<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1998
REGISTRATION NO. 333-57367
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
POGO PRODUCING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 1311 74-1659398
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION CLASSIFICATION CODE)
OF INCORPORATION OR
ORGANIZATION)
5 GREENWAY PLAZA, SUITE GERALD A. MORTON
2700 VICE PRESIDENT--LAW AND
HOUSTON, TEXAS 77046 CORPORATE SECRETARY
(713) 297-5000 POGO PRODUCING COMPANY
(ADDRESS, INCLUDING ZIP 5 GREENWAY PLAZA, SUITE
CODE, AND TELEPHONE 2700
NUMBER, INCLUDING AREA HOUSTON, TEXAS 77046
CODE, OF REGISTRANT'S (713) 297-5017
PRINCIPAL EXECUTIVE (NAME, ADDRESS, INCLUDING
OFFICES) ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA
CODE, OF AGENT FOR
SERVICE)
COPIES TO:
ROBERT L. STILLWELL LARRY KALAS R. SCOTT COHEN
BAKER & BOTTS, L.L.P. ARCH PETROLEUM INC. WEIL, GOTSHAL & MANGES
ONE SHELL PLAZA 777 TAYLOR STREET LLP
910 LOUISIANA SUITE II-A 100 CRESCENT COURT
HOUSTON, TEXAS 77002 FORT WORTH, TEXAS 76102 SUITE 1300
DALLAS, TEXAS 75201
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement and the effective time of the merger of a subsidiary of Pogo
Producing Company with and into Arch Petroleum Inc., as described in the
Agreement and Plan of Merger, dated as of May 28, 1998, attached as Appendix A
to the Proxy Statement/Prospectus forming a part of this Registration
Statement.
----------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
ARCH PETROLEUM INC.
POGO PRODUCING COMPANY
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus relates to an Agreement and Plan of Merger,
dated as of May 28, 1998 (the "Merger Agreement"), among Pogo Producing
Company, a Delaware corporation ("Pogo"), Alphac, Inc., a Delaware corporation
and a direct wholly owned subsidiary of Pogo ("Merger Sub"), and Arch
Petroleum Inc., a Delaware corporation ("Arch"). The Merger Agreement provides
for the merger of Merger Sub with and into Arch (the "Merger"), as a result of
which Arch would become a direct wholly owned subsidiary of Pogo, and the
outstanding shares of common stock, par value $0.01 per share, of Arch ("Arch
Common Stock") would be converted into the right to receive shares of common
stock, par value $1.00 per share, of Pogo ("Pogo Common Stock") at a
conversion ratio of 0.09615 of a share of Pogo Common Stock for each share of
Arch Common Stock. In addition, (i) each outstanding share of Arch's 8%
Exchangeable Convertible Preferred Stock, par value $0.01 per share ("Arch
Preferred Stock"), would be converted into the right to receive 0.9615 of a
share of Pogo Common Stock and (ii) Arch's 9.75% Series A Convertible
Subordinated Notes due 2004 (the "Series A Notes") and Arch's Adjustable Rate
Series B Subordinated Notes (the "Series B Notes" and collectively with the
Series A Notes, the "Arch Notes") would be converted into the right to receive
an aggregate of 174,818 shares of Pogo Common Stock. See "The Merger." Each
share of Pogo Common Stock to be issued in the Merger will have related rights
(the "Rights") to purchase Series A Junior Participating Preferred Stock, par
value $1.00 per share, of Pogo ("Pogo Series A Preferred Stock"). See
"Description of Pogo Capital Stock--Stockholder Rights Plan." Accrued, but
unpaid, dividends on the Arch Preferred Stock and accrued, but unpaid,
interest on the Arch Notes will be paid in cash by Pogo upon consummation of
the Merger.
Pogo has filed a registration statement on Form S-4 pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering shares of
Pogo Common Stock and the Rights to be issued in the Merger. This Proxy
Statement/Prospectus constitutes the Prospectus filed as a part of the
registration statement and is being furnished to stockholders of Arch in
connection with the solicitation of proxies by the Board of Directors of Arch
for use at the Special Meeting of the Stockholders of Arch (the "Special
Meeting"), or any adjournment or postponement thereof, scheduled to be held on
August 14, 1998.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to stockholders of Arch on or about July 17, 1998.
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS,
IN CONNECTION WITH THE SOLICITATION AND THE OFFERING MADE BY THIS PROXY
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES IN
ANY JURISDICTION IN WHICH SUCH SOLICITATION OR OFFERING MAY NOT LAWFULLY BE
MADE.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION
OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF POGO OR ARCH SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
See "Risk Factors" beginning on page 19 for certain matters you should
consider.
The date of this Proxy Statement/Prospectus is July 15, 1998.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS REGARDING
POGO BY REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS THE EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING
ANY BENEFICIAL OWNER OF ARCH COMMON STOCK OR ARCH PREFERRED STOCK, UPON
REQUEST FROM GERALD A. MORTON, VICE PRESIDENT--LAW AND CORPORATE SECRETARY,
POGO PRODUCING COMPANY, P.O. BOX 2504, HOUSTON, TEXAS 77252-2504, TELEPHONE
NUMBER (713) 297-5000. TO ENSURE TIMELY DELIVERY OF THESE DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY AUGUST 3, 1998.
