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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
UNDER SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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PENNACO ENERGY, INC.
(Name of Subject Company)
PENNACO ENERGY, INC.
(Name of Persons Filing Statement)
COMMON STOCK, $0.001 PAR VALUE
(Title of Class of Securities)
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708046107
(CUSIP Number of Class of Securities)
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PAUL M. RADY
PENNACO ENERGY, INC.
1050 17TH STREET, SUITE 700
DENVER, COLORADO 80265
(303) 629-6700
(Name, address and telephone number of person
authorized to receive notices and communications
on behalf of the persons filing statement)
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With copies to:
David P. Oelman, Esq.
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, Texas 77002
(713) 758-2222
[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
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INTRODUCTION
This Solicitation/Recommendation Statement on Schedule 14D-9 (this
"Schedule 14D-9") relates to an offer by Marathon Oil Acquisition 1, Ltd., a
Delaware corporation (the "Purchaser"), which is a direct wholly owned
subsidiary of Marathon Oil Company, an Ohio corporation ("Marathon"), which is a
direct wholly owned subsidiary of USX Corporation, a Delaware corporation
("USX"), to purchase all of the outstanding shares of Common Stock (as defined
below) of Pennaco Energy, Inc., a Delaware corporation (the "Company"), together
with the associated common share purchase rights (the "Rights") issued pursuant
to the Rights Agreement dated as of February 24, 1999, as amended as of December
22, 2000, between the Company and Computershare Investor Services, L.L.C., as
rights agent (collectively with the Common Stock, the "Shares").
ITEM 1. SUBJECT COMPANY INFORMATION.
The name of the subject company is Pennaco Energy, Inc. Its principal
executive offices are located at 1050 17th Street, Suite 700, Denver, Colorado
80265 and its phone number is (303) 629-6700. This Schedule 14D-9 relates to the
Company's common stock, par value $.001 per share (the "Common Stock"). As of
December 29, 2000, there were 19,641,286 shares of Common Stock outstanding.
ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON.
(a) Name and Address. The name, business address and business telephone
number of the Company, which is the subject company and the person filing this
statement, are set forth in Item 1 above, which information is incorporated
herein by reference.
(b) Tender Offer. This Schedule 14D-9 relates to the tender offer made by
the Purchaser, disclosed in a Tender Offer Statement on Schedule TO dated
January 8, 2001 (as amended or supplemented from time to time, the "Schedule
TO"), to purchase all of the outstanding shares of Common Stock, together with
the associated Rights, at a price (the "Offer Price") of $19.00 per Share, net
to the seller in cash, without interest, upon the terms and subject to the
conditions set forth in the Offer to Purchase, dated January 8, 2001 (as amended
or supplemented from time to time, the "Offer to Purchase"), and the related
Letter of Transmittal (which, together with any amendments or supplements
thereto, collectively constitute the "Offer"), copies of which are filed as
Exhibits (a)(1) and (a)(2) hereto, respectively, and incorporated herein by
reference.
The Offer is being made pursuant to an Agreement and Plan of Merger, dated
as of December 22, 2000, among the Company, Marathon and the Purchaser (the
"Merger Agreement"), which provides for (i) the making of the Offer by the
Purchaser, subject to the conditions set forth in the Offer and to the
conditions and upon the terms of the Merger Agreement and (ii) the subsequent
merger of the Purchaser with and into the Company (the "Merger"), at which time
the separate corporate existence of the Purchaser shall cease and the Company
shall continue as the surviving corporation (the "Surviving Corporation"). In
the Merger, each Share, except for Shares owned by the Company, the Purchaser,
Marathon and any stockholder properly exercising appraisal rights, if available,
outstanding at the Effective Time (as defined in the Merger Agreement) will, by
virtue of the Merger and without any action by the holder thereof, be converted
into the right to receive, without interest, an amount in cash equal to the
price per Share paid in the Offer (the "Merger Consideration"). The Merger
Agreement, a copy of which is filed as Exhibit (e)(1) hereto, is summarized in
Section 12 of the Offer to Purchase and incorporated herein by reference.
As set forth in the Schedule TO, the principal executive offices of the
Purchaser and Marathon are located at 5555 San Felipe, Houston, Texas 77056 and
the principal executive offices of USX are located at 600 Grant Street,
Pittsburgh, Pennsylvania 15219-4776.
ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
Except as set forth in response to this Item 3 or in Annex A attached
hereto or as incorporated by reference herein, to the knowledge of the Company,
there are no material agreements, arrangements, or understandings and no actual
or potential conflicts of interest between the Company or its affiliates, on the
one
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hand, and (1) the Company's executive officers, directors or affiliates or (2)
the Purchaser, Marathon, USX or any of their respective executive officers,
directors or affiliates, on the other hand.
A summary of the material provisions of the Merger Agreement is included in
Section 12 of the Offer to Purchase, which is incorporated herein by reference.
The summary of the Merger Agreement in the Offer to Purchase is qualified in its
entirety by reference to the Merger Agreement.
Certain contracts, arrangements, or understandings between the Company or
its affiliates and certain of the Company's directors, executive officers and
affiliates are described in the Information Statement of the Company attached to
this Schedule 14D-9 as Annex A (the "Information Statement"). The Information
Statement is being furnished to the Company's stockholders pursuant to Section
14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and Rule 14f-1 issued under the Exchange Act in connection with the Purchaser's
right (after acceptance for payment of, and payment by Purchaser for, any Shares
pursuant to the Offer) to designate persons to the Board of Directors of the
Company (the "Board") other than at a meeting of the stockholders of the
Company. The Information Statement is incorporated herein by reference.
The Company's executive officers are parties to employment agreements, as
well as "parachute" tax agreements, which may provide them with compensation as
a result of the consummation of the Merger. Each of these agreements is
described in more detail in the Information Statement.
Under the terms of the Company's 1998 Stock Option and Incentive Plan (the
"Plan"), all outstanding stock options will vest as a result of the transactions
contemplated by the Merger Agreement. Pursuant to the Merger Agreement, the
Board (or the Compensation Committee of the Board) will take or cause to be
taken such actions as are required to provide that each stock option outstanding
immediately prior to the acceptance for payment of Shares pursuant to the Offer
will be canceled, with the holder thereof becoming entitled to receive the
amount of cash in respect of such stock options as provided in the Plan upon a
change in control. The Plan provides that the option holder will receive the
Black Scholes value of the options upon the change in control. As a condition to
entering into the Merger Agreement, Marathon required that holders of
approximately 90% of the outstanding stock options, including all directors and
executive officers, agree that each stock option held by such holder will be
canceled, with such holder becoming entitled to receive an amount of cash in
respect of such stock option equal to the product of (A) the excess, if any, of
(x) the Merger Consideration over (y) the exercise price per share subject to
such stock option and (B) the number of shares subject to such stock option
immediately prior to its cancellation. Information regarding options held by the
Company's directors and executive officers is set forth in the Information
Statement.
The Merger Agreement also provides that Marathon will cause the Surviving
Corporation to indemnify, for a period of six years from the Effective Time,
each person who is now, or has been at any time, a director or officer of the
Company, for claims or losses based on, or arising out of, the fact that such
person is or was a director or officer of the Company, in each case, to the full
extent that Marathon or the Company is permitted under applicable law to so
indemnify. In addition, Marathon has agreed to cause to be maintained for a
period of not less than six years after the Effective Time, an insurance and
indemnification policy for the benefit of those persons who are covered by the
Company's directors' and officers' liability insurance at the Effective Time
that provides for coverage of events occurring at or prior to the Effective Time
(the "D & O Insurance"). The D & O Insurance will be at least equal to the
coverage provided under the Company's current directors' and officers' liability
insurance policies, to the extent that such liability insurance can be
maintained at an annual cost to Marathon not greater than 150 percent of the
premium for the current Company directors' and officers' liability insurance;
provided, however, that if such insurance cannot be so maintained at or below
such cost, Marathon will maintain as much of such insurance as can be so
maintained at a cost equal to 150 percent of the current annual premiums of the
Company for such insurance.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Solicitation or Recommendation. At a meeting held on December 22,
2000, the Board unanimously (i) approved the Merger Agreement, the Offer and the
Merger, (ii) determined that the Offer and the Merger are advisable and fair to,
and in the best interests of, the Company and its stockholders, and (iii) voted
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to recommend that the Company's stockholders accept the Offer and tender their
Shares pursuant to the Offer. Accordingly, the Board unanimously recommends that
the stockholders of the Company accept the Offer and tender their Shares
pursuant to the Offer. Copies of the Company's letter to the stockholders of the
Company communicating the Board's recommendation and the joint press release of
the Company and Marathon announcing the Merger Agreement and the transactions
contemplated thereby are filed as Exhibits (a)(3) and (a)(4) hereto,
respectively, and are incorporated herein by reference.
(b) Reasons.
Background of the Offer. From time to time, the Company has been the
subject of informal inquiries regarding a possible acquisition or other business
combination transaction. On September 8, 2000, Mr. Douglas E. Brooks,
Manager -- Business Development for the Rocky Mountain Region of Marathon, made
such an initial inquiry to Mr. Paul M. Rady, Chairman of the Board, President
and Chief Executive Officer of the Company. In response to the inquiry, the
Company provided representatives of Marathon with various materials containing
publicly available information about the Company's operations.
On November 8, 2000, Mr. Clarence P. Cazalot, President of Marathon,
contacted Mr. Rady to express Marathon's interest in acquiring the Company and
to explore business combination options. On November 10, 2000, Mr. Rady and Mr.
