FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to __________ Commission File Number 1-2256 EXXON CORPORATION ______________________________________________________ (Exact name of registrant as specified in its charter) NEW JERSEY 13-5409005 _____________________________ ___________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5959 Las Colinas Boulevard, Irving, Texas 75039-2298 __________________________________________________________________ (Address of principal executive offices) (Zip Code) (972) 444-1000 ___________________________________________________________ (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of September 30, 1998 _______________________________ ____________________________________ Common stock, without par value 2,431,229,690 EXXON CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS Page Number ______ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statement of Income 3 Three and nine months ended September 30, 1998 and 1997 Condensed Consolidated Balance Sheet 4 As of September 30, 1998 and December 31, 1997 Condensed Consolidated Statement of Cash Flows 5 Nine months ended September 30, 1998 and 1997 Notes to Condensed Consolidated Financial Statements 6 - 8 Item 2. Management's Discussion and Analysis of Financial 9 -14 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 Signature 16 Index to Exhibits 17 -2- EXXON CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements EXXON CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (millions of dollars)
Three Months Ended Nine Months Ended September 30, September 30, __________________ ________________ REVENUE 1998 1997 1998 1997 _______ _______ _______ _______ Sales and other operating revenue, including excise taxes $28,254 $32,381 $87,044 $100,780 Earnings from equity interests and other revenue 525 368 1,589 1,400 ______ ______ ______ ______ Total revenue 28,779 32,749 88,633 102,180 ______ ______ ______ _______ COSTS AND OTHER DEDUCTIONS Crude oil and product purchases 10,973 13,619 34,463 43,457 Operating expenses 2,874 3,186 8,776 9,763 Selling, general and administrative expenses 2,112 2,088 6,306 6,276 Depreciation and depletion 1,337 1,299 4,115 4,068 Exploration expenses, including dry holes 202 174 623 480 Interest expense 42 107 174 289 Excise taxes 3,395 3,616 10,449 10,904 Other taxes and duties 5,699 5,798 16,400 17,182 Income applicable to minority and preferred interests 84 96 259 299 ______ ______ ______ ______ Total costs and other deductions 26,718 29,983 81,565 92,718 ______ ______ ______ ______ INCOME BEFORE INCOME TAXES 2,061 2,766 7,068 9,462 Income taxes 661 946 2,158 3,502 ______ ______ ______ ______ NET INCOME $ 1,400 $ 1,820 $ 4,910 $ 5,960 ====== ====== ====== ====== Net income per common share (dollars) $ 0.58 $ 0.74 $ 2.01 $ 2.40 Net income per common share - assuming dilution (dollars) $ 0.58 $ 0.73 $ 1.99 $ 2.37 Average number common shares outstanding (millions) 2,435 2,470 2,443 2,477 Average number common shares outstanding - assuming dilution (millions) 2,465 2,506 2,473 2,510 Dividends per common share $ 0.410 $ 0.410 $ 1.230 $ 1.215
Net income per common share is based on net income less preferred stock dividends and the weighted average number of outstanding common shares. Net income per common share - assuming dilution is based on net income and the weighted average number of outstanding common shares, including the additional common shares that would have been outstanding if dilutive potential common shares (incentive program stock and preferred stock) had been issued. -3- EXXON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (millions of dollars)
Sept. 30, Dec. 31, 1998 1997 ______ ______ ASSETS Current assets Cash and cash equivalents $ 2,101 $ 4,047 Other marketable securities 108 15 Notes and accounts receivable - net 9,293 10,702 Inventories Crude oil, products and merchandise 4,704 4,725 Materials and supplies 758 762 Prepaid taxes and expenses 1,113 941 ______ ______ Total current assets 18,077 21,192 Property, plant and equipment - net 68,277 66,414 Investments and other assets 8,873 8,458 ______ ______ TOTAL ASSETS $95,227 $96,064 ====== ====== LIABILITIES Current liabilities Notes and loans payable $ 2,639 $ 2,902 Accounts payable and accrued liabilities 14,269 14,683 Income taxes payable 1,857 2,069 ______ ______ Total current liabilities 18,765 19,654 Long-term debt 6,912 7,050 Annuity reserves, deferred credits and other liabilities 25,791 25,700 ______ ______ TOTAL LIABILITIES 51,468 52,404 ______ ______ SHAREHOLDERS' EQUITY Preferred stock, without par value: Authorized: 200 million shares Outstanding: 2 million shares at Sept. 30, 1998 119 3 million shares at Dec. 31, 1997 190 Guaranteed LESOP obligation (125) (225) Common stock, without par value: Authorized: 3,000 million shares Issued: 2,984 million shares 2,323 2,323 Earnings reinvested 54,113 52,214 Cumulative foreign exchange translation adjustment (846) (1,119) Common stock held in treasury: 553 million shares at Sept. 30, 1998 (11,825) 527 million shares at Dec. 31, 1997 (9,723) ______ ______ TOTAL SHAREHOLDERS' EQUITY 43,759 43,660 ______ ______ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $95,227 $96,064 ====== ======
