schedule II may be amended from time to time by the Company without the consent of the Trustee; provided, however, that such Schedule may not be amended during the period commencing on a Record Date or Initial Date and ending on the date which is 30 days after respectively, the stockholder meeting following the Record Date or the last date for stockholders to Accept the Offer following the Initial Date. (4) "Initial Date" shall mean the date of the commencement of any Offer. (5) "International Company Stock Arrangements" shall mean the Arrangements identified in Part B of Schedule II to this Trust Agreement. (6) "Offer" shall mean any offer for the tender or exchange of Company Stock which is made to Company stockholders. -9- (7) "Record Date" shall mean the record date for any annual or special meeting of the stockholders of the Company. (8) "Reject" shall mean a direction to the Trustee to take or omit to take whatever action (including, without limitation, the retention of Company Stock) as may be necessary to reject an Offer. (9) "Vote" or "Voting" shall mean a direction to the Trustee to vote in favor of, against or to abstain from voting on a particular issue. (10) "Determination Date" shall mean the date and time nearest a stockholder meeting date and time, and shall be established by the Trustee, in its absolute and sole discretion, as the deadline for receipt of such directions as to how to Vote, or whether to Accept or Reject an Offer, taking into consideration an adequate period of time for the tabulation of such directions; provided, however, that a Determination Date shall not be established sooner than the Trustee's close of business on the business day immediately preceding a stockholder meeting at which stockholders may cast votes, or the last date by which stockholders must accept an Offer. (11) "Directing Fiduciary" shall mean (i) an Appointed Person who is an Employee and, as of a Determination Date, elects to direct the Trustee with regard to his or her pro rata portion of (x) all Company Stock allocated to him hereunder for the purpose of giving the Trustee directions as to how to Vote or whether to Accept or Reject an Offer, and (y) all Company Stock so allocated to other Appointed Persons for which the Trustee fails to receive written directions as to how to Vote, or whether to Accept or Reject an Offer, by the Determination Date, and for purposes of Voting, (ii) each trustee of an International Company Stock Arrangement. 4.2 Voting of Company Stock. (a) The Trustee shall Vote the shares of Company Stock held by the Trust at any annual or special meeting of the stockholders of the Company in accordance with Voting directions from employees as hereinafter set -10- forth. (b) After the determination of a Record Date and within a reasonable time before the date scheduled for a Company stockholder meeting, the Company shall provide to the Trustee a list of the names and addresses of each person who is an Appointed Person and the Trustee shall determine, pursuant to this Section, the number of shares of Company Stock to be allocated to the account of each Appointed Person. In addition, the Company shall deliver to the Trustee copies of any proxy or consent solicitation materials the Company may have prepared. If proxies or consents are solicited by any person other than the Company's board of directors, the Trustee shall request copies of materials prepared by such person regarding any contested matter under consideration. (c) Upon receipt of the information and materials described in paragraph (b), the Trustee shall distribute or make available copies thereof to each Appointed Person (except to the extent the Company has previously certified to the Trustee that copies of any such materials have been made available to each Appointed Person), together with a form prepared or approved by the Trustee by which the Appointed Person may give Voting directions to the Trustee. The Voting direction form shall state that if such person fails to return the prescribed direction form to the Trustee by the indicated Determination Date, the Trustee will conclusively presume that the person has rejected his or her appointment to become a Directing Fiduciary and that such person will thereafter have no responsibility or right to direct the Trustee as to how to Vote such Company Stock. The Trustee shall communicate the permissible methods of giving Voting directions and the Determination Date by which such directions must be received by the Trustee to all Appointed Persons. The Trustee shall Vote Company Stock held as of the applicable Record Date in accordance with directions received from Directing Fiduciaries pursuant to this Article IV. -11- (d) Each Directing Fiduciary shall have the authority and shall be afforded the opportunity to direct the Trustee as to how to Vote his pro rata portion (as hereinafter determined) of all Company Stock held in this Trust and allocated to him or her for the purposes described in this Article IV. Each Directing Fiduciary who is a trustee of an International Company Stock Arrangement shall be allocated a pro rata share of that portion of Company Stock held in the Trust which is determined as the respective percentage of Company Stock held in the Trust Fund that bears an equal proportion to the ratio between the number of shares of Company Stock held in trust for the International Company Stock Arrangement and the aggregate number of shares of Company Stock held as of the Record Date by all trustees of Company Stock Arrangements. If any such trustee shall fail to become a Directing Fiduciary by failing to return Voting directions in the timely manner permitted by the Trustee, shares of Company Stock otherwise allocated to that particular trustee shall be allocated proportionately among all other such International Company Stock Arrangement trustees who become Directing Fiduciaries. The shares of Company Stock allocated to Directing Fiduciaries who are Employees shall be determined by subtracting the total number of shares of Company Stock held in the Trust which is allocated to Directing Fiduciaries who are trustees of International Company Stock Arrangements from the total number of shares held in the Trust as of the Record Date. Each Directing Fiduciary who is an Employee shall be allocated and shall direct the Trustee to Vote with respect to that number of shares of Company Stock held by the Trust as of the Record Date which is determined by dividing the number of shares held in the Trust as of the Record Date which are allocated to Directing Fiduciaries who are Employees, by the number of Directing Fiduciaries who are Employees. (e) The Trustee shall not reveal or release any individual Employee's Voting directions given as a Directing Fiduciary to the Company, its officers, directors, -12- employees, or representatives. Notwithstanding the foregoing, the Trustee may inform the Company or other party soliciting proxies or consents, at the request of either of them, of the approximate number of shares of Company Stock for which Voting directions have been received as of a given point in time and the manner in which such shares are required to be Voted in the aggregate, when the votes are cast by the Trustee. 4.3 Tender of Company Stock. (a) The Trustee shall Accept or Reject any Offer for the shares of Company Stock held by the Trust in accordance with directions from Employees as hereinafter set forth. (b) After the determination of an Initial Date and within a reasonable time before the final date scheduled for the expiration of the Offer, the Company shall provide to the Trustee a list of the names and addresses of each person who is an Appointed Person and the Trustee shall determine, pursuant to this Section, the number of shares of Company Stock to be allocated to the account of each such Appointed Person. The Trustee shall distribute or make available to each Appointed Person, such information and materials relating to the Offer as the Trustee receives from the person making the Offer and such other materials as the Trustee may deem relevant including, without limitation, a description of the terms and conditions of the Offer filed with the Securities and Exchange Commission or any similar materials if such filing is not required and, if requested by the Company, a statement acceptable to the Trustee from Company management setting forth its position with respect to the Offer. (c) Upon receipt of the information and materials described in paragraph (b), the Trustee shall distribute or make available copies thereof to each Appointed Person (except to the extent the Company has previously certified to the Trustee that copies of any such materials have been made available to each Appointed Person), together with a form prepared or approved by the Trustee by which the Appointed Person may give -13- directions to the Trustee to Accept or Reject the Offer. The direction form shall state that if such person fails to return the prescribed direction form to the Trustee by the indicated Determination Date, the Trustee will conclusively presume that the person has rejected his or her appointment to become a Directing Fiduciary and that such person will thereafter have no responsibility or right to direct the Trustee as to whether to Accept or to Reject the Offer. The Trustee shall communicate the permissible methods of giving directions and the Determination Date by which such directions must be received by the Trustee to all Appointed Persons. The Trustee shall Accept or Reject the Offer with regard to Company Stock held as of the applicable Initial Date in accordance with directions received from Directing Fiduciaries pursuant to this Article IV. (d) Each Directing Fiduciary shall have the authority and shall be afforded the opportunity to direct the Trustee as to whether to Accept or to Reject the Offer with regard to his pro rata portion (as hereinafter determined) of all Company Stock held in this Trust and allocated to him or her for the purposes described in this Article IV. Directing Fiduciaries who are not on a U.S. dollar domestic payroll ("International Directing Fiduciaries") shall be allocated in the aggregate a pro rata share of that portion of Company Stock held in the Trust which is determined as the respective percentage of Company Stock held in the Trust Fund that bears an equal proportion to the ratio between the number of shares of Company Stock held in trust for all International Company Stock Arrangements and the aggregate number of shares of Company Stock held as of the Initial Date in all Company Stock Arrangements. Each International Directing Fiduciary shall be individually allocated a pro rata share of that portion of Company Stock so allocated to all International Directing Fiduciaries and shall direct the Trustee to Accept or Reject the Offer with respect to that number of shares of Company Stock held by the Trust as of the Initial Date which is determined by dividing the number of shares held in the Trust as of the Initial Date which are allocated to International -14- Directing Fiduciaries by the number of International Directing Fiduciaries. Each Directing Fiduciary who is an Employee on the Company's U.S. dollar domestic payroll records as a "regular employee" shall be allocated and shall direct the Trustee to Accept or Reject the Offer with respect to that number of shares of Company Stock held by the Trust as of the Initial Date which is determined by dividing the number of shares held in the Trust as of the Initial Date which are allocated to Directing Fiduciaries who are domestic regular Employees, by the number of Directing Fiduciaries who are domestic regular Employees. The shares of Company Stock allocated to Directing Fiduciaries who are domestic regular Employees shall be determined by subtracting the total number of shares of Company Stock held in the Trust which is allocated to International Directing Fiduciaries from the total number of shares held in the Trust as of the Initial Date. (e) The Trustee shall not reveal or release any individual Employee's Offer response directions given as a Directing Fiduciary to the Company, its officers, directors, employees, or representatives. Notwithstanding the foregoing, the Trustee may inform the Company or other party making an Offer, at the request of either of them, of the approximate number of shares of Company Stock for which directions have been received as of a given point in time and whether such shares are required to be Accepted or Rejected in the aggregate, when the directions are carried out by the Trustee. (f) Any securities received by the Trustee as a result of having Accepted an Offer and tendered Company Stock, as hereinabove provided, shall be held, and any cash so received shall be invested in cash or short-term investments pending any further action which the Trustee may be required to take by the Company pursuant to this Trust Agreement. Company Stock which, following the Trustee's tender thereof in response to an Offer, has not been accepted by the party making the Offer and is returned to the Trustee, shall be returned to the Trust Fund. -15- (g) In the event of an Offer for Company Stock, the Trustee is authorized in accordance with this Article IV to dispose of Company Stock which is pledged or otherwise encumbered to secure repayment of a loan from a lender only to the extent such disposition is permitted by or pursuant to the documents by which such shares of Company Stock are so pledged or encumbered. 