Glen C. Warren, Jr., Executive Vice President, Chief Financial Officer and
Director of the Company, met in Houston, Texas with Mr. Cazalot, Mr. Steven B.
Hinchman, Senior Vice President -- Operations of Marathon, and Mr. Richard J.
Murphy, Manager -- Mergers and Acquisitions of Marathon, to discuss a potential
acquisition transaction. The parties agreed to further explore a possible
transaction over the next 30 days. The Company agreed at that time to provide
Marathon with information concerning the Company's operations pursuant to the
terms of a confidentiality agreement dated as of November 15, 2000.
On November 16 and 17, 2000, representatives of Marathon met with members
of the Company's senior management team in Denver, Colorado for an initial due
diligence session. Throughout the latter half of November and the first half of
December 2000, Marathon conducted a due diligence review of the Company and its
operations.
As a result of the preliminary discussions with Marathon, as well as other
informal inquiries that had been received from time to time, the Company
determined in late November 2000 to interview several investment banking firms
in order to retain a financial advisor, which would assist the Company with any
potential transaction with Marathon, as well as any other inquiries that might
be received or solicited.
On December 8, 2000, Mr. Cazalot discussed with Mr. Rady Marathon's initial
valuation of the Company. After receiving this initial indication of interest,
the Board held a special meeting on the same day to discuss a potential
transaction with Marathon. The Board was advised of the level of Marathon's
indication of interest and determined that the initial valuation was not
acceptable. However, the Board authorized the officers of the Company to
continue discussions with Marathon's representatives. Following this meeting,
Company representatives held additional discussions and provided additional due
diligence materials to Marathon's representatives. On December 14, 2000, the
Company's senior management was advised of a revised indication of interest from
Marathon at an increased offer price of $19.00 per Share. At a regularly
scheduled meeting of the Board held on the same date, the Board was advised of
this revised indication of interest and of the status of the continuing
discussions with Marathon. At this meeting, the Board authorized continued
discussions with representatives of Marathon, authorized the engagement of
Lehman Brothers Inc. ("Lehman Brothers") to act as its financial advisor with
respect to the proposed transaction and authorized the appropriate officers of
the Company to engage legal counsel.
On December 15, 2000, following continued discussions between senior
representatives of Marathon and the Company, the representatives of the parties
reached a tentative agreement as to the principal economic terms of the
transaction, subject to finalizing Marathon's due diligence, negotiation of a
definitive agreement and the approval of each party's board of directors. The
Company directed its counsel to prepare an initial draft of the Merger
Agreement, which was circulated to Marathon and its representatives on December
18, 2000. Lehman Brothers conducted formal due diligence with the Company's
senior management in Denver,
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Colorado on December 18, 2000. Between December 18 and 22, 2000, representatives
of Marathon conducted a further due diligence review of the Company and its
assets and operations.
On December 19, 2000, the Board held a special meeting to again discuss the
terms of the proposed transaction. Representatives of Lehman Brothers were also
present at the meeting and described the role Lehman Brothers would play in
connection with the continued discussions with Marathon and the fairness
analysis Lehman Brothers would undertake to deliver. Representatives of the
Company's counsel were also present and described the legal issues surrounding a
proposed transaction, as well as the terms of the transaction contained in the
initial draft of the Merger Agreement that had been delivered to Marathon and
its legal counsel. The Board directed the appropriate officers of the Company,
assisted by Lehman Brothers, as well as Company counsel, to continue
negotiations with Marathon and its representatives. Following this meeting,
representatives of the Company and Marathon proceeded to negotiate, in detail,
the terms of the proposed transaction at meetings and conference calls held
December 20, 21 and 22, 2000.
On December 22, 2000, the Board held a special meeting to review and
discuss with the Company's management and legal and financial advisors the terms
of the proposed acquisition and the applicable agreements. At this meeting,
Lehman Brothers reviewed with the Board its financial analysis of the
consideration payable in the Offer and the Merger and rendered to the Board an
oral opinion (confirmed in writing) to the effect that, as of the date of the
opinion and based upon and subject to certain matters stated in such opinion,
the $19.00 per Share cash consideration to be received in the Offer and the
Merger by the Company's stockholders (other than the Company, the Purchaser and
Marathon) was fair, from a financial point of view, to such holders. Also at
this meeting, the Company's counsel gave an update with respect to various legal
aspects of the transaction. At the conclusion of this meeting, the Board
unanimously approved the Offer, the Merger and the Merger Agreement, determined
that the Offer, the Merger and the Merger Agreement are advisable and fair to
and in the best interests of the Company's stockholders, and recommended that
the stockholders accept the Offer and tender their Shares pursuant thereto.
The Merger Agreement was thereafter finalized and executed after the
closing of trading on December 22, 2000, and a joint press release announcing
the proposed Offer and the Merger was issued by the Company and Marathon.
On January 8, 2001, the Purchaser commenced the Offer.
For additional information regarding the background of the Offer, please
read Section 11 of the Offer to Purchase, which is incorporated herein by
reference.
Reasons. In making the determinations and recommendations set forth in
subparagraph (a) above, the Board considered a number of factors, including,
without limitation, the following:
- the Board's knowledge of the Company's business, operations, prospects,
projected financial performance and competitive position and current
trends in the natural gas industry, including production of coal bed
methane gas;
- the financial and other terms and conditions of the Offer and the Merger
Agreement and the fact that they were the product of arm's-length
negotiations between the parties;
- the fact that the $19.00 per Share price to be received by the Company's
stockholders in the Offer and the Merger represents a significant premium
over the historical trading prices for the Company's Common Stock since
it began trading in July 1998, including a 30% premium over the closing
market price of $14.625 per share on December 21, 2000, the last full
trading day prior to the Board's approval of the Merger Agreement and a
40% premium over the average closing market price of $13.5375 per share
for the 20 trading days prior to the Board's approval of the Merger
Agreement;
- the fact that the Offer and the Merger provide for a prompt cash tender
offer for all of the Shares to be followed by the Merger for the same
consideration, thereby enabling the Company's stockholders, to obtain
promptly the benefits of the transaction in exchange for their Shares;
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- the financial presentation of Lehman Brothers, including its opinion as
to the fairness, from a financial point of view and as of the date of the
opinion, of the $19.00 per Share cash consideration to be received in the
Offer and the Merger by the Company's stockholders (other than the
Company, the Purchaser and Marathon). The full text of Lehman Brothers'
written opinion, dated December 22, 2000, which sets forth the
assumptions made, matters considered and limitations on the review
undertaken by Lehman Brothers, is attached hereto as Annex B and is
incorporated herein by reference;
- the fact that the Offer and the Merger were not expressly conditioned on
the availability of financing, which, combined with the experience,
reputation and financial condition of Marathon, increased the likelihood
that the proposed Offer and Merger would be consummated;
- the terms of the Merger Agreement, including the parties'
representations, warranties and covenants and the conditions to their
respective obligations;
- the interests of the Company's directors and executive officers in the
proposed transaction as set forth in Item 3 above; and
- the fact that the Company may terminate the Merger Agreement in order to
approve a tender offer for the Shares or other proposed business
combination by a third party on terms more favorable to the Company's
stockholders than the Offer and the Merger, upon the payment to Marathon
of a $15 million termination fee.
The Board did not assign relative weights to the above factors or determine
that any factor was of particular importance. Rather, the Board viewed its
position and recommendations as being based on the totality of the information
presented to and considered by it. In addition, it is possible that different
members of the Board assigned different weights to the various factors described
above.
(c) Intent to Tender. To the Company's knowledge after reasonable inquiry,
the Company's executive officers, directors and affiliates currently intend to
tender all Shares held of record or beneficially by them pursuant to the Offer
or to vote in favor of the Merger. The foregoing does not include Common Stock
over which, or with respect to which, any such executive officer, director or
affiliate acts in a fiduciary or representative capacity or is subject to the
instructions of a third party with respect to such tender.
ITEM 5. PERSON/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.
The Company has retained Lehman Brothers to act as its exclusive financial
advisor in connection with the Offer and the Merger. Pursuant to the terms of
Lehman Brothers' engagement, the Company has agreed to pay Lehman Brothers for
its services, upon consummation of the Offer and the Merger, an aggregate fee
equal to a percentage of the total consideration, including liabilities assumed,
payable in the Offer and the Merger. The aggregate fee payable to Lehman
Brothers is currently estimated to be approximately $3 million. The Company has
also agreed to reimburse Lehman Brothers for reasonable travel and other
out-of-pocket expenses, including reasonable fees and expenses of its legal
counsel, and to indemnify Lehman Brothers and related parties against certain
liabilities, including liabilities under the federal securities laws, arising
out of Lehman Brothers' engagement. In the ordinary course of business, Lehman
Brothers and its affiliates may actively trade or hold the securities of the
Company and affiliates of Marathon for their own account or for the account of
customers and, accordingly, may at any time hold a long or short position in
such securities.
Neither the Company nor any person acting on its behalf has employed,
retained or compensated any other person to make solicitations or
recommendations to stockholders on its behalf concerning the Offer or the
Merger.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
During the past 60 days, neither the Company nor any subsidiary of the
Company nor, to the best of the Company's knowledge, any executive officer,
director, or affiliate of the Company has effected a transaction in shares of
Common Stock.
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ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.