Pogo hereby undertakes to provide, without charge, to each person, including
any beneficial owner of Arch Common Stock or Arch Preferred Stock, to whom a
copy of this Proxy Statement/Prospectus has been delivered, upon the written
or oral request of any such person, a copy of any and all of the documents
referred to below which have been or may be incorporated herein by reference,
other than exhibits to such documents, unless such exhibits are specifically
incorporated herein by reference. Requests for such documents should be
directed to the person indicated in the immediately preceding paragraph.
The following documents, which have been filed previously by Pogo (File No.
1-7792) with the Securities and Exchange Commission (the "SEC") pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are
hereby incorporated herein by reference:
. Pogo's Annual Report on Form 10-K for the fiscal year ended December
31, 1997; and
. Pogo's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
All documents and reports filed by Pogo pursuant to Section 13 (a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the termination of the offering of the
securities registered hereunder shall be deemed to be incorporated by
reference herein and to be a part hereof from the respective dates of filing
of such documents or reports (collectively, with all documents and reports
previously filed by Pogo pursuant to the Exchange Act, the "Reports"). All
information appearing in this Proxy Statement/Prospectus or in any Reports
incorporated herein by reference is not necessarily complete and is qualified
in its entirety by the information and financial statements (including notes
thereto) appearing in the Reports incorporated herein by reference and should
be read together with such information and documents.
Any statement contained herein or in a Report all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Proxy Statement/Prospectus
to the extent that a statement contained herein (or in any subsequently filed
Report which also is or is deemed to be incorporated by reference herein)
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this Proxy
Statement/Prospectus except as so modified or superseded.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus, and, if given
or made, such information or representation must not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer
to sell, or a solicitation of an offer to purchase, any of the securities
offered by this Proxy Statement/Prospectus, or the solicitation of a proxy, in
any jurisdiction in which, or to any person to whom, it is unlawful to make
such offer or solicitation of an offer or proxy solicitation. Neither the
delivery of this Proxy Statement/Prospectus nor any distribution of the
securities offered hereby shall, under any circumstances, create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof or that there has been no change in the affairs
of Pogo or Arch since the date hereof.
2
<PAGE>
AVAILABLE INFORMATION
Pogo and Arch are subject to the informational requirements of the Exchange
Act and, in accordance therewith, file reports, proxy statements and other
information with the SEC. Such reports and other information may be inspected
and copied at the public reference facilities that the SEC maintains at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, and at
the following Regional Offices of the SEC: Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The SEC maintains a Web site
that contains reports, proxy and information statements and other information
filed electronically by Pogo and Arch with the SEC that can be accessed over
the Internet at http://www.sec.gov. In addition, reports, proxy statements and
other information filed by Pogo can be inspected at the offices of The New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, and at
the offices of The Pacific Stock Exchange, 301 Pine Street, San Francisco,
California 94104. Such material filed by Arch can be inspected at the offices
of The Nasdaq Stock Market, Reports Section, 1735 K Street N.W., Washington,
D.C. 20006.
Pogo has filed with the SEC a registration statement on Form S-4 (together
with all the amendments, supplements and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Pogo Common Stock and
the Rights issuable in connection with the Merger. Pogo has provided the
information contained herein with respect to Pogo and its subsidiaries, and
Arch has provided the information with respect to Arch and its subsidiaries.
This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, certain parts of
which are omitted in accordance with the rules and regulations of the SEC. The
Registration Statement and any amendments hereto, including exhibits filed as
a part thereof, are available for inspection and copying as set forth above.
Statements contained in this Proxy Statement/Prospectus or in any document
incorporated in this Proxy Statement/Prospectus by reference as to the
contents of any contract or other document referred to herein or therein are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
3
<PAGE>
TABLE OF CONTENTS
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 2
AVAILABLE INFORMATION....................................................... 3
SUMMARY..................................................................... 6
The Companies............................................................. 6
Risk Factors.............................................................. 6
The Special Meeting....................................................... 7
The Merger................................................................ 8
Market Price and Dividend Information..................................... 13
Pogo Summary Historical Financial Information............................. 15
Arch Summary Historical Financial Information............................. 16
Comparative Per Share Data................................................ 17
THE COMPANIES............................................................... 18
Pogo Producing Company.................................................... 18
Merger Sub................................................................ 18
Arch Petroleum Inc........................................................ 18
RISK FACTORS................................................................ 19
Volatility of Oil and Gas Markets......................................... 19
Uncertainties Inherent in Estimates of Reserves
and Future Net Revenues.................................................. 19
Operating and Uninsured Risks............................................. 20
Availability of Equipment and Personnel................................... 20
Dependence on Other Operators............................................. 20
Substantial Capital Requirements.......................................... 21
Competition............................................................... 21
Government Regulation and Environmental Risks............................. 21
Risks of Foreign Operations............................................... 22
Additional Risks Related to Pogo's
Operations in the Kingdom of Thailand.................................... 22
Southeast Asia Economic Issues............................................ 22
Expected Benefits of Combined Business May
Not Be Achieved.......................................................... 23
Anticipated Accounting Treatment.......................................... 23