4.4 Voting and Tender Responsibilities. (a) It is intended that the Trustee's functions and responsibilities as to Voting Company Stock or Accepting or Rejecting an Offer shall be custodial and ministerial only. The Trustee is directed to comply with the terms of this Article IV conferring on Directing Fiduciaries the exclusive authority to direct the Trustee as to how to Vote Company Stock or whether to Accept or Reject an Offer. (b) Each Employee Directing Fiduciary who exercises his authority under this Article IV to direct the Trustee as to how to Vote or to Accept or Reject an Offer with respect to Company Stock shall be a fiduciary of the Trust with respect to the Voting or tendering of such Company Stock for which he or she gives direction, but shall have no other fiduciary authority or responsibility under this Trust. Each Appointed Person who is an Employee and does not exercise his authority to so direct the Trustee shall be conclusively presumed to have refused his appointment hereunder, and no such Appointed Person shall be a fiduciary of the Trust for any purpose, unless expressly designated as a fiduciary under provisions of the Trust other than provisions of this Article IV. (c) Company Stock allocated to a Directing Fiduciary for Voting or Offer response purposes shall be determined by the Trustee in accordance with this Article IV from (i) the stockholder records of the Company in the case of the trustees of the International Company Stock Arrangements and (ii) the listing of Employees appointed as Appointed Persons certified and provided to the Trustee by the Company. (d) The Trustee shall not express any opinion or give any advice or recommendation to any Directing Fiduciary concerning matters subject to Vote or -16- consent or concerning an Offer and shall not have any authority or responsibility to do so. (e) The Company acknowledges and agrees to honor the confidentiality of Voting and Offer response directions of individual Employees to the Trustee. If the Company, by its own act or omission, breaches the confidentiality of such directions, the Company agrees to indemnify and hold harmless the Trustee against and from all liabilities, claims, demands, damages, costs, and expenses, including reasonable attorneys' fees the Trustee may incur as a result thereof. (f) The Trustee shall have the right to require payment in advance by the Company and any other party soliciting proxies or consents or making an Offer of all reasonably anticipated expenses associated with the distribution of information to and the processing of directions received from Directing Fiduciaries pursuant to this Article IV. (g) Notwithstanding the foregoing provisions of this Article IV, allocations and dispositions pursuant to this Article shall be subject to such reasonable requirements for rounding of fractional interests as may be prescribed by the Trustee; provided such rounding shall be not less than three decimal places. To the extent practicable, the Trustee shall Vote or respond to an Offer by combining fractional shares of Company Stock allocated to Directing Fiduciaries hereunder to reflect the directions of the Directing Fiduciaries. ARTICLE V Distributions from Trust Fund ----------------------------- 5.1 Distributions from the Trust. (a) Except to the limited extent provided in Article IV, in this Article V and in Section 7.2, all distributions from the Trust shall be used to fund Company Obligations. The Company shall from time to time direct the Trustee to -17- (i) distribute shares of Company Stock from the Trust, (ii) to sell shares of Company Stock and distribute the cash proceeds, or (iii) to distribute earnings or profits on Company Stock and Other Assets held by the Trust to such persons or entities as the Company shall identify in such directions. Distributions of Company Stock (or the net proceeds of the sale of Such Company Stock) from the Trust shall result in a repayment or deemed forgiveness of a pro rata amount of principal of the loan used to acquire such Company Stock in an amount determined under this Section 5.1. For purposes of the foregoing, the pro rata portion of the principal payment made or deemed forgiven with respect to any stock acquisition loan provided by the Company shall be determined by multiplying the initial principal balance of the loan by a fraction, the numerator of which is the number of shares of Company Stock distributed or sold on that distribution date, and the denominator of which is the total number of shares of Company Stock acquired with the proceeds of such loan. (b) Distributions of Company Stock from the Trust shall be made in accordance with the schedule set forth in Schedule III to this Trust Agreement (the "Minimum Distribution Schedule") applicable to such stock; provided that, if the Company Stock distributed pursuant to such Schedule has been acquired in exchange for outstanding debt, the principal amount attributable to such shares so acquired shall be repaid or deemed forgiven in accordance with the formula in paragraph (a) of this Section 5.1. The Company's directions to the Trustee shall be in writing. The Trustee may rely upon such written instructions and shall have no responsibility to verify or monitor the determinations made by the Company. 5.2 Determination of Taxability (or ERISA Application). (a) Notwithstanding anything contained in this Trust Agreement to the contrary, if, at any time, any amounts held in the Trust Fund are found in a determination (within the meaning of Section 1313(a) of the Code) to have been includable in the gross income of any person participating in any Arrangement prior to payment of such amounts from the Trust, the Trustee shall take such appropriate action in response thereto as directed by the Financial Administrator. -18- (b) Notwithstanding anything contained in this Trust Agreement to the contrary, if, at any time, the United States Department of Labor or a court of competent jurisdiction has determined (or in the Company's sole judgment, reflected in written notice to the Trustee, would be likely to determine) that any assets of the Trust are subject to Part 4 of Subtitle B of Title I of ERISA, the affected assets shall be distributed to the person with responsibility to hold the affected assets under the terms of the relevant Arrangement. 5.3 Withholding Tax. Any amounts required to be paid under this Article V shall be reduced by the amount of any withholding of tax required by law, and the Trustee shall inform the Company of all amounts so withheld and shall pay such amounts to the appropriate governmental authorities. 5.4 Legal Action by Trustee. Except in the event the Company is Insolvent (as defined in Section 12.1), the Trustee shall not itself commence any legal action, whether in the nature of an interpleader action, request for declaratory judgment, or otherwise, requesting a court (i) to determine the validity of this Trust Agreement, or (ii) to make any determination in the Trustee's stead with respect to any Company Obligation that this Trust Agreement requires to be made by the Trustee. Notwithstanding the foregoing sentence, in defending any legal action brought with respect to any Company Obligation, the Trustee shall be entitled to ask the court to determine the nature and amount of such Company Obligation. ARTICLE VI Settlement of Accounts ---------------------- 6.1 Trustee Records. The Trustee shall keep full, accurate and detailed accounts of all investments, receipts and disbursements and other transactions hereunder. The Trustee's financial statements, books and records with respect to the Trust Fund shall be open to inspection by the Company upon reasonable notice at all reasonable times during business hours of the Trustee. -19- 6.2 Valuation of Trust Fund. As of the last business day of each month, the Trustee shall value the Trust Fund at current market values, and shall report such valuation to the Company. The report of any such valuation shall not constitute a representation by the Trustee that the amounts reported as fair market values would actually be realized upon the liquidation of the Trust Fund. Such valuation shall reflect cash contributions, income of the Trust Fund, gains or losses (including gains or losses not yet realized), distributions and expenses incurred during the month. 6.3 Trustee Statements. (a) The Trustee shall render to the Company quarterly statements of its receipts and disbursements as Trustee hereunder. Within 90 days after the close of each calendar year or any termination of the duties of the Trustee, the Trustee shall prepare, sign and mail in duplicate to the Company an account of its acts and transactions as Trustee hereunder. If the Trustee files an account while the Company is Insolvent, the Company shall notify each of its creditors to whom it owes $1,000,000.00 or more that the account has been filed. In the event of Insolvency of the Company, the Company shall make a copy of such account (or any adjustment thereof) available for inspection by creditors of the Company, at its principal executive office during ordinary business hours for a period of 60 days (30 days in the case of an adjusted account). If within 90 days after receipt of the account neither the Company nor, in the event of Insolvency, any creditor of the insolvent entity has filed with the Trustee notice of any objection to any act or transaction of the Trustee, the initial account shall become an account stated as between the Trustee, the Company, and all persons having or claiming to have an interest in the Trust Fund. If any objection has been filed, and if the objecting party is satisfied that it should be withdrawn, the objecting party shall in a writing filed with the Trustee signify its approval of the accounts, and it shall become an account stated as between the Trustee, the Company, and all persons having or claiming to have an interest in the Trust Fund. If the account is adjusted following an objection thereto, the Trustee -20- shall mail to the Company the adjusted account, and if within 30 days after receipt of the adjusted account neither the Company nor, in the event of Insolvency, any creditor of the insolvent entity has filed with the Trustee notice of any objection to the transactions as so adjusted, the adjusted account shall become an account stated as between the Trustee, the Company and all persons having or claiming to have an interest in the Trust Fund. (b) Unless an account is fraudulent, when it becomes an account stated it shall be finally settled, and the Trustee shall be completely discharged and released, as if such account had been settled and allowed by a judgment or decree of a court of competent jurisdiction in an action or proceeding in which the Trustee, the Company, and all persons having or claiming to have an interest in the Trust were parties. 6.4 Audit. The Trustee shall maintain a true and correct set of all records pertaining to the Trust, the Trust Fund and all transactions hereunder. The Trustee further agrees to retain all such records during the term of this Trust Agreement and for a period of not less than two (2) years after termination of this Trust Agreement. Any representatives authorized by Company may audit any and all such records at any time or times during the term of this Trust Agreement, as well as during the two- year period after termination of this Trust Agreement. 6.5 Judicial Settlement. Nothing contained in this Trust Agreement shall be construed as depriving the Trustee or the Company of the right to have a judicial settlement of the Trustee's accounts, and upon any proceeding for a judicial settlement of the Trustee's accounts or for instructions the only necessary party thereto in addition to the Trustee shall be the Company. 6.6 Delivery of Records to Successor. In the event of the removal or resignation of the Trustee, the Trustee shall deliver to the successor Trustee all records that shall be required by the successor Trustee to enable it to carry out the provisions of this Trust Agreement. -21- ARTICLE VII Taxes, Expenses and Compensation of Trustee ------------------------------------------- 7.1 Taxes. (a) The Company shall from time to time pay taxes of any and all kinds whatsoever that at any time are lawfully levied or assessed upon the Company or become payable by the Company in respect of the Trust Fund, the income or any property forming a part thereof, or any security transaction pertaining thereto. The Trustee shall notify the Company promptly after it becomes aware of any tax liability assessed against, or imposed upon, the Trust or the Trustee in its capacity as Trustee of the Trust. The Company shall be responsible for all matters in respect of such assessment or imposition, and shall have sole responsibility for any defense in connection therewith. Payments in respect of any tax liability of the Company arising in connection with earnings, gains or activities relating to the Trust, including, without limitation, interest and penalties, shall be made from the Trust Fund after a final determination of such liability, unless the Company promptly pays such liability. In the event the assets of the Trust are insufficient to pay such liability, any deficit shall be paid promptly by the Company. All references in this Trust Agreement to the payment of taxes shall include interest and applicable penalties. (b) To enable the Company to make monthly tax accrual and to compute its estimated income tax obligations, the Trustee will furnish, on or prior to the eighth business day of the succeeding month, a monthly report identifying the type of income by source of investment (interest, dividends, etc.,). 7.2 Expenses and Compensation. The Trustee shall be paid compensation by the Company in accordance with the schedule of fees set forth in Schedule IV hereto. -22- ARTICLE VIII For Protection of Trustee ------------------------- 8.1 Evidence of Action by the Company. (a) The Company has certified to the Trustee the name or names of any person or persons initially authorized to act for the Company on Schedule V hereto. Until the Company notifies the Trustee, in a notice signed by the Secretary or an Assistant Secretary of the Company, that any such person is no longer authorized to act for the Company, the Trustee may continue to rely upon the authority of such person. The Company may certify to the Trustee, in a notice signed by the Secretary or an Assistant Secretary the names of any additional persons authorized to act for the Company. (b) The Trustee may rely upon any certificate, notice or direction of the Company that the Trustee reasonably believes to have been signed by a duly authorized officer or agent of the Company. 8.2 Advice of Counsel. The Trustee may consult with any legal counsel, including counsel to the Trustee, and counsel to the Company, with respect to the construction of this Trust Agreement and the Arrangements, its duties under this Trust Agreement, or any act that it proposes to take or omit, and shall not be liable for any action taken or omitted in good faith pursuant to such advice. Expenses of such counsel shall be deemed to be expenses of the management and administration of the Trust within the meaning of Section 7.2 hereof. 