Other than as set forth in this Schedule 14D-9, no negotiation is being
undertaken or is underway by the Company in response to the Offer that relates
to:
- a tender offer or other acquisition of the Company's securities by the
Company, any subsidiary of the Company or any other person;
- an extraordinary transaction, such as a merger, reorganization or
liquidation, involving the Company or any subsidiary of the Company;
- a purchase, sale or transfer of a material amount of assets of the
Company or any subsidiary of the Company; or
- any material change in the present dividend rate or policy, or
indebtedness or capitalization of the Company.
Except as described above or in Item 3 of this Schedule 14D-9, there are no
transactions, board resolutions, agreements in principle or signed contracts in
response to the Offer that relate to or would result in one or more of the
matters referred to in this Item 7.
ITEM 8. ADDITIONAL INFORMATION.
(a) Delaware General Corporation Law. Under the Delaware General
Corporation Law (the "DGCL"), if the Purchaser or any other subsidiary of
Marathon acquires, pursuant to the Offer or otherwise, at least 90% of the
outstanding Shares, the Purchaser will be able to effect the Merger after
consummation of the Offer without a vote of the Company's stockholders. However,
if the Purchaser does not acquire at least 90% of the outstanding Shares, a vote
of the Company's stockholders is required under the DGCL, and a longer period of
time will be required to effect the Merger. Please read Section 12 of the Offer
to Purchase, which is incorporated herein by reference.
No appraisal rights are available in connection with the Offer. Appraisal
rights may be available in connection with the Merger. Please read Section 12 of
the Offer to Purchase, which is incorporated herein by reference.
For information regarding the inapplicability to the Offer and the Merger
of certain anti-takeover provisions of the DGCL, please read Section 15 of the
Offer to Purchase, which is incorporated herein by reference.
(b) Regulatory Approvals. For information regarding governmental and
regulatory approvals required in order to consummate the Offer and the Merger,
please read Section 15 of the Offer to Purchase, which is incorporated herein by
reference.
(c) Information Provided Pursuant to Rule 14f-1 Under the Exchange
Act. The Information Statement attached as Annex A to this Schedule 14D-9 is
being furnished to the Company's stockholders in connection with the designation
by the Purchaser of persons to the Board other than at a meeting of the
Company's stockholders, and such information is incorporated herein by
reference.
(d) Forward-Looking Statements. This Schedule 14D-9 may contain or
incorporate by reference certain "forward-looking statements." All statements
other than statements of historical fact included or incorporated by reference
in this Schedule 14D-9, including without limitation statements regarding the
Company's financial position, business strategy and growth prospects are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. A number of
risks and uncertainties could cause actual results to differ materially from
these statements, including, without limitation, fluctuations in the price of
natural gas, the success rate of drilling efforts, expected production levels,
operating expenses, capital expenditures, completion of gathering and pipeline
projects and availability
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of equipment and personnel, as well as other risk factors described from time to
time in the Company's documents and reports filed with the Securities and
Exchange Commission.
(e) Other Material Information. The information contained in all of the
Exhibits referred to in Item 9 below is incorporated herein by reference.
ITEM 9. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
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<C> <S>
+*(a)(1) -- Offer to Purchase, dated January 8, 2001.
+*(a)(2) -- Letter of Transmittal.
*(a)(3) -- Letter to stockholders of the Company, dated January 8,
2001.
(a)(4) -- Joint Press Release issued by the Company and Marathon on
December 22, 2000 (incorporated by reference to the
Company's Preliminary Communication on Schedule 14D-9-C
filed December 26, 2000).
+(a)(5) -- Form of Summary Advertisement, dated January 8, 2001.
(e)(1) -- Agreement and Plan of Merger, dated as of December 22,
2000, by and among the Company, the Purchaser and
Marathon (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed December 27,
2000).
++*(e)(2) -- Opinion of Lehman Brothers Inc., dated December 22, 2000.
(e)(3) -- First Amendment to the Employment Agreement dated July 2,
1998 between Pennaco Energy, Inc. and Paul M. Rady.
(e)(4) -- First Amendment to the Employment Agreement dated July 2,
1998 between Pennaco Energy, Inc. and Glen C. Warren, Jr.
(e)(5) -- Employment Agreement dated July 28, 2000 between Pennaco
Energy, Inc. and Gregory V. Gibson.
(e)(6) -- Employment Agreement dated July 28, 2000 between Pennaco
Energy, Inc. and Terrell A. Dobkins.
(e)(7) -- Employment Agreement dated July 28, 2000 between Pennaco
Energy, Inc. and Brian A. Kuhn.
(e)(8) -- Form of Parachute Tax Agreement.
(e)(9) -- Form of Letter Agreement Re: Purchase of Stock Options.
</TABLE>
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* Included in materials delivered to stockholders of the Company.
+ Filed as an exhibit to the Purchaser's Tender Offer Statement on Schedule TO,
dated January 8, 2001, and incorporated herein by reference.
++ Included as Annex B to this Schedule 14D-9.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
PENNACO ENERGY, INC.
By: /s/ PAUL M. RADY
----------------------------------
Name: Paul M. Rady
Title: Chairman of the Board,
President and Chief Executive
Officer
January 8, 2001
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ANNEX A
PENNACO ENERGY, INC.
1050 17TH STREET, SUITE 700
DENVER, COLORADO 80265
INFORMATION STATEMENT PURSUANT TO SECTION 14(f)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AND RULE 14f-1 THEREUNDER
NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS IS REQUIRED
IN CONNECTION WITH THIS INFORMATION STATEMENT. NO PROXIES ARE BEING
SOLICITED AND YOU ARE REQUESTED NOT TO SEND A PROXY TO THE COMPANY.
This Information Statement is being mailed on or about January 8, 2001, as
part of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") of Pennaco Energy, Inc. (the "Company") to the holders of
record of shares of common stock, par value $.001 per share, of the Company (the
"Common Stock") and the associated common share purchase rights (collectively,
the "Shares"). You are receiving this Information Statement in connection with
the possible election or appointment of persons designated by the Purchaser (as
defined below) to a majority of the seats on the Board of Directors of the
Company (the "Board"). Capitalized terms used herein and not otherwise defined
herein shall have the meanings assigned to them in the Schedule 14D-9.
The Company, Marathon and the Purchaser entered into the Merger Agreement
on December 22, 2000, in accordance with the terms and subject to the conditions
of which the Purchaser commenced the Offer. The Offer is scheduled to expire at
12:00 midnight, New York City time, on Monday, February 5, 2001.
The Merger Agreement requires the Company to cause the directors designated
by the Purchaser to be elected to the Board under the circumstances described
therein upon the acceptance for payment of, and payment by the Purchaser for,
any Shares pursuant to the Offer.
This Information Statement is required by Section 14(f) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1
thereunder. You are urged to read this Information Statement carefully. You are
not, however, required to take any action at this time.
The information contained in this Information Statement (including
information incorporated by reference) concerning the Purchaser and the
Purchaser Designees (as defined herein) has been furnished to the Company by the
Purchaser, and the Company assumes no responsibility for the accuracy or
completeness of such information.
GENERAL INFORMATION REGARDING THE COMPANY
The shares of Common Stock are the only class of voting securities of the
Company outstanding. As of December 29, 2000, there were 19,641,286 shares of
Common Stock outstanding and 4,021,536 shares of Common Stock subject to
issuance upon exercise of outstanding stock options and warrants. The Board
currently consists of five members. Each share of Common Stock is entitled to
one vote. The officers of the Company serve at the discretion of the Board.
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INFORMATION WITH RESPECT TO PURCHASER DESIGNEES
Pursuant to the Merger Agreement, promptly upon the acceptance for payment
of, and payment by the Purchaser for, any Shares pursuant to the Offer,
Purchaser shall be entitled to designate such number of directors on the Board
as will give the Purchaser, subject to compliance with Section 14(f) of the
Exchange Act, representation on the Board equal to at least that number of
directors, rounded up to the next whole number, that equals the product of (a)
the total number of directors on the Board (giving effect to the directors
elected pursuant to this sentence) multiplied by (b) the percentage that (i)
such number of Shares so accepted for payment and paid for by the Purchaser plus
the number of Shares otherwise owned by the Purchaser or any other subsidiary of
Marathon bears to (ii) the number of such Shares then outstanding, and the
Company shall, at such time, cause the Purchaser's designees to be so elected or
appointed to the Board; provided, that in the event that the Purchaser's
designees are appointed or elected to the Board, until the Effective Time the
Board shall have at least two directors who were directors on the date of the
Merger Agreement and who are not officers of the Company (the "Independent
Directors"); and provided further that, in such event, if the number of
Independent Directors shall be reduced below two for any reason whatsoever, the
remaining Independent Director shall be entitled to designate a person to fill
such vacancy who shall be deemed to be an Independent Director for purposes of
the Merger Agreement or, if no Independent Directors then remain, the other
directors shall designate two persons to fill such vacancies who are not
officers, stockholders or affiliates of the Company, Marathon or the Purchaser,
and such persons shall be deemed to be Independent Directors for purposes of the
Merger Agreement. After acceptance by the Purchaser of Shares pursuant to the
Offer and prior to the Effective Time, any (i) amendment or termination of the
Merger Agreement by the Company, (ii) extension of time for the performance, or
waiver, of the obligations or other acts of the Purchaser or Marathon or (iii)
waiver of the Company's rights under the Merger Agreement will require the
approval of all the Independent Directors (and, in any event, at least two
Independent Directors) in addition to any required approval by the full Board.