THE SPECIAL MEETING......................................................... 24
General................................................................... 24
Matter to be Considered................................................... 24
Record Date; Shares Entitled to Vote; Quorum.............................. 24
Votes Required; Effect of Abstentions
and Non-Votes............................................................ 24
Voting and Revocation of Proxies.......................................... 25
Solicitation of Proxies; Expenses......................................... 25
THE MERGER.................................................................. 26
General; Merger Consideration............................................. 26
Stockholder Agreements.................................................... 26
Procedures for Exchange of Certificates................................... 27
Fractional Shares......................................................... 28
Background of the Merger.................................................. 28
Recommendation of the Arch Board;
Reasons for the Merger................................................... 29
Opinion of Arch's Financial Advisor....................................... 30
Certain Federal Income Tax Consequences
of the Merger............................................................ 35
Regulatory Approvals...................................................... 36
Accounting Treatment...................................................... 36
Arch Employee Matters..................................................... 37
Treatment of Arch Stock Options........................................... 37
Interests of Certain Persons.............................................. 38
4
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<TABLE>
<S> <C>
Resales of Pogo Common Stock............................................. 38
NYSE Listing of Common Stock............................................. 38
No Dissenters' Rights.................................................... 38
CERTAIN PROVISIONS OF THE MERGER AGREEMENT................................. 39
Conditions to the Merger................................................. 39
Representations and Warranties........................................... 41
Certain Covenants--Conduct of Business of Arch........................... 41
No Solicitation of Acquisition Proposals................................. 43
Additional Agreements.................................................... 43
Termination.............................................................. 45
Expenses and Termination Fee............................................. 46
Indemnification.......................................................... 46
Amendment and Waiver..................................................... 47
DESCRIPTION OF POGO CAPITAL STOCK.......................................... 48
Authorized and Outstanding Capital Stock................................. 48
Pogo Common Stock........................................................ 48
Pogo Preferred Stock..................................................... 48
Listings................................................................. 48
Transfer Agent and Registrar............................................. 49
Stockholder Rights Plan.................................................. 49
Delaware Law and Certain Charter and Bylaw Provisions.................... 49
Certain Anti-takeover Provisions......................................... 49
COMPARISON OF STOCKHOLDER RIGHTS........................................... 51
Business Combinations.................................................... 51
Amendments to Charter.................................................... 51
No Stockholder Action by Written Consent................................. 51
Special Meetings of Stockholders......................................... 52
Classification of Board of Directors..................................... 52
Removal of Directors..................................................... 52
Cumulative Voting........................................................ 52
No Pre-emptive Rights.................................................... 52
Advance Notice Bylaws.................................................... 52
INFORMATION REGARDING ARCH................................................. 53
Business of Arch......................................................... 53
Government Regulation.................................................... 56
Properties............................................................... 57
Legal Proceedings........................................................ 60
Market for Arch Common Stock and Related Stockholder Matters............. 61
Selected Financial Data.................................................. 64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS OF ARCH........................................................ 65
LEGAL MATTERS.............................................................. 69
EXPERTS.................................................................... 69
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
Appendix A--Agreement and Plan of Merger
Appendix B--Fairness Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation
Appendix C--Form of Stockholders Agreement
5
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus and does not purport to be complete. This Summary is
qualified in its entirety by the more detailed information included elsewhere
or incorporated by reference in this Proxy Statement/Prospectus. Stockholders
are urged to carefully read this Proxy Statement/Prospectus and the Appendices
hereto in their entirety.
THE COMPANIES
POGO.......................... Pogo and its subsidiaries are principally
engaged in oil and gas exploration,
development and production activities on
their properties located offshore in the
Gulf of Mexico, onshore in selected areas
in New Mexico, Texas and Louisiana, and
internationally in the Gulf of Thailand. As
of June 10, 1998, Pogo had interests in 102
lease blocks offshore Louisiana and Texas
(assuming the remaining two high bid tracts
from the recent federal outer continental
shelf lease sale are awarded),
approximately 237,000 gross acres onshore
in the United States and approximately
734,000 gross acres offshore in the Kingdom
of Thailand. Pogo is a Delaware corporation
formed in 1970, principally to engage in
oil and gas exploration and production,
originally in the offshore Gulf of Mexico
region. Merger Sub is a direct wholly owned
subsidiary of Pogo organized in May 1998
for purposes of the Merger. The principal
executive offices of Pogo and Merger Sub
are located at 5 Greenway Plaza, Suite
2700, Houston, Texas 77046, and their
telephone number at that location is (713)
297-5000.
ARCH.......................... Arch and its subsidiaries primarily engage
in oil and natural gas exploration,
development, production, transportation and
marketing in the Southwestern United States
and Western Canada. Arch and its
subsidiaries are also active in the
acquisition of interests in both producing
and non-producing oil and gas leases. The
principal executive offices of Arch are
located at 777 Taylor Street, Suite II-A,
Fort Worth, Texas 76102, and its telephone
number at that location is (817) 332-9209.
RISK FACTORS
See "Risk Factors" beginning on page 19 for a discussion of certain matters
that should be considered by the stockholders of Arch in connection with an
investment in Pogo Common Stock.