8.3 Fiduciary Responsibility. (a) The Trustee shall discharge its duties under this Trust Agreement in a manner consistent with the objectives of this Trust Agreement. The Trustee shall not be liable for any loss sustained by the Trust Fund by reason of the purchase, retention, sale or exchange of any investment in good faith and in accordance with the provisions of this Trust Agreement. The Trustee shall have no responsibility or liability for any failure of the Company to make contributions to the Trust Fund or for any -23- insufficiency of assets in the Trust Fund to meet Company Obligations when due. The Trustee shall not be liable hereunder for any act taken or omitted to be taken in good faith, except for its own gross negligence or willful misconduct. (b) The Trustee's duties and obligations shall be limited to those expressly imposed upon it by this Trust Agreement, notwithstanding any reference to the Arrangements. (c) The Company at any time may employ as agent (to perform any act, keep any records or accounts, or make any computations required of the Company by this Trust Agreement or the Arrangements) the corporation or association serving as Trustee hereunder. Nothing done by said corporation or association as such agent shall affect its responsibilities or liability as Trustee hereunder. ARTICLE IX Indemnity of Trustee -------------------- 9.1 Indemnity of Trustee. The Company hereby indemnifies and holds the Trustee harmless from and against any and all losses, damages, costs, expenses or liabilities (herein, "Liabilities"), including reasonable attorneys' fees and other costs of litigation, to which the Trustee may become subject pursuant to, arising out of, occasioned by, incurred in connection with or in any way associated with this Trust Agreement, except for any act or omission constituting gross negligence or willful misconduct of the Trustee. If one or more Liabilities shall arise, or if the Company fails to indemnify the Trustee as provided herein, or both, then the Trustee may engage counsel of the Trustee's choice, but at the Company's expense, either to conduct the defense against such Liabilities or to conduct such actions as may be necessary to obtain the indemnity provided for herein, or to take both such actions. The Trustee shall notify the Company within fifteen days after the Trustee has so engaged counsel of the name and address of such counsel. If the Trustee shall be entitled to indemnification by the Company pursuant to this Section 9.1 -24- and the Company shall not provide such indemnification upon demand, the Trustee may apply assets of the Trust Fund in accordance with Section 7.2 in full satisfaction of the obligations for indemnity by the Company, and any legal proceeding by the Trustee against the Company for such indemnification shall be in behalf of the Trust. ARTICLE X Resignation and Removal of Trustee ---------------------------------- 10.1 Resignation of Trustee. The Trustee may resign at any time upon sixty days' prior written notice to the Company. The Company shall make a good faith effort, following receipt of notice of resignation from the Trustee, to find and to appoint a successor Trustee who will adhere to the obligations imposed on such successor under the terms of this Trust Agreement. The Company shall condition its acceptance of such successor on its determination that the successor Trustee satisfies the criteria set forth in the immediately preceding sentence and on the obtaining from such successor of a written statement that the successor has read the Trust Agreement and understands its obligations thereunder. In the event the Company has failed to appoint a successor Trustee within sixty days of the Trustee's notice of resignation, the Trustee shall be entitled to seek judicial removal. In any event, the Trustee shall continue to be custodian of the Trust assets until the new trustee is in place, and the Trustee shall be entitled to expenses and fees through the later of the effective date of its resignation as Trustee and the end of its custodianship of the Trust assets. Once either: (i) all payments required by the Trust Agreement have been made, or (ii) the Trust fund contains no assets and retains no claims to recover assets from the Company pursuant to any provision hereof; the Trustee may resign on thirty days' prior written notice without -25- assigning a reason and without being obligated in any way to seek out or assist in securing a successor. 10.2 Removal of Trustee. The Company may remove the Trustee with or without cause upon at least 60 days' notice in writing to the Trustee. 10.3 Successor Trustee. All of the provisions set forth herein with respect to the Trustee shall relate to each successor trustee with the same force and effect as if such successor had been originally named as the Trustee hereunder. 10.4 Transfer of Trust Fund to Successor. Upon the resignation or removal of the Trustee and appointment of a successor, the Trustee shall transfer and deliver the Trust Fund to such successor. Following the effective date of the appointment of the successor, the Trustee's responsibility hereunder shall be limited to managing the assets in its possession and transferring such assets to the successor, and settling its final account. Neither the Trustee nor the successor shall be liable for the acts of the other. ARTICLE XI Duration and Termination of Trust and Amendment ----------------------------------------------- 11.1 Duration and Termination. The Trust shall be irrevocable. The Trust shall remain in existence until whichever of the following shall first occur: (i) all payments and distributions directed or otherwise required by the Trust Agreement have been made, (ii) the Trust Fund contains no assets and retains no claims to recover assets from the Company pursuant to any provision hereof, or (iii) twenty-one years after the death of the last survivor of the persons who were Employees as of the effective date of this Trust Agreement. 11.2 Distribution Upon Termination. If this Trust terminates under the provisions of Section 11.1, the Trustee shall liquidate the Trust Fund and, after its final account has -26- been settled as provided in Article VI, shall distribute to the Company the net balance of any assets of the Trust remaining after all Company Obligations have been met and expenses have been paid. Upon making any such distribution, the Trustee shall be relieved of all further obligations hereunder. The powers of the Trustee hereunder shall continue so long as any assets of the Trust Fund (including claims against the Company) remain in its hands. 11.3 Amendment. This Trust Agreement (including Schedule I hereto) may be amended by the Company. No amendment of this Trust Agreement shall increase the duties or responsibilities of the Trustee unless the Trustee consents thereto in writing. Amendment of Schedule I to add additional Arrangements thereto shall not, in and of itself, be deemed to increase the duties or responsibilities of the Trustee. ARTICLE XII Claims of Creditors ------------------- 12.1 Insolvency. As used in this Article XII, the Company shall be deemed to be "Insolvent" if (i) the Company is subject to a pending proceeding as a debtor under the federal Bankruptcy Code (or any successor statute) or any similar law of any state or (ii) the Company is unable to pay its debts as they become due. The Chief Executive Officer of the Company shall promptly notify the Trustee in the event that the Company becomes Insolvent. In the event that the Company shall be Insolvent, the assets of the Trust shall be held for the benefit of the general creditors of the Company. 12.2 Trustee's Responsibilities If Company May Be Insolvent. (a) If at any time the Company or a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall request the Company to advise it within 30 days whether the Company is Insolvent, and failing such advice, shall -27- be entitled (but not required) to independently determine whether the Company is Insolvent. The Company shall cooperate with and assist the Trustee in making such determination. In making such a determination, the Trustee may retain outside experts competent to advise the Trustee as to whether the Company has, in fact, become Insolvent. The expense of retaining such outside experts shall be deemed to be expenses of the management and administration of the Trust within the meaning of Section 7.3 hereof. (b) If the Company notifies the Trustee, or the Trustee determines, that the Company is Insolvent, the Trustee shall hold the balance in the Trust Fund for the benefit of the Company's creditors, and shall disburse assets from the Trust Fund to creditors of the Company only pursuant to an order of a court of competent jurisdiction. (c) If the Trustee discontinues payments from the Trust Fund pursuant to this Section 12.2, the Trustee shall resume payments under this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent, if the Trustee initially determined the Company to be Insolvent). The first payment following such discontinuance shall include an aggregate amount equal to the difference between the payments that would have been made under this Trust Agreement but for this Section 12.2 and the aggregate payments actually made by the Company pursuant to an Arrangement during any such period of discontinuance. ARTICLE XIII Miscellaneous ------------- 13.1 Governing Law. This Trust Agreement and the Trust hereby created shall be construed and regulated by the laws of the State of Delaware. 13.2 Titles and Headings Not to Control. The titles to Articles and headings of Sections in this Trust Agreement are placed herein for convenience of reference only and in case of any conflict, the text of this Trust Agreement, rather than such titles or -28- headings, shall control. 13.3 Successors and Assigns. This Trust Agreement may not be assigned by any party without the prior written consent of the other party hereto, and any purported assignment without such prior written consent shall be null and void. This Trust Agreement shall be binding upon the successors and permitted assigns of each party hereto. In the case of any consolidation of the Company with, or merger of the Company with or into, any corporation or corporations, or any sale or conveyance of all or substantially all of the assets of the Company, the corporation formed by such consolidation, or with or into which the Company merged, or the person that acquires the assets of the Company, shall be deemed to succeed as the Company hereunder, and shall expressly assume in writing, in form satisfactory to the Trustee, the duties and obligations of the Company under this Trust Agreement and the Agreements. 13.4 Notices. (a) Communications to the Trustee shall be sent in writing to the Trustee's office at Valley Forge, Pennsylvania, Attention: Marshall House, or to such other address as the Trustee may specify. No communication shall be binding upon the Trust Fund or the Trustee until it is received by the Trustee and unless it is in writing and signed by an authorized person. (b) Communications to the Company shall be sent in writing to the Company at Phillips Building, Bartlesville, Oklahoma 74004, Attention: Treasurer, or to such other address as the Company may specify. No communication shall be binding upon the Company until it is received by the Company and unless it is in writing and signed by an authorized person. 13.5 Enforcement of Trust Agreement. The Company and the Trustee shall have the right to enforce any provision of this Trust Agreement. In any action or proceeding affecting the Trust, the only necessary parties shall be the Company and the Trustee and, except as otherwise required by applicable law, no other person shall be entitled to any -29- notice or service of process. Any judgment entered in such an action or proceeding shall, to the maximum extent permitted by applicable law, be binding and conclusive on all persons having or claiming to have any interest in the Trust or any Plan. 13.6 Limitation on Rights of Participants, Beneficiaries and Other Affiliates. Neither the Arrangements nor any participant or Beneficiary therein shall have any rights with respect to the Trust Fund, no Arrangement shall be deemed to have any beneficial interest in the Trust Fund, no employee shall be deemed to have any beneficial interest in the Trust Fund arising from his participation in any particular Arrangement, and no Affiliate shall have or be deemed to have any interest in the Trust. IN WITNESS WHEREOF, PHILLIPS PETROLEUM COMPANY, and VANGUARD FIDUCIARY TRUST COMPANY, as Trustee, have caused this Trust Agreement to be executed by their duly authorized officers and their respective seals to be hereunto affixed as of the day and year first above written. [SEAL) Attest: PHILLIPS PETROLEUM COMPANY /s/Dale J. Billam By: /s/ John A. Carrig - ----------------------- --------------------------- Secretary Title: Treasurer [SEAL) Attest: VANGUARD FIDUCIARY TRUST COMPANY /s/Raymond J. Klapinsky By: /s/ R. Gregory Barton - ----------------------- --------------------------- Secretary Title: Vice President -30- SCHEDULE I ARRANGEMENTS SCHEDULE Domestic Plans Educational Assistance Plan Phillips Petroleum Company Employee Assistance Plan The Phillips Petroleum Company Employee Death Gratuity Plan Phillips Petroleum Company Flexible Spending Plan The Phillips Petroleum Company Group Life Insurance Plan Long-Term Disability Insurance Plan Long-Term Stock Savings Plan of Phillips Petroleum Company Phillips Petroleum Company Medical and Dental Assistance Plan Pension Plan for Hourly Employees of Phillips Fibers Corporation Phillips Layoff Plan Retirement Income Plan of Phillips Petroleum Company Retirement Savings Plan of Phillips Petroleum Company Thrift Plan of Phillips Petroleum Company Work Force Stabilization Plan of Phillips Petroleum Company Phillips Petroleum Company Key Employee Death Protection Plan Key Employee Deferred Compensation Plan Supplemental Thrift Supplemental Retirement Key Employee Deferred Compensation Plan of Phillips Petroleum Company Retirement Restoration Plan of Phillips Petroleum Company Principal Corporate Officers Supplemental Retirement Plan of Phillips Petroleum Company Phillips Petroleum Company Supplemental Executive Retirement Plan Phillips Oil Company Excess Benefit Plan Aminoil Retirement Contracts Retirement Makeup Plan of Phillips Petroleum Company Key Employee Supplemental Retirement Plan of Phillips Petroleum Company Defined Contribution Makeup Plan of Phillips Petroleum Company Phillips Puerto Rico Core Inc. Group Medical and Dental Assistance Plan Phillips Puerto Rico Core Inc. Long Term Disability Insurance Plan Phillips Puerto Rico Core Inc. Pension Plan Savings and Investment Plan for Employees of Phillips Puerto Rico Core Inc. -31- SCHEDULE I (cont'd) Major Foreign Plans Phillips Petroleum Resources, Ltd. Canada Region Employee Savings Plan Pension Plan for the Employees of Phillips Petroleum Resources, Ltd. and/or Affiliated Companies, Phillips Petroleum Canada Ltd., Phillips Petroleum Co. Western Hemisphere and GAO Canada Ltd. Phillips Petroleum Company Norway Pension Plan Phillips Petroleum Company Norway Stock Savings Plan Phillips Petroleum Company Norway Top Hat Plan Phillips Petroleum United Kingdom Retirement Plan Employee Share Allocation Scheme of Phillips Petroleum Company Europe- Africa Phillips Petroleum Company Europe-Africa Employee Single Company Plan Phillips Petroleum Chemicals (Belgian) Pension Plan Pension Plan for International Expatriate Employees of International Energy Limited -32- SCHEDULE II COMPANY STOCK ARRANGEMENTS SCHEDULE Part A - Domestic Company Stock Arrangements Long-Term Stock Savings Plan of Phillips Petroleum Company Retirement Savings Plan of Phillips Petroleum Company Thrift Plan of Phillips Petroleum Company Part B - International Company Stock Arrangements