The number of shares of common stock issued and outstanding at September 30, 1998 and December 31, 1997 was 2,431,229,690 and 2,456,315,299, respectively. -4- EXXON CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (millions of dollars)
Nine Months Ended September 30, _________________ 1998 1997 _____ _____ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,910 $ 5,960 Depreciation and depletion 4,115 4,068 Changes in operational working capital, excluding cash and debt 616 229 All other items - net 3 1,758 _____ _____ Net Cash Provided By Operating Activities 9,644 12,015 _____ ______ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (5,948) (5,300) Sales of subsidiaries and property, plant and equipment 304 331 Other investing activities - net (17) (232) _____ _____ Net Cash Used In Investing Activities (5,661) (5,201) _____ _____ NET CASH GENERATION BEFORE FINANCING ACTIVITIES 3,983 6,814 _____ _____ CASH FLOWS FROM FINANCING ACTIVITIES Additions to long-term debt 145 483 Reductions in long-term debt (116) (220) Additions/(reductions) in short-term debt - net (415) (294) Cash dividends to Exxon shareholders (3,014) (3,024) Cash dividends to minority interests (219) (258) Changes in minority interests and sales/ (purchases) of affiliate stock (84) (87) Acquisitions of Exxon shares - net (2,236) (1,555) _____ _____ Net Cash Used In Financing Activities (5,939) (4,955) _____ _____ Effects Of Exchange Rate Changes On Cash 10 (29) _____ _____ Increase/(Decrease) In Cash And Cash Equivalents (1,946) 1,830 Cash And Cash Equivalents At Beginning Of Period 4,047 2,951 _____ _____ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,101 $ 4,781 ===== ===== SUPPLEMENTAL DISCLOSURES Income taxes paid $ 1,738 $ 2,502 Cash interest paid $ 618 $ 576
-5- EXXON CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis Of Financial Statement Preparation These unaudited condensed consolidated financial statements should be read in the context of the consolidated financial statements and notes thereto filed with the S.E.C. in the corporation's 1997 Annual Report on Form 10-K. In the opinion of the corporation, the information furnished herein reflects all known accruals and adjustments necessary for a fair statement of the results for the periods reported herein. All such adjustments are of a normal recurring nature. The corporation's exploration and production activities are accounted for under the "successful efforts" method. During the third quarter of 1997, the corporation increased its ownership in General Sekiyu K.K. (GSK) from 49.0% to 50.1%. These financial statements reflect the consolidation of GSK retroactive to the beginning of 1997. GSK was previously accounted for as an equity company. The January 1, 1997 balance sheet of GSK had total assets of $3.9 billion and total liabilities of $3.2 billion. Consolidated net income was unchanged as a result of the restatement of prior quarter statements of income. 2. Recently Issued Statements Of Financial Accounting Standards In June 1997, the Financial Accounting Standards Board released Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires disclosure of certain information about operating segments and geographic areas of operation. This statement, which will be adopted in 1998, will not have any effect upon the corporation's consolidated financial condition or operations. In June 1998, the Financial Accounting Standards Board released Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, which must be adopted beginning no later than 2000, establishes accounting and reporting standards for derivative instruments. The statement requires that an entity recognize all derivatives as either assets or liabilities in the financial statements and measure those instruments at fair value, and it defines the accounting for changes in the fair value of the derivatives depending on the intended use of the derivative. No decision has been made as to whether the corporation will adopt this standard before 2000. The effect on the corporation's operating results subsequent to adoption is not expected to be material. Liquidity and cash flow will not be affected. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." The statement requires that costs of start-up activities and organizational costs be expensed as incurred. The statement is effective no later than 1999, with earlier application permitted. The corporation expects that this new requirement will not materially affect its consolidated financial condition or operations. 3. Litigation and Other Contingencies A number of lawsuits, including class actions, were brought in various courts against Exxon Corporation and certain of its subsidiaries relating to the accidental release of crude oil from the tanker Exxon Valdez in 1989. Essentially all of these lawsuits have now been resolved or are subject to appeal. -6- EXXON CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On September 24, 1996, the United States District Court for the District of Alaska entered a judgment in the amount of $5.058 billion in the Exxon Valdez civil trial that began in May 1994. The District Court awarded approximately $19.6 million in compensatory damages to fisher plaintiffs, $38 million in prejudgment interest on the compensatory damages and $5 billion in punitive damages to a class composed of all persons