6
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THE SPECIAL MEETING
THE SPECIAL MEETING........... The Special Meeting of Stockholders of Arch
will be held on August 14, 1998 at 9:00
a.m., Fort Worth time, at the corporate
offices of Arch at 777 Taylor Street, Suite
II-A, Fort Worth, Texas.
MATTER TO BE CONSIDERED AT
THE SPECIAL MEETING.......... At the Special Meeting, stockholders of
Arch will be asked to approve and adopt the
Merger Agreement and the Merger. For
additional information relating to the
Special Meeting, see "The Special Meeting."
VOTES REQUIRED................ Approval of the Merger Agreement requires
the affirmative vote of the holders of a
majority of the outstanding shares of Arch
Common Stock and the Arch Preferred Stock
voting together as one class, together with
the separate approval of holders of at
least 66 2/3% of the Arch Preferred Stock
voting as a separate class. The Arch Common
Stock and the Arch Preferred Stock are
sometimes referred to herein as Arch Stock.
Collectively, voting as one class, holders
of Arch Preferred Stock and Arch Common
Stock that have agreed to vote in favor of
the Merger constitute approximately 47% of
the outstanding shares entitled to vote in
the Arch Common Stock class at the Special
Meeting. Holders of 100% of the Arch
Preferred Stock have agreed to vote for the
Merger. See "The Special Meeting--Votes
Required; Effect of Abstentions and Non-
Votes" and "The Merger--Stockholder
Agreements."
No approval by the holders of outstanding
shares of Pogo Common Stock is required to
approve the Merger Agreement.
RECORD DATE; SHARES ENTITLED
TO VOTE...................... Only stockholders of record of Arch Common
Stock and Arch Preferred Stock at the close
of business on July 10, 1998 (the "Record
Date") are entitled to notice of and to
vote at the Special Meeting. On that date,
there were outstanding 17,321,804 shares of
Arch Common Stock and 727,273 shares of
Arch Preferred Stock (which were entitled
to 7,272,730 Arch Common Stock votes on an
"as converted" basis). Holders of Arch
Common Stock are entitled to one vote per
share held and holders of Arch Preferred
Stock are entitled to an equivalent of ten
Arch Common Stock votes (calculated on an
"as converted" basis) per share held. See
"The Special Meeting--Record Date; Shares
Entitled to Vote; Quorum."
SECURITY OWNERSHIP OF
SIGNIFICANT STOCKHOLDERS AND
MANAGEMENT................... Collectively, voting as one class, holders
of Arch Preferred Stock and Arch Common
Stock that have agreed to vote in favor of
the Merger constitute approximately 47% of
the outstanding shares entitled to vote in
the Arch Common Stock class at the Special
Meeting. Holders of 100% of the Arch
Preferred Stock have
7
<PAGE>
agreed to vote for the Merger. See "The
Special Meeting--Votes Required; Effect of
Abstentions and Non-Votes" and "The
Merger--Stockholder Agreements."
THE MERGER
EFFECT OF THE MERGER.......... In the Merger, Merger Sub will merge with
and into Arch, Arch will be the surviving
corporation and Arch will become a direct
wholly owned subsidiary of Pogo. See "The
Merger--General; Merger Consideration."
TREATMENT OF ARCH COMMON
STOCK........................ In the Merger, each share of Arch Common
Stock will be converted into the right to
receive 0.09615 of a duly authorized,
validly issued, fully paid and non-
assessable share of Pogo Common Stock,
together with any associated Rights to
acquire shares of Pogo Series A Preferred
Stock. See "Description of Pogo Capital
Stock--Stockholder Rights Plan." This
0.09615 of a share of Pogo Common Stock,
together with any associated Rights, to be
received for each share of Arch Common
Stock is referred to as the "Common
Exchange Ratio." See "The Merger--General;
Merger Consideration."
TREATMENT OF ARCH PREFERRED
STOCK........................ In the Merger, each share of Arch Preferred
Stock will be converted into 0.9615 of a
duly authorized, validly issued, fully paid
and non-assessable share of Pogo Common
Stock, together with any associated Rights
to purchase shares of Pogo Series A
Preferred Stock. See "Description of Pogo
Capital Stock--Stockholder Rights Plan."
This 0.9615 of a share of Pogo Common
Stock, together with any associated Rights,
to be received for each share of Arch
Preferred Stock is referred to as the
"Preferred Exchange Ratio." Accrued, but
unpaid, dividends on each share of Arch
Preferred Stock through the Effective Time
(as hereafter defined), whether or not
declared, shall be paid in cash by Pogo at
the Effective Time. See "The Merger--
General; Merger Consideration."
PRICE OF ARCH COMMON STOCK
AND POGO COMMON STOCK........ On May 28, 1998, the business day preceding
public announcement of the Merger
Agreement, the closing price of the Arch
Common Stock on the Nasdaq National Market
("Nasdaq") was $2.47 per share, and the
closing price of the Pogo Common Stock on
the New York Stock Exchange ("NYSE") as
reported in The Wall Street Journal's NYSE
Composite Transactions Reports was $25.75
per share. The shares of Pogo Common Stock
to be issued in the Merger to stockholders
of Arch and holders of the Arch Notes would
represent approximately 6% of the Pogo
Common Stock outstanding after the Merger.