Phillips Petroleum Resources Ltd. - Canada Region Employees Savings Plan Employee Share Allocation Scheme of Phillips Petroleum Company Europe-Africa Phillips Petroleum Overseas Stock Savings Plan -33- SCHEDULE III MINIMUM DISTRIBUTION SCHEDULE PRIOR TO CUMULATIVE SHARES RELEASED - -------- -------------------------- January 1, 2006 5,000,000 shares January 1, 2011 10,000,000 shares January 1, 2016 15,000,000 shares January 1, 2021 29,200,000 shares -34- SCHEDULE IV TRUSTEE'S COMPENSATION SCHEDULE The Trustee shall be paid as compensation an annual fee of five thousand dollars ($5,000.00). It is intended that this fee will cover the expenses associated with the management and administration of the Trust fund, including custodial expenses. -35- SCHEDULE V PERSONS AUTHORIZED TO ACT FOR THE COMPANY T. C. Morris J. J. Mulva J. A. Carrig L. L. McCall J. E. Lowe R. S. Nickel C. L. Bowerman EX-10 7 Exhibit 10(e) 1990 STOCK PLAN OF PHILLIPS PETROLEUM COMPANY (As Approved April 25, 1989) 1. PURPOSE The purpose of the 1990 Stock Plan of Phillips Petroleum company is to provide incentive earnings opportunities to those key employees whose decisions and actions most directly affect the profitability and growth of the Company and its subsidiaries. Since the incentive earnings opportunities under this Plan are based on the market value of the Company's Common Stock, it will have the additional effect of increasing these employees' identity of interest with that of the Company's stockholders. There are two programs permitted by this Plan; a Stock Option Plan and the Strategic Incentive Plan. 2. DEFINITIONS (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (c) "Company" shall mean Phillips Petroleum Company. (d) "Committee" shall mean the Compensation Committee of the Board of Directors as appointed from time to time, and consisting of not less than three Board members. Each member of the Committee shall be a "disinterested person" as that term is now or hereafter defined in Rule 16(b)(3) of the Securities and Exchange Commission. (e) "Earned Award" shall mean the award which an SIP Participant is entitled to receive under the Strategic Incentive Plan. (f) "Employee" shall mean any person employed by the Company or a Subsidiary on a full-time salaried basis, including officers and employee directors thereof. (g) "Fair Market Value" shall mean the average of the highest price and the lowest price at which Stock shall have been sold on the date of the grant of the Option as reflected on the consolidated tape of New York Stock Exchange issues. In the event that any Options shall be granted on a date on which there were no such sales of Stock, the fair market value of Stock on such date shall be the average of the highest price and the lowest price at which Stock shall have been sold on the last trading day preceding the date of grant of such Option as reflected on the consolidated tape of New York Stock Exchange issues. (h) "Incentive Stock Option" or "ISO" shall mean an Option which meets or complies with the terms and conditions set forth in Section 422A of the Code and Treasury regulations promulgated thereunder. (i) "Indicators of Performance" shall mean the criteria which the Committee will use at the conclusion of the Performance Period to evaluate the Company's overall performance as described in Section 9(b) of this Plan. -2- "Strategic Incentive Plan Participant" or "SIP Participant" shall mean any eligible Employee who has been so designated by the Committee. (k) "Option" or "Stock Option" shall mean a right granted under the Plan to an Optionee to purchase a stated number of shares of Stock at a stated exercise price. (l) "Optionee" shall mean an employee who has received a Stock Option granted under the Plan. (m) "Performance Period" shall mean a period established by the Committee beginning on the first day of a calendar year, or not less than three consecutive calendar years, at the conclusion of which settlement will be made with a SIP Participant with respect to his Earned Award. (n) "Plan" shall mean the 1990 Stock Plan of Phillips Petroleum Company. (o) "Restricted Stock" shall mean Stock which is not transferable except in accordance with the terms established for such transfer at the time of its issue in accordance with the plan under which it was issued. (p) "Stock" shall mean the common stock, including both Restricted and unrestricted Stock, of the Company. (q) "Stock Appreciation Right" or "ISAR" shall mean the right of an Optionee to exercise an option granted in accordance with Section 8 of this Plan. (r) "Subsidiary" shall mean any corporation, a majority of the voting stock of which is beneficially owned, directly or indirectly, by the Company. -3- (s) "Target Award" shall mean the award, expressed in shares of Stock, which will be considered an Earned Award, absent any adjustment thereto for individual performance, if the Committee determines pursuant to Section 9(b) of this Plan that the Company's overall performance was "competitive". (t) "Total Disability" and "Totally Disabled" shall mean the condition in which, by reason of bodily injury or disease, an employee is and will at all times thereafter be wholly prevented from engaging in any occupation or employment for compensation, profit or gain. All determinations of Total Disability shall be made by the insurance company carrying the group life insurance plan of the Company on the date on which the employee, whether or not eligible for benefits under such insurance plan, becomes Totally Disabled. 3. ADMINISTRATION The Committee is authorized, subject to the provisions of the Plan, from time to time to establish such rules and regulations and to appoint such agents as it deems appropriate for the proper administration of the Plan, and to make such determinations under, and such interpretations of, and to take such steps in connection with the Plan or the Options or Stock Appreciation Rights or the Strategic Incentive Plan as it deems necessary or advisable. Each determination, interpretation, or other action made or taken pursuant to the provision of the Plan by the Committee shall be final and shall be binding and conclusive for all purposes -4- and upon all persons. Notwithstanding any provision of the Plan or any Administrative Procedure adopted thereunder which may be capable of being construed to the contrary, no discretion concerning the administration of the Plan in so far as it relates to persons subject to Section 16 of the Securities Exchange Act of 1934 shall be afforded to a person who is not a disinterested person in respect of the Plan. 4. ELIGIBILITY Only those Employees who, in the sole judgment of the Committee, may have a significant effect on the profitability and growth of the Company, shall be eligible to receive options and Stock Appreciation Rights under this Plan. Of such Employees, those who are in positions evaluated at grade 35 or higher under the company's salary administration system are eligible for participation in the Strategic Incentive Plan; provided, however, the Committee may also permit Employees eligible for Participation in the Plan evaluated at less than grade 35 to participate in the Strategic Incentive Plan if in the opinion of the Committee such Employees have a significant effect on the Company's long term growth and profitability. 5. MAXIMUM-SHARES AVAILABLE The Stock to be distributed under the Plan may be either authorized and unissued shares or issued shares whether held in the treasury of the Company or otherwise. The total amount of Stock which, under the provisions of this Plan, may be subject to delivery on the exercise of Options, issued in satisfaction of exercised Options or SARS, or issued under -5- the Strategic Incentive Plan shall not exceed 8.6 million shares of the Company's stock, which represents approximately 3.5% of the number of issued and outstanding shares of Stock as of December 31, 1988. The maximum number of shares is subject to adjustment in accordance with the provisions of Section 10 hereof. In determining the number of shares subject to delivery under this Plan, those represented by cancelled Options, forfeited Options, expired Options and non-earned awards under the Strategic Incentive Plan shall be returned upon the occurrence of such event to the pool of shares available for distribution under the Plan and may be the subject of further Options or SARS, or may be issued under the Strategic Incentive Plan. 6. STOCK OPTIONS (a) Award of Options. (i) The Committee, at any time and from time to time prior to December 31, 1994, may grant Options under the Plan to eligible Employees, for such numbers of shares and having such terms as the Committee shall designate, subject, however, to the provisions of the Plan. The Committee will also determine the type of Option granted (e.g., ISO, nonstatutory, other statutory Options as from time to time may be permitted by the Code) or a combination of various types of options. Options designated as ISOs shall comply with all the provisions of Section 422A(b) of the Code and applicable Treasury Department regulations. The aggregate Fair Market Value (determined at the time the option is granted) of Stock with respect to which ISOs are exercisable for the first time by any individual during -6- a calendar year under all plans of the Company, and any subsidiary shall not exceed $100,000. All shares over the $100,000 first exercisable value shall be granted as a non-qualified Option. The date on which an Option shall be granted shall be the date of the Committee's authorization of such grant. Any individual at any one time and from time to time may hold more than one Option granted under the Plan or under any other Stock plan of the Company. (ii) Each Option shall be evidenced by a Stock Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve. (b) Exercise Price. The price at which shares of Stock may be purchased under an Option shall not be less than 100 percent of the Fair Market Value of the Stock on the date the Option is granted. (c) Term of Options. The period during which an Option may be exercised shall be determined by the Committee; provided, that such period will not be longer than ten years from the date on which the option is granted for those Options designated as ISOs or 11 years for other types of Options. The date or dates on which installment portion(s) of an Option may be exercised during the term of an option shall be determined by the Committee and may vary from Option to Option. If the Committee makes no such specific arrangement with respect to an Option, each such Option granted pursuant -7- to the Plan shall become exercisable in four installments. The first such installment shall become exercisable on the first anniversary of the date of the grant for 25 percent of the number of shares of Stock subject to the Option. Thereafter, on each anniversary of the date of the grant an installment shall become exercisable for an additional 25 percent of the number of shares of Stock subject to the Option until the Option shall have become fully exercisable. To the extent that an installment is not exercised when it becomes exercisable, it shall not expire but shall continue to be exercisable at any time thereafter until the option shall be cancelled, expire or be surrendered. The Committee may accelerate the exercise schedule on outstanding Options, if in its sole judgment conditions are such to warrant such acceleration. (d) Termination of Employment. (i) If, prior to a date one year from the date an option shall have been granted, the Optionee's employment with the Company or Subsidiary shall be terminated for any reason, such option shall be cancelled and all rights thereunder shall cease; provided that an Option granted in any year to an Optionee who terminates employment on January 1 of the following year due to retirement pursuant to the terms of a retirement plan of the Company or a Subsidiary -8- shall not be cancelled for that reason, and provided, further, the Committee may, in its sole discretion determine that all or any portion of any other Option shall not be cancelled due to termination of employment prior to a date one year from the date the Option shall have been granted. (ii) If, on or after one year from the date an Option shall have been granted, an Optionee's employment with the Company or Subsidiary is terminated for any reason except retirement pursuant to the terms of a retirement plan of the Company or a Subsidiary, Total Disability, or death, any Option so granted under the Plan shall be cancelled on such termination; provided, that the Committee may, in its sole discretion, determine that all or a portion of any such Option shall not be cancelled. (iii) If, on or after a date one year from the date the Option is granted, an Optionee shall terminate employment by reason of retirement pursuant to a retirement plan of the Company or Subsidiary, or by reason of Total Disability, the Optionee shall retain all rights provided by the Option at the time of such termination of employment. If on or after a date one year from the date the Option is granted, or such shorter period as may be permitted pursuant to (d)(ii) above, an optionee shall die while in the employ of the -9- Company or Subsidiary or after termination of employment by reason of retirement pursuant to a retirement plan of the Company or Subsidiary, the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or the administrator pursuant to will or the laws of descent and distribution shall have the right to exercise the Option to the same extent the Optionee could have, had the Optionee not died. No transfer of an Option by the Optionee by will or by the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and such other evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions of such Option. (iv) Transfer of employment between the Company and a Subsidiary or between Subsidiaries shall not constitute termination of employment for the purpose of any Option granted under the Plan. Whether any leave of absence shall constitute termination of employment for the purposes of any Option granted under the Plan shall be determined in each case by the Committee in its sole discretion. -10- (e) Payment for Shares. (i) The exercise price for all shares of Stock purchased upon the exercise of an Option, or a portion thereof, shall be paid in full at the time of such exercise. Such payment may be made in cash, by tendering shares of Stock having a value on the date of exercise equal to the exercise price, or tendering shares of Restricted Stock having a value on the date of exercise equal to the exercise price. Such value shall be the Fair Market Value except that the applicable date for determination of the highest and lowest price on the New York Stock Exchange shall be the date on which the Option is exercised, or if not a trading date, than the last trading day on such Exchange preceding the date on which the option is exercised. If Restricted Stock is used in such exercise, the resulting new shares shall have the same restrictions as the tendered shares. The number of shares so restricted shall not be less than the number of shares of Restricted Stock tendered. The Committee may, in its sole discretion and judgment, limit the extent to which shares of Stock or shares of Restricted Stock may be used in exercising options. (ii) The Stock delivered to the Optionee upon exercise of an Option, whether or not Restricted Stock is used for payment of the purchase price of the Option may, at the discretion of the Committee, have restrictions placed on it, provided that the Stock Option agreement with the Optionee covering the Option permits such use of Restricted Stock. -11- (f) Should a withholding tax obligation arise upon the exercise of an option, the withholding tax may be satisfied by withholding shares of Stock or by payment of cash. 7. DETRIMENTAL ACTIVITIES If the Committee determines that, subsequent to the grant of any Option, the Optionee has engaged or is engaging in any activity which, in the sole judgment of the Committee, is or may be detrimental to the Company or a Subsidiary, the Committee may refuse to honor the exercise of such Optionee's options already requested, and cancel the Option or Options granted to that Optionee. 