The Purchaser has informed the Company that it will choose the Purchaser
designees from the persons listed below. The Purchaser has informed the Company
that each of the individuals listed below has consented to act as a director, if
so designated.
The Purchaser has informed the Company that the name, age as of January 5,
2001, position with Marathon or an affiliate, and five-year employment history
of each of the Purchaser designees is set forth below.
<TABLE>
<CAPTION>
POSITION WITH PURCHASER OR AFFILIATE AND
NAME AGE FIVE-YEAR EMPLOYMENT HISTORY
---- --- ----------------------------------------
<S> <C> <C>
Clarence P. Cazalot, Jr. ............ 50 Vice Chairman of USX, President of Marathon and
member of the Board of Managers of Marathon
Ashland Petroleum LLC since March 2000;
President -- Worldwide Production Operations of
Texaco Inc. (major integrated oil and gas) from
January 1999 to March 2000;
President -- International Production and
Chairman of London-based Texaco Ltd. from
January 1998 to January 1999; President of
International Marketing and Manufacturing of
Texaco from January 1997 to January 1998;
President of Texaco Exploration and Production
Inc. from 1994 to January 1997.
</TABLE>
A-2
<PAGE> 12
<TABLE>
<CAPTION>
POSITION WITH PURCHASER OR AFFILIATE AND
NAME AGE FIVE-YEAR EMPLOYMENT HISTORY
---- --- ----------------------------------------
<S> <C> <C>
Philip G. Behrman.................... 50 Senior Vice President, Worldwide Exploration,
of Marathon since October 2000; Acting Vice
President, Exploration and Land, of Vastar
Resources Inc., an independent oil and gas
exploration and production company, from March
2000 to October 2000; Exploration Manager,
Deepwater Gulf of Mexico, of Vastar from June
1996 to March 2000; Exploration Manager,
Special Projects, of BP Exploration, an oil and
gas exploration company, from January 1995
until June 1996.
J. Louis Frank....................... 64 Executive Vice President of Marathon since
January 2001; Executive Vice
President -- Refining, Marketing and
Transportation, of Marathon from 1991 to
January 1997; President and a member of the
Board of Managers of Marathon Ashland Petroleum
LLC from December 1997 to present.
G. David Golder...................... 53 Senior Vice President, Commercialization and
Development, of Marathon since October 2000;
Vice President, International Production, of
Marathon from November 1999 to October 2000;
Vice President, Asian Operations, of Marathon
from January 1999 to November 1999; Executive
Vice President of Sakhalin Energy Investment
Co., Ltd., an affiliate of Marathon, from
August 1996 to January 1999; Production
Manager, Gulf Coast Production Region, of
Marathon from November 1990 to August 1996.
Steven B. Hinchman................... 42 Senior Vice President, Production Operations,
of Marathon since October 2000; Regional
Manager, Mid-Continent Region, of Marathon from
November 1999 to October 2000; Production
Manager, Mid-Continent Region, of Marathon from
November 1996 to November 1999; Engineering
Manager, International Production, of Marathon
from August 1994 to November 1996.
Steve J. Lowden...................... 41 Senior Vice President, Business Development, of
Marathon since December 2000; Director --
Commercial and Business Development of Premier
Oil PLC, a London oil and gas exploration,
development and production company, from 1996
to December 2000; General Manager for
International Exploration and Production of
Premier Oil from 1994 to 1996.
John T. Mills........................ 53 Senior Vice President, Finance and
Administration, of Marathon since September
1998; Vice President -- Taxes of USX from 1987
until 1998. Director and Vice President of the
Purchaser.
</TABLE>
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<PAGE> 13
<TABLE>
<CAPTION>
POSITION WITH PURCHASER OR AFFILIATE AND
NAME AGE FIVE-YEAR EMPLOYMENT HISTORY
---- --- ----------------------------------------
<S> <C> <C>
Richard J. Murphy.................... 47 Director and President of the Purchaser;
Manager, Mergers and Acquisitions, of Marathon
since October 2000; Manager, Acquisitions and
Reserve Evaluation, of Marathon from September
1998 to October 2000; Engineering Manager,
International Production, of Marathon from
November 1996 until September 1998; Manager,
International Production, Joint Ventures, of
Marathon from June 1992 until November 1996.
William F. Schwind................... 56 General Counsel and Secretary of Marathon since
1992.
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Biographical information concerning the Company's current directors and
executive officers as of December 29, 2000, is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul M. Rady......................... 47 Chairman of the Board, President and Chief
Executive Officer
Glen C. Warren, Jr. ................. 44 Executive Vice President, Chief Financial
Officer and Director
Gregory V. Gibson.................... 50 Vice President -- Legal, Secretary and Director
Terrell A. Dobkins................... 48 Vice President -- Production
Bryan G. Hassler..................... 41 Vice President -- Gas Marketing and
Transportation
Brian A. Kuhn........................ 42 Vice President -- Land
David W. Lanza....................... 32 Director
Kurt M. Petersen..................... 48 Director
</TABLE>
Paul M. Rady, President, Chief Executive Officer and Director since 1998,
became Chairman of the Board in September 1999. He joined the Company in June
1998 as its President, Chief Executive Officer and Director. Prior to joining
the Company, Mr. Rady was with Barrett Resources Corporation, an oil and gas
exploration and production company listed on the New York Stock Exchange, for
approximately eight years. During his tenure at Barrett, Mr. Rady held various
executive positions including his most recent position as Chief Executive
Officer, President and Director. Other positions held by Mr. Rady were Chief
Operating Officer, Executive Vice President -- Exploration, and Chief
Geologist-Exploration Manager. Prior to his employment at Barrett, Mr. Rady was
with Amoco Production Company based in Denver, Colorado for approximately ten
years.
Glen C. Warren, Jr., Executive Vice President, Chief Financial Officer and
Director since 1998, joined the Company in July 1998. Prior to joining the
Company, Mr. Warren was an investment banker with Lehman Brothers Inc. in New
York from 1996 to 1998. Prior to Lehman Brothers, Mr. Warren was also an
investment banker with Dillon, Read & Co., Inc. and Kidder, Peabody & Co.
Incorporated with a total of nine years of investment banking experience. Mr.
Warren also has six years of oil and gas exploration and production experience
with Amoco Production Company.
Gregory V. Gibson, Vice President -- Legal and Secretary and director since
1998, has been an attorney specializing in securities and securities broker
dealerships for over 15 years. Mr. Gibson is a southern California-based
practicing attorney with the law firm of Gibson, Haglund & Paulsen. Mr. Gibson
is also an officer and director of Ubrandit.com, a southern California-based
company that provides internet services. Prior to his present affiliations, Mr.
Gibson was corporate counsel for three years to Global Resource Investment
Limited, a southern California-based broker-dealer specializing in resource and
foreign publicly
A-4
<PAGE> 14
traded securities. Prior to working at Global, Mr. Gibson practiced securities
and international law with the law firms of Gibson & Haglund and Gibson, Ogden &
Johnson.
Terrell A. Dobkins, Vice President -- Production, has over 20 years
experience in the petroleum industry and joined the Company in July 1998. Mr.
Dobkins started his career at Amoco Production Company where he had extensive
experience in Rocky Mountain low permeability gas reservoirs and worked in
operations, completions and reservoir engineering. Mr. Dobkins worked as a
Manager for three years at American Hunter Exploration where he was involved in
all U.S. operations and engineering. More recently, Mr. Dobkins was employed for
eight years by Barrett Resources Corporation, most recently as Manager of
Acquisitions.
Bryan G. Hassler, Vice President -- Gas Marketing and Transportation,
joined the Company in August 2000 with 16 years experience in the oil and gas
industry. Mr. Hassler began his career at Questar Corporation as a petroleum
engineer with responsibilities in drilling, facilities and acquisitions, as well
as gas marketing and transportation. More recently, Mr. Hassler led marketing,
transportation and trading efforts at Barrett Resources Corporation.
Brian A. Kuhn, Vice President -- Land, has 18 years experience in the oil
and gas industry as a landman and joined the Company in July 1998. Mr. Kuhn
worked as a landman for 13 years at Amoco Production Company from June 1980 to
April 1993. While at Amoco, Mr. Kuhn spent three years in the Powder River Basin
and other basins of the Rocky Mountain region. Most recently, Mr. Kuhn was
employed as a Division Landman for five years at Barrett Resources Corporation,
where he worked in the Rocky Mountain region and numerous other basins. Mr. Kuhn
has extensive experience in the acquisition of producing properties, testifying
as expert witness before state regulatory agencies, management of lease
acquisition and negotiation of both large and small exploration agreements.
David W. Lanza, Director since 1998, has been a real estate developer, oil
and gas real property and lease developer, and business owner in California,
Nevada, Colorado, Texas and Wyoming for the past ten years. He is currently the
President of Hust Brothers, a commercial real estate and development company,
Vice President and principal of Hust Brothers Inc., a national automotive
wholesale company, and President and principal of Colusa Motor Sales. Mr. Lanza
has the majority interest in Marysville Auto Parts, which owns and operates 13
automotive chain stores.
Kurt M. Petersen, Director since 1999, is a partner in the natural
resources department of Davis, Graham & Stubbs, LLP, a Denver law firm. Mr.
Petersen has been an attorney specializing in oil and gas, mining, real estate,
tax and environmental issues for over 14 years and has extensive experience in
the acquisition and divestiture of producing and non-producing oil and gas
properties. Mr. Petersen is also a member of the Board of Trustees of the
National Outdoor Leadership School.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 2000, the Board was comprised of five directors. The Board has
established an Audit Committee and a Compensation Committee as its standing
committees. The Board does not have a nominating committee or any committees
performing similar functions.