8
<PAGE>
RECOMMENDATION OF THE ARCH
BOARD OF DIRECTORS........... The Board of Directors of Arch (the "Arch
Board") believes that the terms of the
Merger are fair to and in the best
interests of Arch and its stockholders and
has unanimously approved the Merger
Agreement and the transactions contemplated
thereby. THE ARCH BOARD UNANIMOUSLY
RECOMMENDS THAT ARCH STOCKHOLDERS APPROVE
AND ADOPT THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY. See "The
Merger--Recommendation of the Arch Board;
Reasons for the Merger."
ARCH'S REASONS FOR THE
MERGER....................... The Arch Board believes the Merger will,
among other things, enable Arch's
stockholders to receive, on a tax deferred
basis, a more liquid security and
participate in a combined enterprise that
will have significantly greater business
and financial resources, better
opportunities for growth and expansion and
an improved financial outlook compared to
what Arch would have if it were to continue
on a stand-alone basis. See "The Merger--
Recommendation of the Arch Board; Reasons
for the Merger."
OPINION OF ARCH'S FINANCIAL
ADVISOR...................... Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") has delivered its
written opinion, dated May 28, 1998, to the
Arch Board that, as of the date of such
opinion and based upon and subject to the
factors and assumptions, qualifications and
limitations set forth therein, the Common
Exchange Ratio is fair, from a financial
point of view, to the non-affiliate holders
of Arch Common Stock.
The DLJ opinion was provided to the Arch
Board for its information and is directed
only to the fairness from a financial point
of view of the Common Exchange Ratio to the
non-affiliate holders of Arch Common Stock,
does not address the merits of the
underlying decision by Arch to engage in
the Merger and does not constitute a
recommendation as to how any stockholder
should vote on the Merger. For information
on the assumptions made, matters considered
and the qualifications and limitations on
the review by DLJ, see "The Merger--Opinion
of Arch's Financial Advisor." Stockholders
are urged to read in its entirety the
opinion of DLJ, attached as Appendix B to
this Proxy Statement/ Prospectus.
EFFECTIVE TIME OF THE MERGER.. Unless another date is agreed to by the
parties, the closing of the Merger (the
"Closing") will occur no later than the
second business day after the conditions to
the Merger contained in the Merger
Agreement have been satisfied or waived.
The Merger will become effective at or as
soon as practicable after the Closing. See
"Certain Provisions of the Merger
Agreement--Conditions to the Merger."
9
<PAGE>
CONDITIONS TO THE MERGER...... The obligations of Pogo and Arch to
consummate the Merger are subject to
certain conditions, including:
. the approval of holders of a majority of
the outstanding shares of Arch Common
Stock and Arch Preferred Stock voting
together as one class, together with the
separate approval of holders of at least
66 2/3% of the Arch Preferred Stock
voting as a separate class;
. the favorable opinion of Arch's tax
advisors that the Merger will qualify as
a tax-free reorganization, which has
previously been delivered to Arch, not
having been withdrawn (see "--Certain
Federal Income Tax Consequences" below);
and
. other conditions customary for
transactions of this nature.
See "Certain Provisions of the Merger
Agreement--Conditions to the Merger."
REGULATORY MATTERS............ No material federal or state regulatory
approvals are required in order to
consummate the Merger. See "The Merger--
Regulatory Approvals."
AMENDMENT AND WAIVER.......... The parties may amend the Merger Agreement
at any time before or after approval of the
Merger by the stockholders of Arch;
provided, however, that the amendment of
certain provisions of the Merger Agreement
requires the consent of the holders of the
Arch Preferred Stock, including provisions
relating to the consideration to be
received by such holders. Following such
stockholder approval, no amendment may be
made that requires the further approval of
stockholders of Arch without first
obtaining such required approval.
Any party to the Merger Agreement may, to
the extent legally allowed, extend the time
for performance of any of the obligations
of the other parties, waive any
inaccuracies in any representations and
warranties of the other parties or waive
compliance with any of the agreements or
conditions contained in the Merger
Agreement for the benefit of such party.
TERMINATION................... The Merger Agreement may be terminated at
any time prior to the Merger by mutual
consent of Pogo and Arch. It may also be
terminated by the parties in certain
events, including if the Merger has not
been consummated by September 30, 1998 or
if there is a Material Adverse Change (as
defined) with respect to the other party,
except for general economic changes or
changes that may affect the oil and gas
industry generally.
Arch may also terminate the Merger
Agreement, subject to certain conditions,
if Arch receives an unsolicited acquisition
proposal that is financially superior to
the Merger and reasonably capable of being
financed, and the Arch Board concludes that
terminating the Merger Agreement is
necessary to satisfy its fiduciary duties
under applicable law; provided, however,
that
10
<PAGE>
Arch may only terminate the Merger
Agreement in this situation if it has first
given Pogo three business days' prior
written notice of its intention to effect
such termination and, during the three
days, shall cause its financial and legal
advisors to consider any adjustment in the
terms and conditions of the Merger that
Pogo may propose. Pogo may terminate the
Merger Agreement if the Arch Board has
recommended to the Arch stockholders an
alternative acquisition proposal or has
withdrawn its recommendation of the Merger.
Upon termination of the Merger Agreement
under the circumstances described above in
this paragraph, Arch will be required to
pay Pogo a fee of $3.0 million.