and entities who asserted claims for punitive damages from the corporation as a result of the Exxon Valdez grounding. The District Court also ordered that these awards shall bear interest from and after entry of the judgment. The District Court stayed execution on the judgment pending appeal based on a $6.75 billion letter of credit posted by the corporation. Exxon has appealed the judgment. Exxon has also appealed the District Court's recent denial of its renewed motion for new trial. The corporation continues to believe that the punitive damages in this case are unwarranted and that the judgment should be set aside or substantially reduced by the appellate courts. The ultimate cost to the corporation from the lawsuits arising from the Exxon Valdez grounding is not possible to predict and may not be resolved for a number of years. German and Dutch affiliated companies are the concessionaires of a natural gas field subject to a treaty between the governments of Germany and the Netherlands under which the gas reserves in an undefined border or common area are to be shared equally. Entitlement to the reserves is determined by calculating the amount of gas which can be recovered from this area. Based on the final reserve determination, the German affiliate has received more gas than its entitlement. Arbitration proceedings, as provided in the agreements, have been underway to determine the manner of resolving the issues between the German and Dutch affiliated companies. On July 8, 1996, an interim ruling was issued establishing a provisional compensation payment for the excess gas received. Additional compensation, if any, remains subject to further arbitration proceedings or negotiation. Other substantive matters remain outstanding, including recovery of royalties paid on such excess gas and the taxes payable on the final compensation amount. The net financial impact on the corporation is not possible to predict at this time given these outstanding issues. However, the ultimate outcome is not expected to have a materially adverse effect upon the corporation's consolidated financial condition or operations. The U.S. Tax Court has decided the issue with respect to the pricing of crude oil purchased from Saudi Arabia for the years 1979-1981 in favor of the corporation. This decision is subject to appeal. Certain other issues for the years 1979-1988 remain pending before the Tax Court. The ultimate resolution of these issues is not expected to have a materially adverse effect upon the corporation's operations or financial condition. Claims for substantial amounts have been made against Exxon and certain of its consolidated subsidiaries in other pending lawsuits, the outcome of which is not expected to have a materially adverse effect upon the corporation's consolidated financial condition or operations. The corporation and certain of its consolidated subsidiaries are directly and indirectly contingently liable for amounts similar to those at the prior year-end relating to guarantees for notes, loans and performance under contracts, including guarantees of non-U.S. excise taxes and customs duties of other companies, entered into as a normal business practice, under reciprocal arrangements. -7- EXXON CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Additionally, the corporation and its affiliates have numerous long-term sales and purchase commitments in their various business activities, all of which are expected to be fulfilled with no adverse consequences material to the corporation's operations or financial condition. The operations and earnings of the corporation and its affiliates throughout the world have been, and may in the future be, affected from time to time in varying degree by political developments and laws and regulations, such as forced divestiture of assets; restrictions on production, imports and exports; price controls; tax increases and retroactive tax claims; expropriation of property; cancellation of contract rights and environmental regulations. Both the likelihood of such occurrences and their overall effect upon the corporation vary greatly from country to country and are not predictable. 4. Nonowner Changes in Shareholders' Equity Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," was implemented in January 1998. This statement establishes standards for reporting and display of total nonowner changes in shareholders' equity. For the corporation, total nonowner changes in shareholders' equity include net income and the change in the cumulative foreign exchange translation adjustment component of shareholders' equity. The total nonowner changes in shareholders' equity for the three months ended September 30, 1998 and 1997 were $1,978 million and $1,163 million, respectively. The total nonowner changes in shareholders' equity for the nine months ended September 30, 1998 and 1997 were $5,183 million and $4,234 million, respectively. This statement did not have any effect on the corporation's consolidated financial condition or operations. -8- EXXON CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FUNCTIONAL EARNINGS SUMMARY Third Quarter First Nine Months _________________ _________________ 1998 1997 1998 1997 ______ ______ ______ ______ (millions of dollars) Petroleum and natural gas Exploration and production United States $ 211 $ 326 $ 625 $1,215 Non-U.S. 274 569 1,454 2,079 Refining and marketing United States 142 182 468 401 Non-U.S. 439 345 1,347 1,024 _____ _____ _____ _____ Total petroleum and natural gas 1,066 1,422 3,894 4,719 Chemicals United States 181 214 579 652 Non-U.S. 120 135 391 400 Other operations 102 111 294 366 Corporate and financing (69) (62) (248) (177) _____ _____ _____ _____ NET INCOME $1,400 $1,820 $4,910 $5,960 ===== ===== ===== =====