During the year ended December 31, 2000, the Board held six meetings and
took certain actions by written consent. During 2000, the Audit Committee held
three meetings and the Compensation Committee held three meetings. During 2000,
no director attended fewer than 75% of the aggregate of (1) the number of
meetings of the Board held during the period he served on the Board and (2) the
number of meetings of committees of the Board held during the period he served
on such committees.
The Compensation Committee consists of Mr. Petersen and Mr. Lanza. The
Compensation Committee administers management incentive compensation plans and
makes recommendations to the Board with respect to the compensation of directors
and officers of the Company.
The Audit Committee consists of Mr. Petersen and Mr. Lanza, each of whom
are not officers of the Company and each of whom are considered "independent."
The Audit Committee reviews the financial statements and independent auditors'
report, including recommendations from the independent auditors
A-5
<PAGE> 15
regarding internal controls and other matters. The Board has adopted a written
charter for the Audit Committee, which is included as an Appendix to this
Information Statement.
The Audit Committee meetings were designed to facilitate and encourage
communication between the Audit Committee and the Company's independent public
accountants, KPMG LLP. As of the date of this Information Statement, the audited
financial statements for the year ended December 31, 2000 are not yet complete.
Therefore, the Audit Committee has not yet reviewed and discussed the audited
financial statements with management or recommended that those financial
statements be included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000. In addition, the Audit Committee has not yet discussed
with the independent accountants the matters required by Statement on Auditing
Standards No. 61, "Communication with Audit Committees", and it has not yet
received the written disclosures and the letter from the independent accountants
required by Independence Standards Board Standard No. 1.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2000, no executive officer of the Company served as (1) a member of
the Compensation Committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served on the
Board, or (2) a director of another entity, one of whose executive officers
served on the Board or its subsidiaries.
During 2000, no member of the Compensation Committee (or other board
committee performing equivalent functions) (1) was an officer or employee of the
Company or (2) was formerly an officer of the Company. Mr. Petersen, a member of
the Compensation Committee, is a partner with the law firm Davis, Graham &
Stubbs, LLP. During 2000, Davis, Graham provided various legal services to the
Company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for 1998, 1999 and 2000, the compensation
paid to the Company's current Chief Executive Officer and its other three most
highly compensated executive officers with annual compensation in excess of
$100,000 for the fiscal year 2000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
--------------------------- ---- --------- -------- ------------
<S> <C> <C> <C> <C>
Paul M. Rady....................................... 2000 $230,000 $520,000 140,000
Chairman of the Board, President and Chief 1999 178,116 200,000 477,750
Executive Officer 1998(1) 65,077 -- 800,000
Glen C. Warren, Jr. ............................... 2000 $175,000 $260,000 100,000
Executive Vice President and Chief Financial 1999 148,533 150,000 317,750
Officer 1998(2) 46,680 -- 513,228
Terrell A. Dobkins................................. 2000 $145,000 $135,000 80,000
Vice President -- Production 1999 134,574 135,000 155,000
1998(3) 46,465 -- 250,000
Brian A. Kuhn...................................... 2000 $130,000 $120,000 70,000
Vice President -- Land 1999 109,570 120,000 100,000
1998(4) 41,548 -- 150,000
</TABLE>
---------------
(1) Mr. Rady became an executive officer on June 16, 1998, compensated at an
annual salary of $120,000.
(2) Mr. Warren became an executive officer on July 2, 1998, compensated at an
annual salary of $100,000.
(3) Mr. Dobkins became an executive officer on July 6, 1998, compensated at an
annual salary of $95,000.
A-6
<PAGE> 16
(4) Mr. Kuhn became an executive officer on July 9, 1998, compensated at an
annual salary of $87,000.
STOCK OPTION PLAN
Under the Company's 1998 Stock Option and Incentive Plan (as amended, the
"Plan"), 5,500,000 shares of Common Stock are reserved for issuance upon the
exercise of stock options. The Plan is designed as a means to retain and
motivate key employees and to attract and retain key individuals as directors.
The Compensation Committee administers and interprets the Plan and is authorized
to grant options thereunder to all eligible employees and directors of the
Company.
The Plan provides for the granting of both incentive stock options (as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code")) and nonqualified stock options. Options are granted under the Plan on
such terms and at such prices as determined by the Compensation Committee,
except that the per share exercise price of incentive stock options cannot be
less than the fair market value of the Common Stock on the date of grant. Each
option is exercisable after the period or periods specified in the option
agreement, but no option may be exercisable after the expiration of ten years
from the date of grant. Options granted under the Plan are not transferable
other than by will or by the laws of descent and distribution, except that
nonqualified stock options may be transferred to immediate family members with
the consent of the Compensation Committee. As of December 29, 2000, 3,931,536
shares of Common Stock were subject to issuance upon exercise of outstanding
stock options.
The Plan provides that all options become fully vested and exercisable upon
a change in control of the Company, which will occur upon completion of the
Offer. If the options are not continued following the change in control, the
Plan provides that they will be cashed out based on their Black-Scholes value.
As a condition to entering into the Merger Agreement, Marathon required that
holders of approximately 90% of the outstanding stock options, including all
directors and executive officers, agree that each stock option held by such
holder will be canceled, with such holder becoming entitled to receive an amount
of cash in respect of such stock option equal to the product of (A) the excess,
if any, of (x) the Merger Consideration over (y) the exercise price per share
subject to such stock option and (B) the number of shares subject to such stock
option immediately prior to its cancellation.
The following table provides information regarding stock options granted to
the Named Executive Officers during 2000.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS POTENTIAL REALIZABLE VALUE
NUMBER OF GRANTED TO AT ASSUMED ANNUAL RATES
SECURITIES EMPLOYEES AS OF EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING THE YEAR ENDED PRICE FOR OPTION TERM(2)
OPTIONS DECEMBER 31, PER ----------------------------
NAME GRANTED(#) 2000 SHARE EXPIRATION DATE(S)(1) 5%($) 10%($)
---- ---------- --------------- -------- --------------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul M. Rady................. 140,000 16.7% $12.00 July 28, 2006-2009 $745,911 $1,773,162
Glen C. Warren, Jr. ......... 100,000 11.9% $12.00 July 28, 2006-2009 532,794 1,266,544
Terrell A. Dobkins........... 80,000 9.5% $12.00 July 28, 2006-2009 426,235 1,013,235
Brian A. Kuhn................ 70,000 8.3% $12.00 July 28, 2006-2009 372,956 886,581
</TABLE>
---------------
(1) Option expiration date is five years subsequent to vesting which occurs
ratably over a four year period from the date of grant.
(2) In accordance with the rules of the Securities and Exchange Commission, the
potential realizable values for such options shown in the table are based on
the exercise price per share and assumed rates of stock price appreciation
of 5% and 10% compounded annually from the date the respective options were
granted to their expiration date. These assumed rates of appreciation do not
represent the Company's estimate or projection of the appreciation of shares
of Common Stock of the Company.
A-7
<PAGE> 17
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 2000 DECEMBER 31, 2000(1)
ACQUIRED ON VALUE ------------------------------ ------------------------------
EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
----------- ------------ ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Paul M. Rady............. -- $ -- 512,500 905,250 $8,122,625 $12,968,089
Glen C. Warren, Jr. ..... -- -- 335,728 595,250 5,340,475 8,380,414
Terrell A. Dobkins....... 46,442 426,007 93,558 321,250 1,487,480 4,455,200
Brian A. Kuhn............ 10,000 140,000 90,000 220,000 1,447,513 2,896,038
</TABLE>
---------------
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The exercise price
of the options granted to the Named Executive Officers is $2.50-$12.00 per
share. The value of unexercised options for each of the Named Executive
Officers represents the difference between the exercise price of such
options and the closing price of the Company's Common Stock on December 29,
2000 ($19.63 per share).
(2) Pursuant to the terms of the Plan, all options will become fully vested and
exercisable as a result of the transactions contemplated by the Merger
Agreement.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of the Named
Executive Officers and Gregory V. Gibson, Vice President -- Legal and Secretary.
The employment agreement with Mr. Rady, as amended, provides for an annual
base salary and incentive compensation as set by the Board and its Compensation
Committee, participation in the Company's standard insurance plans for its
executives, and participation in the Company's other incentive compensation
programs at the discretion of the Board. Mr. Rady's salary has been adjusted by
the Board to a current rate of $230,000 per year. If Mr. Rady's employment with
the Company is terminated by the Company without cause, or due to his death or
disability prior to expiration of the agreement and prior to a change in control
of the Company, Mr. Rady is entitled to termination compensation of $3,000,000.
If, on or following a change in control, Mr. Rady's employment with the Company
is terminated by the Company without cause, or due to his death or disability or
by Mr. Rady due to an adverse change in his status, duties, title,
responsibilities or authority prior to the expiration of the agreement, Mr. Rady
is entitled to compensation of $6,000,000 in consideration for his agreement not
to compete with the Company in the oil and gas exploration or production
business within the Powder River Basin in Wyoming for a period of two years. Mr.
Rady's employment agreement automatically renews on each June 1 after June 1,
2001 for an additional two years, unless the Company notifies Mr. Rady in
writing 90 days prior to any such June 1 that it will not be renewing his
employment agreement.