8. STOCK APPRECIATION RIGHTS (a) Grant, The Committee may, at its discretion, affix Stock Appreciation Rights to any Option, either at the time of its initial granting to the Optionee or at a later date. The addition of such SARs must be accomplished prior to the completion of the period during which the Option may be exercised and such exercise period may not be extended beyond that which was initially established. The Committee may establish any SAR terms and conditions that it desires at the time such SAR is established, provided that, to the extent permitted by applicable law, notwithstanding any provision of this Plan to the contrary, the terms and conditions of a SAR related to an ISO shall be the same as the terms applicable to the underlying ISO. -12- (b) Exercise of Stock Appreciation Right. (i) A Stock Appreciation Right shall be exercisable at such time as may be determined by the Committee, which shall be not less than six months after its grant, and provided further that a Stock Appreciation Right shall be exercisable only to the extent that the related Option could be exercised. Option shares with respect to which the related Stock Appreciation Right shall have been exercised may not again be subjected to Options under this Plan. Upon the exercise of a Stock Appreciation Right, that portion of the Option underlying the Stock Appreciation Right will be considered as having been exercised. (ii) The Committee may impose any other conditions upon the exercise of a Stock Appreciation Right, which conditions may include a condition that the Stock Appreciation Right may only be exercised in accordance with rules and regulations adopted by the Committee from time to time. Such rules and regulations may govern the right to exercise Stock Appreciation Rights granted prior to the adoption or amendment of such rules and regulations as well as Stock Appreciation Rights granted thereafter. The exercise of a Stock Appreciation Right for cash shall be made only during the periods specified in Rule 16b-3 of the Securities and Exchange Commission. -13- (iii) Upon the exercise of a Stock Appreciation Right, the Company shall give to an Optionee an amount (less any applicable withholding taxes, which at the Company's discretion may be settled by withholding shares of Stock or by payment of cash) equivalent to the excess of the value of the shares of Stock for which the right is exercised on the date of such exercise over the exercise price of such shares under the related Option. The value on the date of exercise shall be the Fair Market Value as determined in Section 6(e) of this Plan. Such amount shall be either in cash or in shares of Stock or both as the Committee shall determine. Such determination may be made at the time of the granting of the Stock Appreciation Right and may be changed at any time thereafter. The shares may consist either in whole or in part of authorized and unissued shares of Stock or issued shares of Stock whether held in the treasury of the Company or otherwise. No fractional shares of Stock shall be issued and the Committee shall determine whether cash shall be given in lieu of such fractional share or whether such fractional share shall be eliminated. (c) Expiration or Termination of Stock Appreciation Rights. (i) Subject to (c) (ii), each Stock Appreciation Right and all rights and obligations thereunder shall expire on a date to be determined by the Committee. -14- (ii) A Stock Appreciation Right shall terminate and may no longer be exercised upon the termination of the related Option. (d) Amendment, Suspension or Termination of Stock Appreciation Rights. The Committee may, at any time, amend, suspend, or terminate any Stock Appreciation Right theretofore granted under the Plan. 9. STRATEGIC INCENTIVE PLAN (a) Administrative Procedure. Normally, the Committee shall adopt administrative procedures applicable to a Performance Period prior to, or within 30 days after, the date designated by the Committee for the Commencement of such Performance Period. The Committee may, however, adopt such administrative procedures more than 30 days after such commencement if in its opinion such delayed action is appropriate. Such procedures shall establish Indicators of Performance and the Target Awards applicable to the Performance Period. Indicators of Performance may vary from Performance Period to Performance Period. (b) Indicators of Performance. Indicators of Performance may include, but shall not be limited to, increased shareholder value, earnings per share, return on shareholder's equity, return on assets and/or other similar criteria. Such indicators may be based on the Company's performance compared to the performance of one or more selected companies in the petroleum industry -15- during the same Performance Period or may relate solely to the Company's performance during the Performance Period or a combination of such indicators. At the completion of the Performance Period, the Committee will review the Company's actual performance with respect to the Indicators of Performance and, in its sole judgment, rank the Company's overall performance. Such ranking may range from "noncompetitive" through "competitive" to "outstanding". In arriving at such ranking, the Committee may take into consideration, and make appropriate adjustments for, events occurring during the Performance Period, which the Committee, in its sole judgment, concludes have affected the performance of the Company or any selected company with respect to any of the Indicators of Performance. No Earned Awards will be granted if the Company's overall performance is ranked "non-competitive". Subject to individual performance adjustments therein, if any, pursuant to paragraph 9(c) of this Plan, if the Company's overall performance is ranked "competitive", Target Awards will result; higher or lower ranking will result in greater or lesser awards provided that in no event, including individual performance adjustments, shall the Earned Award of a SIP Participant exceed 150% of the SIP Participant's Target Award. -16- (c) Award Adjustments. The Committee in its sole discretion may make adjustments in awards determined under paragraph (b) of this Section based on the SIP Participant's individual performance during the Performance Period. The administrative procedures for each Performance Period shall establish the method to be used by the Committee in determining which, if any, SIP Participants may receive such performance adjustments and, subject to the maximum set out in paragraph (b) of this Section, the size of such adjustments. (d) Partial Performance Period Participation. The administrative procedures adopted for each Performance Period shall also include procedures to be used in determining the extent to which an Employee shall participate in a partial Performance Period due to either assignment to a position which makes the Employee eligible to be a SIP Participant after the beginning of such Performance Period or termination of employment prior to the completion of such a Performance Period in which the Employee was a SIP Participant. (e) Award Settlement. With respect to each Performance Period, settlement of all Earned Awards shall be made in Stock as soon as practicable following the date on which the Committee determines the size of Earned Awards; provided that the Committee may decide to settle such awards over a period or periods of time as the Committee shall deem appropriate. -17- 10. ADJUSTMENT UPON CHANGES IN CAPITALIZATION The number of shares of Stock which may be issued pursuant to this Plan, the number of shares covered by each outstanding Option, the option price per share, and the number of shares representing a SIP Participant's Target Award under the Strategic Incentive Plan, shall be adjusted proportionately for any increase or decrease in the total number of issued and outstanding shares of Stock resulting from a subdivision or consolidation of shares or other capital adjustment or the payment of a Stock dividend or other increase or decrease in such shares effected without receipt of consideration by the Company. In the event of any such adjustment, fractional shares shall be eliminated. Appropriate adjustments shall be made by the Committee in the terms of Stock Appreciation Rights to reflect the foregoing changes. 11. MISCELLANEOUS (a) Except as otherwise required by law, no action taken under the Plan shall be taken into account in determining any benefits under any pension, retirement, thrift, profit sharing, group insurance, or other benefit plan maintained by the Company or any Subsidiary, unless such other plan specifically provides for such inclusion. (b) No Option or Stock Appreciation Right or right under the Strategic Incentive Plan shall be transferable other than by will or the laws of descent and distribution. During the lifetime of an Optionee, any Option or Stock Appreciation Right shall be exercisable only by the -18- Optionee or the Optionee's duly appointed guardian or legal representative. (c) The Company shall have the right to withhold from any settlement hereunder any federal, state, or local taxes required by law to be withheld. Such withholding may be satisfied by the withholding of shares of Stock by the Company if the Optionee so requests in a manner prescribed by the Committee, if the Committee so approves, and such withholding of shares does not violate any applicable laws, rules or regulations of federal, state or local authorities. (d) All administrative expenses associated with the administration of the Plan shall be borne by the Company. (e) Masculine pronouns and other words of masculine gender used herein shall refer to both men and women. (f) The titles and headings of the sections in this Plan are for convenience of reference only and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 12. AMENDMENT AND TERMINATION The Board may, at any time, terminate or amend this Plan in such respect as it shall deem advisable, provided, the Board may not, without further approval of the stockholders of the Company if such approval is required in order that transactions in Company securities under the Plan be exempt -19- from the operation of Section 16(b) of the Securities Exchange Act of 1934, amend the Plan so as to (i) increase the number of shares of Stock which may be issued under the Plan, except as provided for in Section 10; (ii) materially modify the requirements as to eligibility for participation; (iii) materially increase the benefits accruing to Participants under the Plan; (iv) extend the duration of the Plan beyond the date approved by the stockholders; or (v) increase the maximum dollar amount of ISOs which an individual Optionee may first exercise during any calendar year beyond that permitted in the Code and applicable regulations of the Treasury Department. 13. DURATION OF THE PLAN The Plan shall become effective on January 1, 1990 provided that it has been approved by the stockholders at the annual meeting of the stockholders in April of 1989, and shall terminate on December 31, 1994. RPN:RKK:clp 1-30-89 PLANS\90STKPLN -20- EX-10 8 Exhibit 10(h) Board of Directors Amended February 12, 1990 PRINCIPAL CORPORATE OFFICERS SUPPLEMENTAL RETIREMENT PLAN OF PHILLIPS PETROLEUM COMPANY ----------------------------- I. DEFINITIONS As used in this Plan: (a) "CEO" shall mean the Chief Executive Officer of the Company. (b) "Company" shall mean Phillips Petroleum Company. (c) "Effective Date" shall mean May 13, 1985, the date on which this Plan is effective. (d) "ICP" shall mean the Incentive Compensation Plan of Phillips Petroleum Company, as amended from time to time. (e) "SIP" shall mean the Strategic Incentive Plan as permitted by the 1986 Stock Plan of Phillips Petroleum Company, and the 1990 Stock Plan of Phillips Petroleum Company, as amended from time to time. (f) "Mandatory Retirement Date" shall mean the applicable retirement date determined under Article III, Section l(b) of the Retirement Income Plan of Phillips Petroleum Company, as amended from time to time. (g) "Performance Period" shall have the same meaning as defined in Section 2(m) of the 1986 Stock Plan of Phillips Petroleum Company and of the 1990 Stock Plan of Phillips Petroleum Company. 