See "Certain Provisions of the Merger
Agreement--Termination" and "--Expenses and
Termination Fee."
NO DISSENTERS' RIGHTS......... Under Delaware law, Arch's stockholders
will not be entitled to any appraisal or
dissenters' rights in connection with the
Merger.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES................. In the opinion of Arthur Andersen LLP, tax
advisor to Arch, the Merger will qualify as
a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and,
accordingly, for federal income tax
purposes, no gain or loss will be
recognized by Arch, Pogo or Merger Sub
(other than possibly cancellation of
indebtedness income upon the exchange of
the Arch Notes for Pogo Common Stock), and
no gain or loss will be recognized by the
stockholders of Arch, except with respect
to any cash received in lieu of fractional
shares or in payment of accrued, but
unpaid, dividends. For a more detailed
discussion of the material federal income
tax consequences of the Merger, see "The
Merger--Certain Federal Income Tax
Consequences of the Merger."
ACCOUNTING TREATMENT.......... The Merger is intended to qualify as a
pooling of interests for accounting and
financial reporting purposes. See "The
Merger--Accounting Treatment."
INTERESTS OF CERTAIN PERSONS
IN THE MERGER................ In considering the recommendation of the
Arch Board with respect to the Merger,
stockholders should be aware that certain
members of Arch's management and the Arch
Board have certain interests in the Merger
(including severance arrangements in
amounts aggregating up to approximately
$1.6 million) that are in addition to the
interests of the stockholders of Arch
generally. Such severance arrangements were
not entered into in contemplation of the
Merger, but were in place pursuant to
certain existing executive employment
agreements. The Arch Board was aware of
these interests and considered them in
connection with the consideration of the
Merger, the Merger Agreement and the
transactions contemplated thereby. See "The
Merger--Arch Employee Matters" and "--
Interests of Certain Persons."
11
<PAGE>
COMPARISON OF STOCKHOLDER
RIGHTS....................... As a result of the Merger, holders of Arch
Common Stock and Arch Preferred Stock will
become stockholders of Pogo and will have
certain different rights as stockholders of
Pogo than they had as stockholders of Arch.
See "Comparison of Stockholder Rights."
FORWARD-LOOKING STATEMENTS.... The statements included or incorporated by
reference in this Proxy
Statement/Prospectus include "forward-
looking statements" within the meaning of
Section 27A of the Securities Act and
Section 21E of the Exchange Act. All
statements included herein or therein other
than statements of historical fact are
forward-looking statements. When used
herein or therein, the words "anticipate,"
"estimate," "expect," "objective,"
"projection," "forecast," "goal," and
similar expressions are intended to
identify forward-looking statements. Such
forward-looking statements include, without
limitation, the statements herein and
therein regarding the timing of future
events regarding Pogo's and Arch's
operations both domestically and
internationally, including Thailand and
Canada, and the statements set forth herein
under the caption "Management's Discussion
and Analysis of Financial Condition and
Results of Operations of Arch--Liquidity
and Capital Resources" regarding Arch's
anticipated future financial position and
cash requirements. Although Pogo and Arch
believe that the expectations reflected in
such forward-looking statements are
reasonable, they can give no assurance that
such expectations will prove to be correct.
Important factors that could cause actual
results to differ materially from Pogo's
and Arch's expectations ("Cautionary
Statements") are disclosed in this Proxy
Statement/Prospectus and in other filings
by Pogo and Arch with the SEC including,
without limitation, in connection with such
forward-looking statements. All subsequent
written and oral forward-looking statements
attributable to Pogo, Arch or persons
acting on their behalf are expressly
qualified in their entirety by the
Cautionary Statements.
12
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Pogo Common Stock is traded on the NYSE and the Pacific Stock Exchange under
the symbol "PPP." Arch Common Stock is traded on Nasdaq under the symbol
"ARCH." The following tables set forth the high and low sales prices of Pogo
Common Stock and Arch Common Stock for the quarters indicated, as reported in
The Wall Street Journal's NYSE Composite Transactions Reports and on Nasdaq,
respectively. Certain dividend information for Pogo Common Stock is also
provided below. No cash dividends were declared or paid on Arch Common Stock
during any of the periods presented.