The employment agreement with Mr. Warren, as amended, provides for an
annual base salary and incentive compensation as set by the Board and its
Compensation Committee, participation in the Company's standard insurance plans
for its executives, and participation in the Company's other incentive
compensation programs at the discretion of the Board. Mr. Warren's salary has
been adjusted by the Board to a current rate of $192,500 per year. If Mr.
Warren's employment with the Company is terminated by the Company without cause,
or due to his death or disability prior to expiration of the agreement and prior
to a change in control of the Company, Mr. Warren is entitled to termination
compensation of $2,000,000. If, on or following a change in control, Mr.
Warren's employment with the Company is terminated by the Company without cause,
or due to his death or disability or by Mr. Warren due to an adverse change in
his status, duties, title, responsibilities or authority prior to the expiration
of the agreement, Mr. Warren is entitled to compensation of $4,000,000 in
consideration for his agreement not to compete with the Company in the oil and
gas exploration or production business within the Powder River Basin in Wyoming
for a period of two years. Mr. Warren's employment agreement automatically
renews on each June 1 after June 1, 2002 for an additional year, unless the
Company notifies Mr. Warren in writing 90 days prior to any such June 1 that it
will not be renewing his employment agreement.
A-8
<PAGE> 18
The employment agreement with Mr. Dobkins provides for an annual base
salary and annual incentive compensation as set by the Board and its
Compensation Committee, participation in the Company's standard insurance plans
for its executives, and participation in the Company's other incentive
compensation programs at the discretion of the Board. Mr. Dobkins' salary has
been adjusted by the Board to a current rate of $155,000 per year. If Mr.
Dobkins' employment with the Company is terminated by the Company without cause,
or due to his death or disability prior to expiration of the agreement and prior
to a change in control of the Company, Mr. Dobkins is entitled to termination
compensation of $750,000. If, on or following a change in control, Mr. Dobkins'
employment with the Company is terminated by the Company without cause, or due
to his death or disability or by Mr. Dobkins due to an adverse change in his
status, duties, title, responsibility or authority prior to the expiration of
the agreement, Mr. Dobkins is entitled to compensation of $1,250,000 in
consideration for his agreement not to compete with the Company in the oil and
gas exploration or production business within the Powder River Basin in Wyoming
for a period of two years. Mr. Dobkins' employment agreement automatically
renews on each August 1 after August 1, 2004 for an additional year, unless the
Company notifies Mr. Dobkins in writing 90 days prior to any such August 1 that
it will not be renewing his employment agreement.
The employment agreement with Mr. Kuhn provides for an annual base salary
and annual incentive compensation as set by the Board and its Compensation
Committee, participation in the Company's standard insurance plans for its
executives, and participation in the Company's other incentive compensation
programs at the discretion of the Board. Mr. Kuhn's salary has been adjusted by
the Board to a current rate of $140,000 per year. If Mr. Kuhn's employment with
the Company is terminated by the Company without cause, or due to his death or
disability prior to expiration of the agreement and prior to a change in control
of the Company, Mr. Kuhn is entitled to termination compensation of $500,000.
If, on or following a change in control, Mr. Kuhn's employment with the Company
is terminated by the Company without cause, or due to his death or disability or
by Mr. Kuhn due to an adverse change in his status, duties, title,
responsibility or authority prior to the expiration of the agreement, Mr. Kuhn
is entitled to compensation of $1,000,000 in consideration for his agreement not
to compete with the Company in the oil and gas exploration or production
business within the Powder River Basin in Wyoming for a period of two years. Mr.
Kuhn's employment agreement automatically renews on each August 1 after August
1, 2004 for an additional year, unless the Company notifies Mr. Kuhn in writing
90 days prior to any such August 1 that it will not be renewing his employment
agreement.
The employment agreement with Mr. Gibson provides for an annual base salary
and annual incentive compensation as set by the Board and its Compensation
Committee, participation in the Company's standard insurance plans for its
executives, and participation in the Company's other incentive compensation
programs at the discretion of the Board. Mr. Gibson's salary has been adjusted
by the Board to a current rate of $66,000 per year. If Mr. Gibson's employment
with the Company is terminated by the Company without cause, or due to his death
or disability prior to expiration of the agreement and prior to a change in
control of the Company, Mr. Gibson is entitled to termination compensation of
$300,000. If, on or following a change in control, Mr. Gibson's employment with
the Company is terminated by the Company without cause, or due to his death or
disability or by Mr. Gibson due to an adverse change in his status, duties,
title, responsibility or authority prior to the expiration of the agreement, Mr.
Gibson is entitled to compensation of $500,000 in consideration for his
agreement not to compete with the Company in the oil and gas exploration or
production business within the Powder River Basin in Wyoming for a period of two
years. Mr. Gibson's employment agreement automatically renews on each August 1
after August 1, 2004 for an additional year, unless the Company notifies Mr.
Gibson in writing 90 days prior to any such August 1 that it will not be
renewing his employment agreement.
Completion of the Offer will result in a change in control of the Company
for purposes of each of the foregoing agreements.
PARACHUTE TAX AGREEMENTS
The Company has entered into parachute tax agreements with each of the
Named Executive Officers and certain other key members of the Company's
management. The agreements provide that in the event the
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<PAGE> 19
respective employee is subject to the excise tax imposed by Section 4999 of the
Code on any "excess parachute" payment (as defined in Section 280G of the Code)
provided by the Company or any other person as a consequence of any change in
control of the Company, the employee is entitled to an additional payment from
the Company in the amount necessary to make the employee "whole" on a net
after-tax basis; i.e., to put the employee in the same net after-tax position he
would have been in had he not been subject to such excise tax. Completion of the
Offer will result in a change in control of the Company for purposes of each of
the foregoing agreements.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company are not paid any fees or
additional compensation for services rendered as members of the Board or any
committee thereof. Directors who are not employees of the Company receive a fee
of $20,000 annually.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board (the "Committee") is composed of
Mr. Lanza and Mr. Petersen, each of whom is a non-employee director of the
Company.
The Committee reviews and approves executive compensation, makes grants of
long-term incentives, and determines the compensation to be paid to the Chief
Executive Officer and each of the other officers of the Company. The goal of the
executive compensation program is to reward executives for their performance and
enhancement of stockholder value.
The Company's executive compensation program is designed to attract and
retain executives who are key to the long-term success of the Company and align
compensation with the attainment of the Company's business goals and the
increase of share value. The Company uses the same philosophy as the Committee
in establishing compensation for employees other than officers.
Executive compensation consists of (i) salary, (ii) annual performance
bonuses, and (iii) long-term incentives. The Committee reviews executive
compensation annually and makes appropriate adjustments based on (i) Company
performance, (ii) individual performance and (iii) changes in an executive's
duties and responsibilities.
Salary. The Committee desires that overall compensation reflect the
performance of each individual executive over time. Base salaries are set at
levels subjectively determined by the Committee to adequately reward and retain
capable executives, including the President and Chief Executive Officer. The
Committee considers the importance of and skills required in a particular
executive position in establishing salary.
At the beginning of each fiscal year, the Committee reviews and establishes
the annual salary of each officer, including the Chief Executive Officer. The
Committee makes an independent, subjective determination of the appropriate
level of each officer's salary to determine such amount, or if a salary has been
fixed by contract which limits decreases, to determine the amount of the
increase, if any. The Committee does not use any mechanical formulations or
weighting of any of the factors considered.
Annual Performance Incentives. During 2000, the Company had an annual
bonus plan for the Chief Executive Officer and Chief Financial Officer that was
based on net cash flows. Annual bonuses for the other executive officers are
determined by the Committee based on the recommendations of management.
Long-Term Incentives. In an effort to properly align the long-term
interests of the Company's management and stockholders, the Committee may make
awards under the Plan, which was approved by the full Board on March 24, 1998.
The aggregate number of shares which may be issued under the Plan to all
officers, directors and employees is 5,500,000. The Committee believes that the
Plan enables the Company to attract and retain the highest quality managers.
Under the Plan, the Committee is responsible for establishing who receives
awards, the terms of the awards, requisite conditions and the size of the
awards. Awards to any recipient are made by a subjective determination by the
Committee, which considers the person's past performance and current
responsibilities, as well as the amount of awards previously made to that
person.
A-10
<PAGE> 20
CEO Compensation. Mr. Rady was elected President and Chief Executive
Officer in June of 1998 and his salary was established at $120,000 to reflect
his duties. Mr. Rady's annual salary was increased to $230,000 in January of
2000. Mr. Rady's salary has been increased over time to reflect his performance
as the Company's Chief Executive Officer, with particular emphasis on the
increases in the value of the Company as reflected in the consistent escalation
of the trading prices of the Company's common stock.
Section 162(m) of the Code places a limit of $1,000,000 on the amount of
compensation that may be deducted by the Company in any one fiscal year with
respect to the Chief Executive Officer and the other four most highly
compensated individuals who are executive officers as of the end of the fiscal
year. This deduction limitation, however, does not apply to certain "performance
based" compensation. The Committee intends to generally design and implement
compensation plans that qualify for full deductibility in accordance with
Section 162(m). The Company, however, may from time to time pay other
compensation to its executive officers that may not be deductible.
Respectfully Submitted,
David W. Lanza
Kurt M. Petersen
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Petersen is a partner in the law firm of Davis, Graham & Stubbs, LLP.