1 (h) "Plan" shall mean the Principal Corporate Officers Supplemental Retirement Plan of Phillips Petroleum Company, the terms of which are stated in this document, as amended from time to time. (i) "Principal Corporate officer" is a person holding one of the positions with the Company set forth on the list entitled "Principal Corporate Officers" attached to this Plan as Attachment A, as it may be amended from time to time by the CEO. (j) "Retirement Plan" shall mean the Retirement Income Plan of Phillips Petroleum Company, as amended from time to time. (k) "Special Retirement Date" shall mean the date which a Principal Corporate Officer pursuant to Article III of this Plan, designates as his/her retirement date. (l) "Supplemental Retirement Benefits" shall mean those benefits described in Article IV of this Plan. (m) The following terms shall have the meaning as defined in the Retirement Plan: Final Average Earnings, Credited Service, Annual Earnings, and Regular Monthly Earnings. II. PURPOSE ------------ The purpose of this Plan is to provide Supplemental Retirement Benefits as an incentive for Principle Corporate Officers to elect to retire prior to the date they would otherwise retire under the Retirement Plan. This Plan is intended to be and shall be administered as an unfunded excess benefit plan within the meaning of ERISA Sections 3(36) and 4(b)(5) subject to Section VI. 2 III. ELIGIBILITY - SPECIAL RETIREMENT DATE ------------------------------------------- Each Principal Corporate officer will be entitled to elect in writing, within the time specified by the Company, to receive Supplemental Retirement Benefits pursuant to this Plan, subject, however, to the condition that he/she designate a Special Retirement Date in accordance with the provisions of this Article III. Principal Corporate Officers who attain the age of 55 on or after the Effective Date of this Plan, or who, on the Effective Date, are age 55 or older but will not attain the age of 60 prior to January 1, 1986, will be given the opportunity to make such election and as a condition thereto shall designate a retirement date which shall be the first day of the month coincident with or next following the attainment of age 62. Principal Corporate officers who on the Effective Date are age 62 or above, or who will attain age 62 prior to January 1, 1987, may also elect to receive Supplemental Retirement Benefits and as a condition thereto shall designate a retirement date which may be the first day of any month after May 1, 1985 but not later than January 1, 1987, and unless waived by the CEO, not less than one year prior to his/her Mandatory Retirement Date. In addition, each person who is a Principal Corporate Officer on the Effective Date and who will attain the age of 60 prior to January 1, 1986 will be given the opportunity to make such election on or before July 1, 1985, subject to the condition that the Principal Corporate Officer designate a retirement date which may be the first day of June, July or August, 1985. At the request of the CEO, such Principal Corporate Officer may be permitted to delay his/her retirement date to a date beyond August 1, 1985 approved by the CEO, but in 3 no event later than August 1, 1986. A Principal Corporate Officer who elects not to receive the Supplemental Retirement Benefits will be entitled to retire under the provisions of the Retirement Plan and to receive retirement benefits in accordance with the Retirement Plan. Notwithstanding the foregoing, (i) a Principal Corporate officer who does not have at least ten years of Credited Service on attaining age 62 and who retires on or after attaining age 62 but before attaining age 65 will be entitled on retirement to receive in accordance with this Plan the Supplemental Retirement Benefits, (ii) a Principal Corporate Officer who has elected to receive the Supplemental Retirement Benefit may elect to retire under the Retirement Plan before his/her Special Retirement Date in which case he/she shall not receive the Supplemental Retirement Benefits, and (iii) if for any reason a person is not a Principal Corporate Officer on his/her Special Retirement Date, he/she will not be entitled to receive the Supplemental Retirement Benefits nor will he/she be required to retire on such date, and the date of his/her retirement and the retirement benefits he/she will receive on such retirement shall be governed by the Retirement Plan and other applicable plans, if any. IV. SUPPLEMENTAL RETIREMENT BENEFITS -------------------------------------- Supplemental Retirement Benefits shall consist of the sum of the following: (a) The amount by which retirement benefits calculated in accordance with this paragraph (a) exceed the aggregate retirement 4 benefits to which the Principal Corporate Officer is entitled to receive as of his/her Special Retirement Date under the Retirement Plan, the Retirement Restoration Plan of Phillips Petroleum Company, the Retirement Makeup Plan of Phillips Petroleum Company and the Key Employee Deferred Compensation Plan of Phillips Petroleum Company, and the supplemental retirement benefits as provided in Article VI, Section l(A) of the Phillips Petroleum Company Key Employee Death Protection Plan. Retirement benefits under this paragraph (a) shall be calculated in the same way as the Principal corporate officer's retirement benefits are calculated as of his/her Special Retirement Date under the Retirement Plan except as if no benefit limitations were imposed by the Internal Revenue Code and no benefit reductions resulted from participation in any qualified or non- qualified Company-sponsored benefit plan and except that (i) Credited Service shall be deemed to be equivalent to the Credited Service that he/she would have accrued if he/she had continued to be employed for 36 months beyond his/her Special Retirement Date, or the number of months after his/her Special Retirement Date to his/her Mandatory Retirement Date, whichever period is shorter; (ii) solely for the purpose of determining the amount of early retirement discount, if any, three years shall be added to the actual age of the Principal Corporate Officer; and (iii) Final Average Earnings shall be computed as if the Principal Corporate Officer had worked for a period of three years after his/her Special Retirement Date or until his/her Mandatory Retirement Date, whichever is the shorter period, with Annual Earnings (prior to reductions resulting from 5 participation in company-sponsored benefit plans) for such period deemed to be the greater of (1) his/her Annual Earnings for his/her last full year worked, plus the amount of award approved, whether paid or deferred, for the Principal Corporate Officer under the ICP during such year, or (2) his/her Regular Monthly Earnings (prior to reductions resulting from participation in Company-sponsored benefit plans) in effect on his/her Special Retirement Date times 12 plus the amount of award approved, whether paid or deferred, or to be paid to the Principal Corporate officer under the ICP in the year of his/her Special Retirement Date; provided, however, the Final Average Earnings used in calculating retirement benefits hereunder shall in no event be less than the actual Final Average Earnings calculated for the Principal Corporate Officer in accordance with the Retirement Plan, nor less than the Final Average Earnings that would have been used to calculate his/her retirement benefits under this paragraph (a) had he/she retired under this Plan on December 1, 1985. (b) A payment will be made to an eligible Principal Corporate officer equal to the pro rata portion of the ICP award he/she would have been entitled to receive under the ICP had he/she worked the entire calendar year in which his/her Special Retirement Date occurs; for example, if the Special Retirement Date is June 1, then the payment would be equal to 5/12ths of the entire award which would have been received. Such payment will be made under this Plan at the time that the applicable awards are paid to award recipients under the ICP. 6 (c) A payment will be made to an eligible Principal Corporate Officer equal to the pro rata portion of the SIP award(s) he/she would have been entitled to receive under the SIP had he/she worked until the end of the Performance Period(s) already commenced on his/her Special Retirement Date. The pro rata payment will be based on the portion of such period(s) that would have been completed on his/her Mandatory Retirement Date. The payment will be made to the Principal Corporate Officer under this Plan after the conclusion of the applicable Performance Period(s) and at the same time as the SIP awards are settled under the SIP to participants in that plan. (d) With approval of the Board of Directors of the Company, a Principal Corporate Officer receiving Supplemental Retirement Benefits who has more than twenty years' Credited Service, and during the year 1985 attained age 58 or above, may be given the option of agreeing to be available to provide advice and consultation to the Company for up to 30 days per year for a period commencing on his/her Special Retirement Date, and ending on the earlier of the expiration of three years or his/her Mandatory Retirement Date. If such option is given and he/she agrees, he/she will enter into a consulting agreement which will provide for an annual fee equivalent to the difference between his/her annual salary at his/her Special Retirement Date and the aggregate of the annual straight- life annuity benefits he/she is entitled to receive under this Plan, the Retirement Plan, the Retirement Restoration Plan of Phillips Petroleum Company, the Retirement Makeup Plan of Phillips Petroleum Company, the Key Employee 7 Deferred Compensation Plan of Phillips Petroleum Company, the Phillips Petroleum company Supplemental Executive Retirement Plan, and such benefits as provided by Article VI, Section l(A) of the Phillips Petroleum Company Key Employee Death Protection Plan. V. PAYMENT OF RETIREMENT BENEFITS ----------------------------------- Subject to the requirement that the manner of payment of retirement benefits determined in accordance with paragraph (a) of Article IV of this Plan which the Principal Corporate Officer is eligible to receive under this Plan, the Retirement Restoration Plan of Phillips Petroleum Company, the Retirement Makeup Plan of Phillips Petroleum Company, the Key Employee Deferred Compensation Plan of Phillips Petroleum Company, the Phillips Petroleum Company Supplemental Executive Retirement Plan and the Phillips Petroleum Company Key Employee Death Protection Plan, shall be the same and, subject further to the condition that a Principal Corporate officer who receives supplemental retirement payments under this Plan shall agree in writing and in the form directed by the Company not to compete with the Company during the period commencing with his/her Special Retirement Date and ending on his/her Mandatory Retirement Date: (i) A Principal Corporate Officer may elect in the manner prescribed by the Company to have such supplemental retirement payments made on a straight-life annuity basis, or to have such life annuity payments converted in the manner provided by the Retirement Plan to any one of the other forms of payment which the Principal Corporate Officer would be entitled to select (except the lump-sum settlement option) if 8 such payments were to be paid to the Principal Corporate officer under the Retirement Plan. (ii) Notwithstanding (i) above, a Principal Corporate Officer who is age 60 or older may, not later than 30 days prior to such Principal Corporate Officer's Special Retirement Date, express preferences as to: a) whether the payment amounts should be converted in the manner provided by the Retirement Income Plan from a life annuity basis to one lump-sum payment, b) whether such lump-sum payment shall be paid to the employee on or as soon as practicable after the Principal Corporate Officer's Special Retirement date, or C) whether such lump-sum payment shall be credited as an award under the Company's Key Employee Deferred Compensation Plan. The Chief Executive Officer, with respect to Principal Corporate Officers who are not members of the Board of Directors and the Compensation Committee of such Board of Directors, with respect to Principal Corporate Officers who are members of such Board of Directors, shall consider such indication of preference and shall respectively decide in the Chief Executive Officer's or the committee's sole discretion whether to accept or reject the preference expressed. In the event the Chief Executive Officer or the committee, as appropriate, accepts such Principal Corporate Officer's preference, such supplemental retirement benefit shall be 9 paid in one lump sum as soon as practicable after the later of such acceptance or the Principal Corporate Officer's special Retirement Date; or if applicable, credited as of the Principal corporate Officer's Special Retirement Date as an award under the Key Employee Deferred Compensation Plan. VI. METHOD OF PROVIDING BENEFITS --------------------------------- All amounts payable under this Plan shall be paid solely from the general assets of the Company and any rights accruing to a Principal Corporate Officer shall be those of a general creditor; provided, however, the Company may establish a grantor trust to satisfy part or all of its Plan payment obligation so long as the Plan remains unfunded for purposes of Title I of ERISA. VII. MISCELLANEOUS PROVISIONS ------------------------------- (a) No right or interest of a Principal Corporate Officer under this Plan shall be assignable or transferable, in whole or in part, directly or indirectly, by operation of law or otherwise (excluding devolution upon death or mental incompetency). (b) This Plan shall be administered by the CEO except to the extent otherwise specifically stated herein, and the CEO's decisions in all matters relating to the interpretation and application thereof shall be final. (c) The Board of Directors of the Company reserves the right to amend or terminate this Plan at any time if, in the sole judg- 10 ment of the Board, such amendment or termination is deemed desirable, provided that no member of the Board shall participate in any action resulting in his or her being named a Principal Corporate Officer, nor, if already a Principal Corporate officer, in any action which has the actual or potential effect of increasing his or her benefits hereunder. (d) No amount accrued or payable hereunder shall be deemed to be a portion of a Principal Corporate Officer's compensation or earnings for the purpose of any other employee benefit plan adopted or maintained by the Company, nor shall this Plan be deemed to amend or modify the provisions of the Retirement Plan. (e) The Plan shall be construed, regulated, and administered in accordance with the laws of the State of Oklahoma except to the extent that said laws have been preempted by the laws of the United States. (f) Except as otherwise provided herein, the Plan shall be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 2DP-S/009 02-12-90 11 ATTACHMENT A PRINCIPAL CORPORATE OFFICERS President and Chief Operating Officer G. A. Cox Senior Vice President Finance R. E. Bonnell Senior Vice President and General Counsel W. G. Paul Senior Vice President K. L. Smalley Vice President Research & Development C. F. Cook Vice President Quality, Environment & Safety J. N. Scott 042-S/310 EX-10 9 Exhibit 10(k) BOARD OF DIRECTORS AMENDED APRIL 10, 1995 NON-EMPLOYEE DIRECTOR RETIREMENT PLAN OF PHILLIPS PETROLEUM COMPANY ARTICLE I - PURPOSE ------------------- The Non-Employee Director Retirement Plan is intended to provide Non-Employee Directors with income commencing upon their retirement from service on the Phillips Petroleum Company Board of Directors. ARTICLE II - DEFINITIONS ------------------------ The following terms, when used in this Plan, have the following meaning unless the context clearly indicates otherwise: 1. "Plan" shall mean the Non-Employee Director Retirement Plan of Phillips Petroleum Company, the terms and provi- sions of which are herein set forth, together with such amendments thereto as may hereafter from time to time be adopted. 