THIRD QUARTER 1998 COMPARED WITH THIRD QUARTER 1997 Exxon Corporation estimated third quarter 1998 net income of $1,400 million, down 23 percent from the record $1,820 million in third quarter 1997. On a per share basis, net income declined 22 percent to $0.58 in the third quarter of 1998, reflecting the ongoing share repurchase program. Exxon's net income of $1.4 billion was down $420 million or 23 percent, reflecting weaker crude oil prices which on average were about $6 per barrel or 33 percent lower than last year. Earnings were also adversely affected by lower natural gas prices and lower industry refining margins in the U.S. and Asia-Pacific. Crude oil prices continued to be weak and on average were at their lowest level since the third quarter of 1986. Exxon's U.S. and European natural gas realizations also declined to the lowest quarterly level in nearly three years. Natural gas production was up slightly from the third quarter of 1997, while liquids volumes were essentially flat. In the downstream, earnings were up 10 percent, reflecting improved marketing margins in the U.S. and Europe and higher lubes earnings. Total petroleum product sales volumes were just below the record levels of last year's third quarter as continued growth in most markets offset weakness in Asia-Pacific. Chemical earnings were down 14 percent from last year as a result of lower margins. Worldwide commodity prices continued to decline due to excess industry capacity and the slowdown in Asian economies. Earnings from other operations were essentially flat as lower coal and copper prices were offset by record quarterly production volumes in both businesses. During the quarter, Exxon continued its active investment program, spending $2.6 billion on capital and exploration projects. -9- EXXON CORPORATION OTHER COMMENTS ON THIRD QUARTER COMPARISON Exploration and production earnings were adversely affected by substantially lower crude oil prices which have fallen significantly since early in the fourth quarter of 1997. Third quarter crude prices averaged about $6 per barrel less than the third quarter of last year. Natural gas prices were also below third quarter 1997 levels in the U.S. and Europe. Liquids production of 1,553 kbd (thousand barrels per day) was flat versus last year as production increases from new developments in the U.K. and Azerbaijan and higher Canadian and Asia-Pacific output were offset by natural field declines in mature areas. Natural gas production of 5,219 mcfd (million cubic feet per day) was 1 percent higher due to stronger European volumes. Earnings from U.S. exploration and production were $211 million compared with $326 million last year. Outside the U.S., earnings from exploration and production were $274 million, versus $569 million in the third quarter 1997. Petroleum product sales of 5,413 kbd were just below last year's record third quarter with higher volumes in Europe offsetting lower volumes in Asia-Pacific. Downstream earnings benefited from higher marketing margins in the U.S., Europe, and Latin America, improved lubes earnings and positive foreign exchange effects. Industry refining profitability was mixed with better European and Latin American margins offset by weakness in Asia-Pacific and the U.S. In the U.S., refining and marketing earnings were $142 million, down $40 million from the prior year. Refining and marketing operations outside the U.S. earned $439 million, an increase of $94 million from 1997. Chemical earnings were $301 million compared with $349 million in the same period last year. Margins were lower as chemical commodity prices declined further. Prime product sales volumes remained strong in most areas except Asia-Pacific. Earnings from other operations, including coal, minerals and power, totaled $102 million, compared to $111 million in the third quarter of 1997. Lower copper and coal prices were offset by record production volumes. Corporate and financing expenses of $69 million compared with $62 million in the third quarter of last year. During the third quarter of 1998, Exxon purchased 8.9 million shares of its common stock for the treasury at a cost of $621 million, representing a continuation of purchases to offset shares issued in conjunction with the Company's benefit plans and programs, as well as the increased share repurchases announced in the first quarter of 1997. Shares outstanding were reduced from 2,438.4 million at the end of the second quarter of 1998 to 2,431.2 million at the end of the third quarter. Purchases are made in the open market and through negotiated transactions and may be discontinued at any time. -10- EXXON CORPORATION FIRST NINE MONTHS 1998 COMPARED WITH FIRST NINE MONTHS 1997 Net income was $4,910 million for the first nine months of 1998, a decrease of 18 