POGO COMMON STOCK
<TABLE>
<CAPTION>
DIVIDEND
MARKET PRICE DECLARED
------------------ PER
FISCAL YEAR ENDED DECEMBER 31, HIGH LOW SHARE
- ------------------------------ ------ ------ --------
<S> <C> <C> <C>
1996
First Quarter................................... $ 34 3/4 $ 24 3/8 $.03
Second Quarter.................................. 38 1/4 31 3/8 .03
Third Quarter................................... 38 3/4 32 1/4 .03
Fourth Quarter.................................. 48 3/8 35 3/4 .03
1997
First Quarter................................... $ 49 7/8 $ 33 3/8 $.03
Second Quarter.................................. 41 3/8 33 1/2 .03
Third Quarter................................... 45 3/8 37 7/8 .03
Fourth Quarter.................................. 44 9/16 27 .03
1998
First Quarter................................... $ 34 $ 26 1/2 $.03
Second Quarter (through June 10)................ 34 11/16 23 .03
</TABLE>
ARCH COMMON STOCK
<TABLE>
<CAPTION>
MARKET PRICE
-------------
FISCAL YEAR ENDED DECEMBER 31, HIGH LOW
- ------------------------------ ------ ------
<S> <C> <C>
1996
First Quarter.................................................... $2.938 $1.938
Second Quarter................................................... 2.688 2.000
Third Quarter.................................................... 2.750 1.688
Fourth Quarter................................................... 3.031 2.250
1997
First Quarter.................................................... $3.375 $2.250
Second Quarter................................................... 3.281 2.438
Third Quarter.................................................... 3.875 2.938
Fourth Quarter................................................... 3.688 2.219
1998
First Quarter.................................................... $2.750 $2.000
Second Quarter (through June 10)................................. 2.625 2.000
</TABLE>
13
<PAGE>
The following table sets forth the closing price per share of Pogo Common
Stock on the NYSE and Arch Common Stock on Nasdaq and the equivalent per share
price (as explained below) of Arch Common Stock on May 28, 1998, the business
day preceding public announcement of the Merger Agreement, and on June 10,
1998:
<TABLE>
<CAPTION>
ARCH
POGO ARCH EQUIVALENT
COMMON COMMON PER SHARE
MARKET PRICE PER SHARE AT: STOCK STOCK PRICE
-------------------------- ------ ------ ----------
<S> <C> <C> <C>
May 28, 1998..................................... $25.75 $2.47 $2.48
June 10, 1998.................................... $23.50 $2.00 $2.26
</TABLE>
The equivalent per share price of a share of Arch Common Stock represents an
estimation of the consideration to be received by the holders of Arch Common
Stock in the Merger, assuming that the Effective Time had occurred on the
respective date set forth in the table above. See "The Merger--General; Merger
Consideration."
Stockholders of Arch are advised to obtain current market quotations for Pogo
Common Stock and Arch Common Stock. No assurance can be given as to the market
price of Pogo Common Stock or Arch Common Stock at or, in the case of Pogo
Common Stock, after consummation of the Merger.
14
<PAGE>
POGO SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary financial information has been derived from the
historical consolidated financial statements of Pogo. Selected unaudited
financial data for the three months ended March 31, 1998 and 1997 include all
adjustments (consisting only of normally recurring adjustments) that Pogo
considers necessary for a fair presentation of consolidated operating results
and financial position for such interim periods. Results for the interim
periods are not necessarily indicative of results for the full year. The
financial information set forth below should be read in conjunction with Pogo's
consolidated financial statements, related notes and other financial
information incorporated by reference in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, FISCAL YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Revenues.............. $ 60,730 $ 61,314 $286,300 $203,977 $157,559 $173,608 $139,554
Operating income...... 3,136 21,940 78,069 61,108 23,428 52,203 50,533
Income before
extraordinary
items(1)............. 184 12,818 37,116 33,581 9,230 27,374 25,061
Net income............ 184 12,818 37,116 32,760 9,230 27,067 25,061
Per share of common
stock(2):
Income before
extraordinary
items(1)
Basic............... $ 0.01 $ 0.38 $ 1.11 $ 1.01 $ 0.28 $ 0.84 $ 0.78
Diluted............. 0.01 0.36 1.06 0.97 0.28 0.82 0.76
Net income
Basic............... $ 0.01 $ 0.38 $ 1.11 $ 0.99 $ 0.28 $ 0.83 $ 0.78
Diluted............. 0.01 0.36 1.06 0.95 0.28 0.81 0.76
Dividends............. 0.03 0.03 0.12 0.12 0.12 0.06 --
Financial position:
Cash and cash
equivalents.......... $ 14,430 $ 9,586 $ 19,646 $ 3,054 $ 4,481 $ 2,922 $ 6,713
Working capital....... 18,646 40,574 9,099 6,671 12,648 11,017 2,877
Total assets.......... 661,167 552,832 676,617 479,242 338,177 298,826 239,774
Long-term debt less
current maturities... 275,000 306,230 348,179 246,230 163,249 149,249 130,539
Stockholders' equity.. 232,185 120,238 146,106 107,282 71,708 64,037 33,803
</TABLE>
- --------
(1) Pogo recorded extraordinary losses of $821,000 in 1996 and $307,000 in 1994
on the early extinguishments of debt.
(2) Earnings per share amounts for 1996 and prior years have been restated to
conform with the Financial Accounting Standards Board's Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share
presentation requirements.