2. "Company" shall mean Phillips Petroleum Company. 3. "Board" shall mean the Board of Directors of the Company. -1- 4. "Non-Employee Director" shall mean a member of the Board of Directors who is not a present employee nor former employee of the Company or any of its subsidiaries. 5. "Chief Executive Officer" shall mean the Chief Executive Officer of the Company. 6. "Disability" shall mean that condition in which, by reason of bodily injury or disease, a Non-Employee Director is prevented from serving in such capacity. All determina- tions of Disability shall be made by a physician selected by the Company. 7. "Fair Market Value" shall be calculated as the average of the high three monthly fair market values of the Company common stock during the twelve calendar months in the relevant calendar year preceding the month in which the Non-Employee Director retires. The monthly fair market value of the Company common stock is the average of the daily fair market value of the stock for each trading day of the month. The daily fair market value of the stock shall be deemed equal to the average of the high and low selling prices of the stock on the New York Stock Exchange, as reported in the Wall Street Journal. -2- 8. "Retires" or "Retirement" shall mean the termination of Board service due to a) the Non-Employee Director's not being nominated for election to the Board; or b) the Non-Employee Director's not being reelected to Board service after being so nominated; or c) the Non-Employee Director's resignation from Board service for any reason, including Disability. 9. "Years of Service" shall mean the number of full and partial consecutive calendar years during which the Non-Employee Director was a member of the Board. 10. "Annual Board Service Retainer" shall mean the sum of the cash compensation paid for Board service exclusive of compensation for committee membership and of fees for attendance at Board or Committee meetings, if any, plus the value of the Company common stock granted, if any, to a Non-Employee Director during the twelve calendar months immediately preceding the date on which the Non-Employee Director retires, such value to be determined as the product of the number of shares of such common stock granted multipled by the higher of the Fair Market Value for the last year or the average of the high three Fair Market Values calculated in accordance with Article II, -3- Section 7, for the last ten years preceding the Non-Employee Director's retirement. ARTICLE III - ELIGIBILITY ------------------------- Only Non-Employee Directors are eligible to participate in the Plan. ARTICLE IV - PAYMENT OF RETIREMENT BENEFITS ------------------------------------------- Upon Retirement from Board service each Non-Employee Director shall receive payments under this Plan. a) These payments shall be made on a monthly basis beginning on or about the first of the month after Retirement. The amount of these monthly payments shall be equal to the Annual Board Service Retainer divided by 12; provided, however, that the amount of payments to any retired Non-Employee Director who has commenced receiving payments from this Plan prior to April 10, 1995, shall not be increased or paid in a different manner, but shall be paid in the same amount and manner as in effect at the time payments commenced. These payments shall continue for a number of months equal to Years of Service times 12. -4- b) Notwithstanding (a) above, a Retiring Non-Employee Director may, not earlier than 365 days nor later than 30 days prior to the date retirement benefit payments would begin, express a preference, in the manner prescribed by the Chief Executive Officer, to have the monthly payment provided hereunder converted to one lump sum payment which is calculated as the present value of the monthly payment amount using the December 1 of the year prior to Retirement rate of the 30-year Treasury Bond as quoted in the Federal Reserve Statistical Release Bulletin No. H.15, or the comparable successor publication, and the number of Years of Service. All or part of such lump sum payment may be either paid to the Non-Employee Director or considered for deferral under the Deferred Compensation Plan for Non-Employee Directors of Phillips Petroleum Company. The Chief Executive Officer shall consider such indication of preference for a lump sum and shall respectively decide in the Chief Executive Officer's sole discretion whether to accept or reject the preference expressed. In the event the Chief Executive Officer accepts such Non-Employee Director's preference for a lump sum, part or all of the retirement benefit shall be paid in a lump sum as soon as practicable -5- after the later of such acceptance or on or about the first of the month after Retirement. ARTICLE V - DEATH OF NON-EMPLOYEE DIRECTOR ------------------------------------------ In the event a Non-Employee Director dies prior to Retirement, no benefits shall be payable from this Plan. After commencement of Retirement payments, if paid as a monthly payment determined in accordance with Article IV (a), such monthly payments will continue until the total number of payments has been made, or the death of the retired Non-Employee Director, whichever occurs first. If death occurs first, then the remaining payments shall be made to the surviving spouse, if any. If there is no surviving spouse, or if the surviving spouse should die, then there will be no further payment obligation under this Plan. ARTICLE VI - ADMINISTRATION --------------------------- The Chief Executive Officer is authorized, subject to the provi- sions of the Plan, to establish rules and regulations, to make determinations under and such interpretations of, and to take steps in connection with the Plan as the Chief Executive Officer deems necessary or advisable, and to appoint agents as the Chief Executive Officer deems appropriate for the proper administration -6- of the Plan. Each determination, interpretation, or other action made or taken pursuant to the provisions of the Plan by the Chief Executive Officer shall be reported to the Board of Directors and once so reported shall be final and shall be binding and conclusive for all purposes and upon all persons. ARTICLE VII - TERMINATION OR AMENDMENT OF THE PLAN -------------------------------------------------- The Board may at any time terminate the Plan and may from time to time alter or amend the Plan, or any part thereof, (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement); provided, however, that no director may act to terminate or amend the Plan if such action would either increase benefits payable under the Plan to that director or remove or reduce the risk that such director's benefits under the Plan might be forfeited. Such termination or amendment will not negatively impact any rights or benefits accrued to date of such termination or amendment under this Plan. ARTICLE VIII - NON-ASSIGNABILITY -------------------------------- Retirement payments may not be pledged, anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process. -7- ARTICLE IX - MISCELLANEOUS -------------------------- (a) All amounts payable under this Plan are unfunded and unsecured benefits and shall be paid solely from the general assets of the Company and any rights accruing to the Non-Employee Director or the surviving spouse under the Plan shall be those of a unsecured general creditor; provided, however, that the Company may establish a grantor trust to pay part or all of its Plan payment obligations so long as the Plan remains unfunded for federal tax purposes. (b) Except as otherwise provided herein, the Plan shall be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. (c) This Plan shall be construed, regulated, and administered in accordance with the laws of the State of Oklahoma except to the extent that said laws have been preempted by the laws of the United States. ARTICLE X - EFFECTIVE DATE OF THE PLAN -------------------------------------- -8- The Plan is amended and restated effective as of April 10, 1995. -9- EX-10 10 Exhibit 10(m) Board of Directors Amended April 10, 1995 DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS OF PHILLIPS PETROLEUM COMPANY Section 1. Purpose of the Plan The purpose of the Deferred Compensation Plan for Non-Employee Directors ("Plan") is to provide a program whereby a member of the Board of Directors of Phillips Petroleum Company ("Company") who is not an officer, present employee, nor former employee of the Company or any of its subsidiaries ("Non-Employee Director") may defer the payment of all or a specific amount of the cash compensa- tion payable to the Non-Employee Director for all services rendered as a Non-Employee Director ("Compensation") and may defer the payment of all or a portion of the lump sum payment from the Non-Employee Director Retirement Plan ("Retirement Payment"). Section 2. Election or Indication of Preference to Defer -1- (a) Compensation. For each calendar year, a Non-Employee Director may elect to have payment of part or all of the Non-Employee Director's Compensation deferred. On or before December 1 of each year, the election to defer Compensation to be earned in the next calendar year may be made by giving written notice thereof to the Corporate Secretary. Such election to defer becomes irrevocable on the last day of the year in which the election is made. (b) Retirement Payment. If a Non-Employee Director prefers to defer under this Plan all or part of the lump sum payment from the Non-Employee Director Retirement Plan, the Non-Employee Director must indicate such preference to the Chief Executive Officer (CEO) of the Company. The Non-Employee Director's preference must be received by the Corporate Secretary in the period beginning 365 days prior to and ending no less than 30 days prior to the date the retirement payment is to be made. Such indication must be in writing signed by the Non-Employee Director and must state the portion of the lump sum payment the Non-Employee Director desires to be deferred. The CEO shall consider such indication of preference as submitted and shall decide whether to accept or reject the preference expressed as -2- soon as practicable. Such indication of preference, if accepted, becomes irrevocable on the date of such acceptance. Section 3. Deferred Compensation Accounts (a) Credit for Deferral. The Company will establish and maintain an account for each Non-Employee Director who elects to defer Compensation and/or a Retirement Payment in which will be credited the amounts deferred. Amounts deferred shall be credited as soon as practicable after the date assigned to the deferral by the Company. (b) Designation of Investments. The amount in each Non-Employee Director's Deferred Compensation Account shall be deemed to have been invested and reinvested from time to time, in such "eligible securities" as the Non-Employee Director shall designate. Prior to or in the absence of a Non-Employee Director's designation, the Company shall designate an "eligible security" in which the Non-Employee Director's Deferred Compensation Account shall be deemed to have been invested until designation instructions are received from the Non-Employee Director. Eligible securities are those securi- -3- ties designated by the Treasurer of the Company. The Treasurer of the Company may include as eligible securities, stocks listed on a national securities exchange, and bonds, notes, debentures, corporate or governmental, either listed on a national securities exchange or for which price quotations are published in The Wall Street Journal and shares issued by investment companies commonly known as "mutual funds". The Non-Employee Director's Deferred Compensation Account will be adjusted to reflect the deemed gains, losses and earnings as though the amount deferred was actually invested and reinvested in the eligible securities for the Non-Employee Director's Deferred Compensation Account. Notwithstanding anything to the contrary in this section 3(b), in the event the Company actually purchases or sells such securities in the quantities and at the times the securities are deemed to be purchased or sold for a Non-Employee Director's Deferred Compensation Account, the Account shall be adjusted accordingly to reflect the price actually paid or received by the Company for such securities after adjustment for all transaction expenses incurred (including without limitation brokerage fees and stock transfer taxes). -4- In the case of any deemed purchase not actually made by the Company, the Deferred Compensation Account shall be charged with a dollar amount equal to the quantity and kind of securities deemed to have been purchased multiplied by the fair market value of such security on the date of reference and shall be credited with the quantity and kind of securities so deemed to have been purchased. In the case of any deemed sale not actually made by the Company, the account shall be charged with the quantity and kind of securities deemed to have been sold, and shall be credited with a dollar amount equal to the quantity and kind of securities deemed to have been sold multiplied by the fair market value of such security on the date of reference. As used herein "fair market value" means in the case of a listed security the closing price on the date of reference, or if there were no sales on such date, then the closing price on the nearest preceding day on which there were such sales, and in the case of an unlisted security the mean between the bid and asked prices on the date of reference, or if no such prices are available for such date, then the mean between the bid and asked prices to the nearest preceding day for which such prices are available. -5- The Treasurer may also designate a Fund Manager to provide services which may include recordkeeping, Non-Employee Director accounting, Non-Employee Director communication, payment of installments to the Non-Employee Director, tax reporting and any other services specified by the Company in agreement with the Fund Manager. (c) Payments. A Non-Employee Director's Deferred Compensation Account shall be debited with respect to payments made from the account pursuant to this Plan as of the date such payments are made from the account. The payment shall be made as soon as practicable, but no later than 30 days, after the installment payment date. If any person to whom a payment is due hereunder is under legal disability as determined in the sole discretion of the Plan Administrator, the Company shall have the power to cause the payment due such person to be made to such person's guardian or other legal representative for the person's benefit, and such payment shall constitute a full release and discharge of the Company and any fiduciary of the Plan. -6- (d) Statements. At