percent from the $5,960 million earned in 1997. On a per share basis, net income was $2.01 for the first nine months of 1998 compared to $2.40 last year. Exploration and production earnings declined primarily due to lower crude oil prices which decreased by about $6 per barrel versus the same period in 1997. Earnings were also negatively impacted by lower U.S. and international natural gas prices. Liquids production of 1,595 kbd was up compared to 1,589 kbd last year. Worldwide natural gas production of 5,990 mcfd was down 114 mcfd from the first nine months of 1997, reflecting warmer weather in Europe. Earnings from U.S. exploration and production operations for the first nine months were $625 million, down from $1,215 million in 1997. Outside the U.S., exploration and production earnings of $1,454 million declined $625 million from last year. Petroleum product sales of 5,412 kbd increased 22 kbd over last year, with higher sales in all major markets except Asia-Pacific. Earnings from U.S. refining and marketing operations were $468 million, up $67 million from 1997, reflecting improved marketing and lubes margins. Outside the U.S., 1998 refining and marketing earnings for the first nine months increased $323 million to $1,347 million with stronger marketing and refining margins in Europe and Latin America more than offsetting weakness in Asia-Pacific. Earnings also benefited from net positive foreign exchange effects. Chemical earnings totaled $970 million in the first nine months of 1998 compared with $1,052 million last year. Margins were weaker versus last year, primarily as a result of lower industry commodity prices. Despite the weaker Asian markets, prime product sales volumes of 13,024 kt (thousand metric tons) were up 1 percent from last year's record levels. Earnings from other operations totaled $294 million, a decrease of $72 million from the first nine months of 1997, reflecting significantly lower copper prices, as well as lower international coal prices. 1998 year-to-date coal and copper production volumes were both at record levels. Corporate and financing expenses increased $71 million to $248 million, reflecting higher tax-related charges. However, the company's operating segments continued to benefit from the impact of lower effective tax rates and the favorable resolution of tax related issues. -11- EXXON CORPORATION Net cash generation before financing activities was $3,983 million in the first nine months of 1998 versus $6,814 million in the same period last year. Operating activities provided net cash of $9,644 million, a decrease of $2,371 million from the prior year, influenced by lower net income and the absence of an insurance related settlement received during the prior year. Investing activities used net cash of $5,661 million or $460 million more than a year ago, reflecting a higher level of capital investment. Net cash used in financing activities was $5,939 million in the first nine months of 1998 versus $4,955 million for the year-ago period. The increase of $984 million reflects higher purchases of shares of Exxon common stock and debt reductions. During the first nine months of 1998, a total of 37.5 million shares of Exxon common stock were acquired for the treasury at a cost of $2,537 million. Purchases are made in the open market and through negotiated transactions. These purchases reflect both the increased repurchases announced in the first quarter of 1997, as well as purchases to offset shares issued in conjunction with the Company's benefit plans and programs. Purchases may be discontinued at any time. Capital and exploration expenditures in this year's first nine months were $7,079 million versus $6,279 million a year ago. Capital and exploration expenditures in 1998, excluding foreign exchange rate fluctuations, are anticipated to increase about 10 percent over 1997, as attractive investment opportunities continue to be developed in each of the major business segments. Total debt of $9.6 billion at September 30, 1998 decreased $0.4 billion from year-end 1997. The corporation's debt to capital ratio was 17.2 percent at the end of the first nine months of 1998, down from 17.8 percent at year-end 1997. Over the twelve months ended September 30, 1998, return on average shareholders' equity was 17.0 percent. Return on average capital employed, which includes debt, was 14.5 percent over the same time period. Although the corporation issues long-term debt from time to time and maintains a revolving commercial paper program, internally generated funds cover the majority of its financial requirements. Litigation and other contingencies are discussed in note 3 to the unaudited condensed consolidated financial statements. There are no events or uncertainties known to management beyond those already included in reported financial information that would indicate a material change in future operating results or future financial condition. The corporation, as part of its ongoing asset management program, continues to evaluate its mix of assets for potential upgrade. Because of the ongoing nature of this program, dispositions will continue to be made from time to time which will result in either gains or losses. -12- EXXON CORPORATION YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define