During 2000, Davis, Graham provided various legal services to the Company. The
fees for such services in 2000 totaled approximately $255,000.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who beneficially own more than ten percent of the
Company's Common Stock, to file reports of their beneficial ownership (Forms 3,
4, and 5, and any amendment thereto) with the Securities and Exchange
Commission. Executive officers, directors, and greater-than-ten percent holders
are required to furnish the Company with copies of the forms that they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers and directors were complied with during 2000, except that
the Form 4 for Mr. Dobkins' transactions in the month of January 2000 was filed
late.
A-11
<PAGE> 21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock of the
Company beneficially owned as of December 29, 2000 by each of the directors and
executive officers, by all directors and executive officers as a group and by
each person known to the Company to be the beneficial owner of more than 5% of
the Common Stock. Unless otherwise noted, each of the named persons and members
of the group has sole voting and investment power with respect to the shares
shown. Unless otherwise noted, each person's address is c/o Pennaco Energy,
Inc., 1050 17th Street, Suite 700, Denver, Colorado 80265.
<TABLE>
<CAPTION>
SHARES OF THE COMPANY'S PERCENT OF THE COMPANY'S
NAME OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK(1)
------------------------ ----------------------- ------------------------
<S> <C> <C>
Paul M. Rady........................................ 2,274,895(2) 10.8%
Glen C. Warren, Jr. ................................ 1,172,953(3) 5.7%
Gregory V. Gibson................................... 181,000(4) *
Terrell A. Dobkins.................................. 485,000(5) 2.4%
David W. Lanza...................................... 129,000(6) *
Brian A. Kuhn....................................... 310,300(7) 1.6%
Bryan G. Hassler.................................... 162,500(8) *
Kurt M. Petersen.................................... 70,000(9) *
All directors and executive officers as a group
(8 persons)....................................... 4,785,648(10) 20.6%
Franklin Resources, Inc. ........................... 2,340,571(11) 11.9%
Centennial Energy Partners, L.L.C................... 1,706,600(12) 8.7%
State Street Research & Management Company.......... 1,425,000(13) 7.3%
Wellington Management Company, L.L.P................ 1,295,100(14) 6.6%
Wanger Asset Management, L.P........................ 1,260,000(15) 6.4%
Advisory Research, Inc. ............................ 1,091,800(16) 5.6%
</TABLE>
---------------
* Represents less than 1% of the Common Stock outstanding.
(1) Assumes 19,641,286 shares outstanding plus, for each individual, any
securities that specific person has the right to acquire upon exercise of
presently exercisable stock options and options that are exercisable as a
result of the transactions contemplated by the Merger Agreement. Options
and warrants held by persons other than the specific individual for whom an
ownership interest percentage is being calculated are not considered in
calculating that specific individual's ownership interest percentage.
(2) Includes 1,417,750 shares issuable upon the exercise of stock options, all
of which will be exercisable as a result of the transactions contemplated
by the Merger Agreement.
(3) Includes 930,978 shares issuable upon the exercise of stock options, all of
which will be exercisable as a result of the transactions contemplated by
the Merger Agreement.
(4) Includes 181,000 shares issuable upon the exercise of stock options, all of
which will be exercisable as a result of the transactions contemplated by
the Merger Agreement. Mr. Gibson's address is 2 Park Plaza, Suite 450,
Irvine, California 92614.
(5) Includes 414,808 shares issuable upon the exercise of stock options, all of
which will be exercisable as a result of the transactions contemplated by
the Merger Agreement.
(6) Includes 73,000 shares issuable upon the exercise of stock options, all of
which will be exercisable as a result of the transactions contemplated by
the Merger Agreement. Mr. Lanza's address is 710 3rd Street, Marysville,
California 95901.
(7) Includes 310,000 shares issuable upon the exercise of stock options, all of
which will be exercisable as a result of the transactions contemplated by
the Merger Agreement.
(8) Includes 162,500 shares issuable upon the exercise of stock options, all of
which will be exercisable as a result of the transactions contemplated by
the Merger Agreement.
(9) Includes 70,000 shares issuable upon the exercise of stock options, all of
which will be exercisable as a result of the transactions contemplated by
the Merger Agreement.
A-12
<PAGE> 22
(10) Includes 3,560,036 shares issuable upon the exercise of stock options, all
of which will be exercisable as a result of the transactions contemplated
by the Merger Agreement.
(11) This disclosure is based solely upon information set forth in the most
recent Schedule 13F, which was filed on November 13, 2000. Franklin
Resources, Inc. has the sole power to vote 2,017,700 shares and no voting
power as to 322,871 shares. Franklin Resources, Inc. shares investment
power as to all of the shares held. The address of Franklin Resources, Inc.
is 777 Mariners Island Boulevard, San Mateo, California 94404.
(12) This disclosure is based solely upon information set forth on Form 4 for
October 2000. Centennial Energy Partners, L.L.C. is the general partner of
Centennial Energy Partners, L.P., Tercentennial Energy Partners, L.P. and
Quadrennial Partners, L.P. Peter K. Seldin is the managing member of
Centennial Energy Partners, L.L.C. Centennial Energy Partners, L.L.C., as
general partner, has the power to dispose of and the power to vote the
shares held by each of the foregoing. Peter K. Seldin, as managing member,
has the power to vote and dispose of the shares beneficially held by
Centennial Energy Partners, L.L.C. The address of each of the foregoing is
900 Third Avenue, Suite 1801, New York, New York 10022.
(13) This disclosure is based solely upon information set forth in the most
recent Schedule 13F, which was filed on November 13, 2000. State Street
Research & Management Company has the sole power to vote 1,328,200 shares
and has no investment power as to any of the shares. The address of State
Street Research & Management Company is One Financial Center, Boston,
Massachusetts 002111-2690.
(14) This disclosure is based solely upon information set forth in the most
recent Schedule 13F, which was filed on November 15, 2000. Wellington
Management Company, L.L.P. has the sole power to vote 928,400 shares,
shares voting power as to 216,700 shares, has no voting power as to 150,000
shares, has sole investment power as to 1,078,400 shares and shares
investment power as to 216,700 shares. The address of Wellington Management
Company, L.L.P. is 75 State Street, Boston, Massachusetts 02109.
(15) This disclosure is based solely upon information set forth in the most
recent Schedule 13F, which was filed on October 11, 2000. Wanger Asset
Management, L.P. shares investment power and has sole voting power as to
1,260,000 shares. The address of Wanger Asset Management, L.P. is 227 W.
Monroe, Suite 3000, Chicago, Illinois 60606.
(16) This disclosure is based solely upon information set forth in the most
recent Schedule 13F, which was filed on November 17, 2000. The address of
Advisory Research, Inc. is 180 North Stetson, Suite 5780, Chicago, Illinois
60601.
CHANGE IN CONTROL ARRANGEMENTS
The Merger Agreement is expected to result in a change in control of the
Company. Please read Section 12 of the Offer to Purchase, which is incorporated
herein by reference.
A-13
<PAGE> 23
PERFORMANCE GRAPH
The following performance graph compares the Company's cumulative total
stockholder return on its Common Stock with the cumulative total return on (1)
the American Stock Exchange Market Value Index and (2) the S&P 600 Oil and Gas
(Exploration and Production) Index as a peer group stock index (the "Peer Group
Index") which consists of 16 publicly traded companies in the same industry or
line of business as the Company. The cumulative total return computations set
forth in the performance graph assume the investment of $100 in the Company's
Common Stock, the American Stock Exchange Market Value Index and the Peer Group
Index on July 2, 1998. The Company is listed on the American Stock Exchange. The
Company believes that the comparison to the American Stock Exchange Market Value
Index is appropriate.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
7/2/98 12/31/98 12/31/99 12/31/00
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennaco Energy, Inc. $100.00 $101.74 $224.53 $550.80
Peer Group 100.00 59.80 79.92 171.84
Amex Market Value 100.00 96.99 123.90 127.32
</TABLE>
A-14
<PAGE> 24
APPENDIX
PENNACO ENERGY, INC.
AUDIT COMMITTEE CHARTER
GENERAL PURPOSE.
The Audit Committee of Pennaco Energy, Inc. (the "Company") is appointed by
the Board of Directors to assist the Board and to perform an oversight function
with respect to the following:
(1) discussing the financial statements of the Company with management
and the Company's independent auditors;
(2) monitoring actions taken by the Company to comply with its
internal policies as well as external accounting, legal and regulatory
requirements;
(3) reviewing disclosures regarding the independence of the Company's
outside auditors; and
(4) evaluating the performance of the Company's independent auditors.
SELECTION OF MEMBERS OF THE AUDIT COMMITTEE.
The members of the Audit Committee shall meet the independence and
experience requirements of the American Stock Exchange (as then required and in
effect). If the Company's securities are listed on any other exchange, the Audit
Committee shall meet the independence and experience requirements of such
exchange. The members of the Audit Committee shall be appointed by the Board on
the recommendation of the Chairman of the Board.
POWERS.
The Audit Committee has the authority, at the Company's expense, to retain
professional advisors, including without limitation special legal, accounting or
other consultants, to advise the Audit Committee, as the Audit Committee deems
necessary or advisable in connection with the exercise of its powers and
responsibilities as set forth in this Audit Committee Charter, all on such terms
as the Audit Committee deems necessary or advisable.
The Audit Committee may request any officer or employee of the Company or
the Company's outside counsel or independent auditor to attend a meeting of the
Audit Committee or to meet with any members of, or consultants to, the Audit
Committee.
RESPONSIBILITIES.