least one time per year the Company or the Company's designee will furnish each Non-Employee Director a written statement setting forth the current balance in the Non- Employee Director's Deferred Compensation Account, the amounts credited or debited to such account since the last statement and the payment schedule of deferred amounts and deemed gains, losses and earnings accrued thereon as provided by the deferred payment option selected by the Non-Employee Director. Section 4. Deferred Payment Options (a) Payment Options for Compensation. A Non-Employee Director, at the time notice of election to defer Compensation is given, shall also specify in writing whether the Compensation deferred by such election and any deemed gains, losses and earnings accrued thereon is to be paid in one lump sum or in annual installments of not less than 5 nor more than 10. If a lump sum payment is selected, the Non-Employee Director will specify the date the lump sum payment is to be made so long as the date is the first day of a calendar quarter, and is at least one year from the date of the election or is specified as the first day of the calendar quarter following retirement under the -7- terms of the Non-Employee Director Retirement Plan. If annual installments of not less than 5 nor more than 10 are selected, the first installment will begin as soon as practicable after the first day of the calendar quarter which is on or after the Non-Employee Director's retirement. After a payment option is selected the first time a Non-Employee Director elects to defer Compensation, all subsequent deferrals of Compensation will be the same payment option. -8- b) Payment Options for Retirement Payment. (i) The payment option for a deferred Retirement Payment for a Non-Employee Director who has previously deferred Compensation will be the same as the payment option for the deferred Compensation. (ii) The payment option for a deferred Retirement Payment for a Non-Employee Director who has not previously deferred Compensation may be elected by the Non-Employee Director at the time the Non-Employee Director submits a preference to defer all or part of the lump sum Retirement payment. The payment options in this situation are: annual installments of not less than 5 nor more than 10, in semi-annual installments of not less than 10 nor more than 20, or in quarterly installments of not less than 20 nor more than 40. The first installment to commence as soon as practicable after any date specified by the Non-Employee Director, so long as such date is the first day of a calendar quarter and is at least one year from the date the payout option was elected. Subject to Section 5, if the CEO, accepts the Non-Employee -9- Director's indication of preference, the election of the method of payment of the deferred Retirement Payment shall become irrevocable. (c) Payment Option Revision. If a Non-Employee Director specified annual installments of not less than 5 nor more than 10 pursuant to Section 4(a) herein, the Non-Employee Director may at any time during a period beginning 365 days prior to and ending 90 days prior to the date the Non-Employee Director retires under the terms of the Non-Employee Director Retirement Plan, in the manner prescribed by the Company, revise such payment option and elect one of the following payment options in place of such payment option: (i) annual installments of not less than 5 nor more than 10, (ii) semi-annual installments of not less than 10 nor more than 20, or (iii) quarterly installments of not less than 20 nor more than 40, -10- with the first installment to commence, as soon as practicable following any date specified by the Non-Employee Director so long as such date is the first day of a calendar quarter, is on or after the Non-Employee Director's first day of retirement and is at least one year from the date the payment option was revised. (d) Installment Amount. The amount of each installment shall be determined by dividing the balance in the Non-Employee Director's Deferred Compensation Account as of the date the installment is to be paid, by the number of installments remaining to be paid (inclusive of the current installment). Section 5. Death of Non-Employee Director Upon the death of a Non-Employee Director, the Non-Employee Director's beneficiary or beneficiaries designated in accordance with Section 6 of this Plan, or, in the absence of an effective beneficiary designation, the spouse, children (natural or adopted), or the legal representative(s) of the deceased Non-Employee Director, in that order of priority, shall receive the beneficiary's or beneficiaries' portion of the payments in -11- accordance with the deferred payment schedule selected by the Non-Employee Director, whether the Non-Employee Director's death occurred before or after such payments have commenced; provided, however, such payments may be made in a different manner if the beneficiary or beneficiaries entitled to receive such payments, due to an unanticipated emergency caused by an event beyond the control of the beneficiary or beneficiaries that results in financial hardship to the beneficiary or beneficiaries, so requests and the CEO gives written consent to the method of payment requested. Section 6. Designation of Beneficiary Each Non-Employee Director who defers under this Plan shall designate a beneficiary or beneficiaries to receive the entire balance of the Non-Employee Director's Deferred Compensation Account by giving signed written notice of such designation to the Corporate Secretary. The Non-Employee Director may from time to time change or cancel any previous beneficiary designation in the same manner. The last written beneficiary designation received by the Corporate Secretary shall be controlling over any prior designation and over any testamentary or other disposition. After receipt by the Corporate Secretary of such written designation, it -12- shall take effect as of the date on which it was signed by the Non-Employee Director, whether the Non-Employee Director is living at the time of such receipt, but without prejudice to the Company on account of any payment made under this Plan before receipt of such designation. Section 7. Nonassignability The right of a Non-Employee Director or beneficiary or other person who becomes entitled to receive payments under this Plan shall not be pledged, assigned or subject to garnishment, attachment or any other legal process by the creditors of or other claimants against the Non-Employee Director, beneficiary, or other such person. Section 8. Administration, Interpretation and Amendment The Plan shall be administered by the Chief Executive Officer of the Company. The decision of the Chief Executive Officer with respect to any questions arising as to the interpretation of this Plan, including the severability of any and all of the provisions thereof, shall be final, conclusive and binding. The Company reserves the right to amend this Plan from time to time or to -13- terminate the Plan entirely, provided, however, that no amendment may affect the balance in a Non-Employee Director's account on the effective date of the amendment. A Non-Employee Director shall not participate in a decision to amend or terminate this Plan. In the event of termination of the Plan, the Chief Executive Officer in the Chief Executive Officer's sole discretion, may elect to pay in one lump sum as soon as practicable after termination of the Plan, the balance then in the Non-Employee Director's account. Section 9. Nonsegregation Amounts deferred pursuant to this Plan and the crediting of amounts to a Non-Employee Director's Deferred Compensation Account shall represent the Company's unfunded and unsecured promise to pay compensation in the future. With respect to said amounts, the relationship of the Company and a Non-Employee Director shall be that of debtor and general unsecured creditor. While the Company may make investments for the purpose of measuring and meeting its obligations under this Plan such investments shall remain the sole property of the Company subject to claims of its creditors generally, and shall not be deemed to form or be included in any part of the Deferred Compensation Account. -14- Section 10. Funding All amounts payable under the Plan are unfunded and unsecured benefits and shall be paid solely from the general assets of the Company and any rights accruing to the Non-Employee Director or the beneficiary under this Plan shall be those of an unsecured general creditor; provided, however, that the Company may establish a grantor trust to pay part or all of its Plan payment obligations so long as the Plan remains unfunded for federal tax purposes. Section 11. Miscellaneous (a) Except as otherwise provided herein, the Plan shall be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substan- tially all of the Company's assets and business or with or into which the Company may be consolidated or merged. (b) This Plan shall be construed, regulated, and administered in accordance with the laws of the State of Oklahoma except to the extent that said laws have been preempted by the laws of the United States. -15- Section 12. Effective Date of the Plan This Plan is amended and restated effective as of April 10, 1995. -16- EX-12 11 Exhibit 12 PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES TOTAL ENTERPRISE Computation of Ratio of Earnings to Fixed Charges Millions of Dollars -------------------------------------- Years Ended December 31 -------------------------------------- 1995 1994 1993 1992 1991 -------------------------------------- (Unaudited) Earnings Available for Fixed Charges Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles $1,064 852 538 511 451 Distributions in excess of (less than) equity in earnings of less-than- fifty-percent-owned companies (1) 2 9 (3) 1 Fixed charges, excluding capitalized interest and the portion of the preferred dividend requirements of a subsidiary not previously deducted from income* 364 340 363 442 631 - ----------------------------------------------------------------------------- $1,427 1,194 910 950 1,083 ============================================================================= Fixed Charges Interest and expense on indebtedness, excluding capitalized interest $ 285 266 290 392 460 Capitalized interest 31 15 11 16 37 Preferred dividend requirements of a subsidiary 73 56 71 3 - One-third of rental expense, net of subleasing income, for operating leases 36 32 30 38 34 - ----------------------------------------------------------------------------- $ 425 369 402 449 531 ============================================================================= Ratio of Earnings to Fixed Charges 3.4 3.2 2.3 2.1 2.0 - ----------------------------------------------------------------------------- *Includes amortization of capitalized interest totaling approximately $10 million, $10 million, $11 million, $10 million and $137 million in 1995, 1994, 1993, 1992 and 1991, respectively. For 1991, the amount includes approximately $120 million of capitalized interest associated with the writedown of offshore California investments. Earnings available for fixed charges include, if any, the company's equity in losses of companies owned less than fifty percent and having debt for which the company is contingently liable. Fixed charges include the company's proportionate share, if any, of interest relating to the contingent debt. In 1990 and 1988, respectively, the company guaranteed a $400 million bank loan and $250 million of notes payable for the Long-Term Stock Savings Plan (LTSSP), an employee benefit plan. In 1994, the notes payable were refinanced with a $131 million term loan, and the $400 million loan was amended in 1994, and again in 1995. Consolidated interest expense includes interest attributable to the LTSSP borrowings of $3 million, $1 million, $1 million, $1 million and $13 million in 1995, 1994, 1993, 1992 and 1991, respectively. EX-21 12 Exhibit 21 LIST OF SUBSIDIARIES OF PHILLIPS PETROLEUM COMPANY Listed below are subsidiaries of the registrant at December 31, 1995. Certain subsidiaries are omitted since such companies considered in the aggregate do not constitute a significant subsidiary. State or Jurisdiction in Which Subsidiary was Incorporated Name of Company or Organized --------------- --------------------- American Olefins, Inc. Delaware GPM Gas Corporation Delaware Phillips Alaska Natural Gas Corporation Delaware Phillips Coal Company Nevada Phillips Gas Company Delaware Phillips Investment Company Nevada Phillips Natural Gas Company Delaware Phillips Oil Company (Nigeria) Limited Nigeria Phillips Petroleum Canada Ltd. Canada Phillips Petroleum Company Indonesia Delaware Phillips Petroleum Company Norway Delaware Phillips Petroleum Company United Kingdom Limited England Phillips Petroleum Company Western Hemisphere Delaware Phillips Petroleum International Corporation Panama Phillips Petroleum International Corporation Asia Liberia Phillips Petroleum International Corporation Denmark Cayman Islands Phillips Petroleum International Investment Company Delaware Phillips Petroleum Resources, Ltd. Delaware Phillips Petroleum UK Investment Corporation Delaware Phillips Pipe Line Company Delaware Phillips Puerto Rico Core Inc. Delaware Phillips-San Juan Partners, L.P. Delaware Sooner Insurance Company Vermont The Largo Company Delaware WesTTex 66 Pipeline Company Delaware EX-23 13 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 21, 1996, with respect to the consolidated financial statements and schedule of Phillips Petroleum Company included in the Annual Report (Form 10-K) for the year ended December 31, 1995, in the following registration statements and related prospectuses. Phillips Petroleum Company Form S-3 File No. 33-51559 Phillips Petroleum Company Form S-3 File No. 33-54987 Thrift Plan of Phillips Petroleum Company Form S-8 File No. 33-50134 Long-Term Stock Savings Plan of Phillips Petroleum Company Form S-8 File No. 33-50283 Retirement Savings Plan of Phillips Petroleum Company Subsidiaries Form S-8 File No. 33-28669 /s/ Ernst & Young LLP ERNST & YOUNG LLP Tulsa, Oklahoma February 21, 1996 EX-27 14
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Phillips Petroleum Company as of December 31, 1995, and the related consolidated statement of income for the year ended December 31, 1995, and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1995 DEC-31-1995 67 0 1,537 15 505 2,409 19,088 10,595 11,978 2,815 3,097 0 0 533 2,655 11,978 13,368 13,521 11,394 12,160 32 0 265 1,064 595 469 0 0 0 469 1.79 1.79 Purchased crude oil and products + Production and operating expenses + Exploration expenses + Depreciation, depletion and amortization. CGS + Selling, general and administrative expenses + Taxes other than income taxes. Preferred dividend requirements of subsidiary.
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