a specific year. Absent corrective actions, a computer program that has date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions to various activities and operations. The corporation initiated assessments in prior years to identify the work efforts required to assure that systems supporting the business successfully operate beyond the turn of the century. The scope of this work effort encompasses business information systems, infrastructure, and technical and field systems, including systems utilizing embedded technology, such as microcontrollers. Plans for achieving Year 2000 compliance were finalized during 1997, and implementation work was underway at year-end. The initial phases of this work, an inventory and assessment of potential problem areas, have been essentially completed. Modification and testing phases continue, with most required system modifications to mission critical systems planned for completion by year-end 1998. Attention has also been focussed on compliance attainment efforts of vendors and others, including key system interfaces with customers and suppliers. Most key suppliers and business partners have been contacted for clarification of their Year 2000 plans. Notwithstanding the substantive work efforts described above, the corporation could potentially experience disruptions to some operations or supplies as a result of Year 2000 issues, particularly in the first few weeks of the year 2000. Such disruptions could include impacts from potentially non-compliant systems utilized by suppliers, customers or government entities. The potential impact of such disruptions cannot be reasonably estimated. Work is underway to develop business contingency plans in order to attempt to mitigate the extent of potential disruption to business operations. This work is targeted to be essentially complete by mid-1999. Through September 30, 1998, about $130 million of costs had been incurred in the corporation's efforts to achieve Year 2000 compliant systems. The ultimate total cost to the corporation of achieving Year 2000 compliant systems is currently estimated to be $250 to $275 million, primarily over the 1997-1999 timeframe, and is not expected to be a material incremental cost impacting Exxon's operations, financial condition or liquidity. ECONOMIC AND MONETARY UNION IN EUROPE The European Union is moving toward economic and monetary union in Europe with an ultimate goal of introducing a single currency called the "euro." Eleven of the fifteen member countries of the European Union will begin conversion of their currencies to the "euro" on January 1, 1999. Based on work to date, this conversion is not expected to have a material effect on the corporation's operations, financial condition or liquidity. FORWARD-LOOKING STATEMENTS Statements in this report regarding future events or conditions are forward- looking statements. Actual results, including capital expenditures and the impact of the Year 2000 Issue, could differ materially due to, among other things, factors discussed in this report and in Item 1 of the corporation's most recent annual report on Form 10-K. -13- EXXON CORPORATION SPECIAL ITEMS _____________ Third Quarter First Nine Months _____________ _________________ 1998 1997 1998 1997 ____ ____ ____ ____ (millions of dollars) TOTAL 0 0 0 0 ==== ==== ==== ==== -14- EXXON CORPORATION Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about market risks for the nine months ended September 30, 1998 does not differ materially from that discussed under Item 7A of the registrant's Annual Report on Form 10-K for 1997. PART II. OTHER INFORMATION Item 1. Legal Proceedings The United States, at the request of the United States Environmental Protection Agency ("EPA"), filed suit against the registrant in the United States District Court, Southern District of the State of Texas, on February 11, 1998. The EPA alleged violations of the Clean Air Act at the registrant's Baytown refinery, primarily relating to the registrant's failure to test and comply with notification requirements with respect to flares at the refinery. The EPA is seeking civil penalties and injunctive relief requiring the registrant to conduct performance testing. Exxon has agreed to pay a civil penalty of $250,000 to settle this matter. Although the settlement is not yet final, the amount of the penalty is not expected to change. Item 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit 10(iii)(a) - Registrant's 1993 Incentive Program, as amended September 30, 1998. Exhibit 27 - Financial Data Schedule (included only in the electronic filing of this document). b) Reports on Form 8-K The registrant has not filed any reports on Form 8-K during the quarter. -15- EXXON CORPORATION FORM 10-Q SIGNATURE Pursuant to the requirements 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. EXXON CORPORATION Date: November 12, 1998 /s/DONALD D. HUMPHREYS _______________________________________________ Donald D. Humphreys, Vice President, Controller and Principal Accounting Officer -16- EXXON CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 INDEX TO EXHIBITS 10(iii)(a). Registrant's 1993 Incentive Program, as amended September 30, 1998. 27. Financial Data Schedule (included only in the electronic filing of this document). -17-