The Audit Committee shall make regular reports to the Board.
In connection with the general purpose, powers and responsibilities set
forth above, the Audit Committee shall also:
1. Recommend to the Board the appointment of the independent auditor,
which firm is ultimately accountable to the Audit Committee and the Board.
2. Approve the fees to be paid to the independent auditor.
3. Receive periodic reports from the independent auditor regarding the
auditor's independence consistent with Independence Standards Board
Standard No. 1, discuss such reports with the auditor, and if so determined
by the Audit Committee, take or recommend that the full Board take
appropriate action to oversee the independence of the auditor.
4. Evaluate together with the Board the performance of the independent
auditor and, if so determined by the Audit Committee, recommend that the
Board replace the independent auditor.
1
<PAGE> 25
5. Meet with the independent auditor prior to the audit to review the
scope, planning and staffing of the audit.
6. Review and discuss with management the annual audited financial
statements including major issues regarding accounting and auditing
principles and practices as well as the adequacy of internal controls that
could significantly affect the Company's financial statements.
7. Review an analysis prepared by management and the independent
auditor of significant financial reporting issues and judgments made in
connection with the preparation of the Company's financial statements.
8. At any meeting of the Audit Committee duly called to review the
Company's quarterly financial statements, review with management and the
independent auditor the Company's quarterly financial statements prior to
the filing of that quarter's Form 10-Q.
9. Review major changes to the Company's auditing and accounting
principles and practices as suggested by the independent auditor, internal
auditors or management.
10. Obtain from the independent auditor assurance that Section 10A
(relating to the detection of illegal acts that may have a direct and
material effect on the determination of financial statement accounts) of
the Securities Exchange Act of 1934 has not been implicated.
11. Obtain reports from management and the independent auditor that
the Company's then-existing subsidiary and foreign affiliated entities are
in conformity with applicable legal requirements.
12. Discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to the conduct
of the audit.
13. Review with the independent auditor any problems or difficulties
the auditor may have encountered and any management letter provided by the
auditor and the Company's response to that letter. Such review should
include:
(a) Any difficulties encountered in the course of the audit work,
including any restrictions on the scope of activities or access to
required information.
(b) Any changes required in the planned scope of the internal
audit.
14. Monitor actions taken by the Company in response to any letters or
reports to management provided by the internal auditors or independent
auditors.
15. Prepare any report of the Audit Committee required by the rules of
the Securities and Exchange Commission to be included in the Company's
annual proxy statement.
16. Review the Company's policies with respect to conflicts of
interest.
17. Advise the Board with respect to the Company's policies and
procedures regarding compliance with its internal policies as well as
applicable laws and regulations, including without limitation with respect
to maintaining books, records and accounts and a system of internal
accounting controls in accordance with Section 13(b)(2) of the Securities
Exchange Act of 1934.
18. Review with the Company's Vice President-Legal legal matters that
may have a material impact on the financial statements, the Company's
compliance policies and any material reports or inquiries received from
regulators or governmental agencies.
19. Meet at least annually with the chief financial officer and the
independent auditor in separate executive sessions.
20. Review and reassess the adequacy of this Audit Committee Charter
annually and recommend any proposed changes to the Board for approval.
2
<PAGE> 26
LIMITATION ON RESPONSIBILITIES AND POWERS.
While the Audit Committee has the responsibilities and powers set forth
above in this Audit Committee Charter, it is not the duty or responsibility of
the Audit Committee:
(1) to plan or conduct audits;
(2) to determine that the Company's financial statements are complete
and accurate and are in accordance with generally accepted accounting
principles (this determination shall remain the responsibility of
management and the independent auditor);
(3) to conduct investigations;
(4) to resolve disagreements, if any, between management and the
independent auditor; or
(5) to assure compliance with the Company's internal policies,
accounting rules and other applicable laws and regulations.
3
<PAGE> 27
ANNEX B
[LEHMAN BROTHERS LOGO]
December 22, 2000
Board of Directors
Pennaco Energy, Inc.
1050 17th Street, Suite 700
Denver, CO 80265
Members of the Board:
We understand that Pennaco Energy, Inc. (the "Company") has entered into an
agreement with Marathon Oil Company ("Marathon") pursuant to which (i) Marathon
or an affiliate thereof will make a tender offer for all outstanding shares of
common stock of the Company at a price of $19.00 per share, subject to certain
terms and conditions, including that at least a majority of the fully diluted
shares of Company common stock be validly tendered and not withdrawn prior to
the expiration of the tender offer and (ii) following the completion of the
tender offer, all of the remaining shares of Company common stock will be
acquired by Marathon or an affiliate thereof through a merger transaction in
which all such shares not held by Marathon or the Company are converted into the
right to receive $19.00 per share (collectively, the "Proposed Transaction").
The terms and conditions of the Proposed Transaction are set forth in more
detail in the draft of the Agreement and Plan of Merger dated December 20, 2000
between the Company, Marathon and Marathon Oil Acquisition I, Ltd. (the
"Agreement").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's stockholders of the consideration to be offered to such stockholders
in the Proposed Transaction. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning the Company that we believe to be relevant to our
analysis, including the Company's Annual Report for the year ended December 31,
1999 and the Company's Quarterly Report for the period ended September 30, 2000,
(3) financial and operating information with respect to the business, operations
and prospects of the Company furnished to us by the Company, including financial
projections for the Company for the period from 2001 through 2005 prepared by
the Company, (4) certain estimates of proved and non-proved reserves and future
production, revenue, operating costs and capital investment for the Company
prepared by the Company, (5) a trading history of the Company's common stock
from December 19, 1999 to the present and a comparison of that trading history
with those of other companies that we deemed relevant, (6) a comparison of the
historical financial results and present financial condition of the Company with
those of other companies that we deemed relevant and (7) a comparison of the
financial terms of the Proposed Transaction with the financial terms of certain
other oil and gas transactions that we deemed relevant. In addition, we have had
discussions with the management of the Company concerning the Company's
business, operations, assets, financial condition, prospects, reserves,
production profiles and exploration programs and have undertaken such other
studies, analyses and investigations as we deemed appropriate.
B-1
<PAGE> 28
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of the
Company and the estimates of future production, revenue, operating costs and
capital investment for the Company, each as prepared by the Company, upon advice
of the Company, we have assumed that such projections and estimates have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgements of the Company's management as to the future performance of the
Company, and that the Company will perform substantially in accordance with such
projections and estimates. However, for purposes of our analysis, we also have
considered certain somewhat more conservative assumptions which resulted in
certain adjustments to the projections and estimates of the Company. We have
discussed these adjusted projections and estimates with the management of the
Company and they have agreed with the appropriateness of the use of such
adjusted projections and estimates in performing our analysis. In arriving at
our opinion, we have not conducted a physical inspection of the properties and
facilities of the Company and have not made or obtained any evaluations or
appraisals of the assets or liabilities of the Company. In addition, you have
not authorized us to solicit, and we have not solicited, any indications of
interest from any third party with respect to the purchase of all or a part of
the Company's business. Our opinion necessarily is based upon market, economic
and other conditions as they exist on, and can be evaluated as of, the date of
this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
offered to the Company's stockholders in the Proposed Transaction is fair to
such stockholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. We also have performed various investment banking
services for Marathon in the past and have received customary fees for such
services. In the ordinary course of our business, we actively trade in the
securities of the Company and Marathon for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as to
whether to accept the consideration to be offered to the stockholders in
connection with the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
B-2
<PAGE> 29
INDEX OF EXHIBITS
<TABLE>
EXHIBIT
NUMBER DESCRIPTION
------------------------ ------------------------------------------------------------
<C> <S>
+*(a)(1) -- Offer to Purchase, dated January 8, 2001.
+*(a)(2) -- Letter of Transmittal.
*(a)(3) -- Letter to stockholders of the Company, dated January 8,
2001.
(a)(4) -- Joint Press Release issued by the Company and Marathon on
December 22, 2000 (incorporated by reference to the
Company's Preliminary Communication on Schedule 14D-9-C
filed December 26, 2000).
+(a)(5) -- Form of Summary Advertisement, dated January 8, 2001.
(e)(1) -- Agreement and Plan of Merger, dated as of December 22,
2000, by and among the Company, the Purchaser and
Marathon (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed December 27,
2000).
++*(e)(2) -- Opinion of Lehman Brothers Inc., dated December 22, 2000.
(e)(3) -- First Amendment to the Employment Agreement dated July 2,
1998 between Pennaco Energy, Inc. and Paul M. Rady.
(e)(4) -- First Amendment to the Employment Agreement dated July 2,
1998 between Pennaco Energy, Inc. and Glen C. Warren, Jr.
(e)(5) -- Employment Agreement dated July 28, 2000 between Pennaco
Energy, Inc. and Gregory V. Gibson.
(e)(6) -- Employment Agreement dated July 28, 2000 between Pennaco
Energy, Inc. and Terrell A. Dobkins.
(e)(7) -- Employment Agreement dated July 28, 2000 between Pennaco
Energy, Inc. and Brian A. Kuhn.
(e)(8) -- Form of Parachute Tax Agreement.
(e)(9) -- Form of Letter Agreement Re: Purchase of Stock Options.
</TABLE>
---------------
* Included in materials delivered to stockholders of the Company.
+ Filed as an exhibit to the Purchaser's Tender Offer Statement on Schedule TO,
dated January 8, 2001, and incorporated herein by reference.
++ Included as Annex B to this Schedule 14D-9.