15
<PAGE>
ARCH SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary financial information has been derived from the
historical consolidated financial statements of Arch. Selected unaudited
financial data for the three months ended March 31, 1998 and 1997 include all
adjustments (consisting only of normally recurring adjustments) that Arch
considers necessary for a fair presentation of consolidated operating results
and financial position for such interim periods. Results for the interim
periods are not necessarily indicative of results for the full year. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Conditions and Results of Operations of
Arch" and the consolidated financial statements of Arch, including the notes
thereto, included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, FISCAL YEAR ENDED DECEMBER 31,
---------------- ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Operating revenues(1). $ 5,891 $33,142 $80,862 $ 99,926 $66,590 $82,696 $44,148
Net income (loss)..... (803) 900 2,828 3,022 (164) (1,830) 176
Preferred stock
dividends............ 400 400 1,600 1,600 1,600 311 --
Income (loss) to
common stock......... (1,203) 500 1,228 1,422 (1,764) (2,141) 176
Per share of common
stock:
Net income (loss)
basic and diluted(2). $ (0.07) $ 0.03 $ 0.07 $ 0.08 $ (0.10) $ (0.12) $ 0.01
Financial position:
Cash and cash
equivalents.......... $ 1,382 $ 3,068 $ 2,160 $ 3,192 $ 2,574 $ 1,553 $ 1,579
Total assets.......... 93,737 95,361 93,171 101,039 79,672 78,025 51,069
Long-term debt, less
current maturities... 37,000 34,937 35,000 35,134 22,821 14,632 6,500
Deferred revenue...... 1,222 12,009 2,123 12,528 16,037 20,690 21,499
Non-recourse
production payment
obligation........... 14,545 -- 13,317 -- -- -- --
Convertible preferred
stock................ 20,000 20,000 20,000 20,000 20,000 20,000 --
Shareholders'
equity(3)............ 8,966 9,477 10,138 9,065 7,595 9,490 11,679
</TABLE>
- --------
(1) Operating revenues for fiscal year ended December 31, 1997 include a gain
of $5,046,000 from the sale of Onyx. See "Information Regarding Arch--
Business of Arch" and Note 3 to Arch's consolidated financial statements
included elsewhere in this Proxy Statement/Prospectus. Operating revenues
for 1996 include a gain of $1,037,000 from the sale of certain oil and gas
properties. See Note 2 to Arch's consolidated financial statements.
(2) Earnings per share amounts for 1996 and prior years have been restated to
conform with SFAS No. 128 presentation requirements.
(3) No cash dividends were declared or paid on Arch Common Stock during any of
the periods presented.
16
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents comparative per share information for Pogo and
Arch on a historical basis, for Pogo on a pro forma basis and for Arch on an
equivalent pro forma basis assuming that the Merger had been consummated and
accounted for as a pooling of interests. Equivalent pro forma information for
Arch is presented on an equivalent share basis, which reflects Pogo's pro forma
amounts multiplied by the Common Exchange Ratio. The table should be read in
conjunction with (i) the consolidated financial statements of Pogo incorporated
by reference in this Proxy Statement/Prospectus and (ii) the consolidated
financial statements of Arch, including the notes thereto, included elsewhere
herein. Additional pro forma financial information, including a balance sheet
and income statement, are not presented herein because Arch does not fall
within the definition of a "significant business" as defined in Rule 11-01 of
Regulation S-X.
<TABLE>
<CAPTION>
YEAR ENDED
THREE MONTHS DECEMBER 31,
ENDED -----------------
MARCH 31, 1998 1997 1996 1995
-------------- ----- ----- -----
<S> <C> <C> <C> <C>
POGO--HISTORICAL
Book value per common share................. $6.61 $4.37 $3.23 $2.18
Cash dividends per common share............. 0.03 0.12 0.12 0.12
Income before extraordinary loss per common
share(2):
Basic..................................... 0.01 1.11 1.01 0.28
Diluted................................... 0.01 1.06 0.97 0.28
POGO--PRO FORMA (UNAUDITED)
Book value per common share................. $6.56 $4.45 $3.34 $2.30
Cash dividends per common share............. 0.03 0.12 0.12 0.12
Income (loss) before extraordinary loss per
common share:
Basic..................................... (0.03) 1.09 1.00 0.22
Diluted................................... (0.03) 0.92 0.85 0.21
ARCH--EQUIVALENT PRO FORMA (UNAUDITED)(1)
Book value per common share................. $0.63 $0.43 $0.32 $0.22
Cash dividends per common share............. 0.00 0.01 0.01 0.01
Income before extraordinary loss per common
share:
Basic..................................... 0.00 0.10 0.10 0.02
Diluted................................... 0.00 0.09 0.08 0.02
ARCH--HISTORICAL
Book value per common share................. $0.52 $0.59 $0.53 $0.44
Cash dividends per common share............. -- -- -- --
Net income (loss) per common share(2):
Basic..................................... (0.07) 0.07 0.08 (0.10)
Diluted................................... (0.07) 0.07 0.08 (0.10)
</TABLE>
- --------
(1) These equivalent pro forma per share amounts were calculated by multiplying
the Pogo-Pro Forma per share amounts by the Common Exchange Ratio.
(2) Earnings per share amounts for 1996 and prior years have been restated to
conform with SFAS No. 128 presentation requirements.
17
<PAGE>
THE COMPANIES
POGO PRODUCING COMPANY
Pogo and its subsidiaries are principally engaged in oil and gas
exploration, development and production activities on their properties located
offshore in the Gulf of Mexico, onshore in selected areas in New Mexico, Texas
and Louisiana, and internationally in the Gulf of Thailand. As of June 10,
1998, Pogo had interests in 102 lease blocks offshore Louisiana and Texas
(assuming the remaining two high bid tracts from the recent federal outer
continental shelf lease sale are awarded), approximately 237,000 gross acres
onshore in the United States and approximately 734,000 gross acres offshore in
the Kingdom of Thailand. Pogo is a Delaware corporation formed in 1970,
principally to engage in oil and gas exploration and production, originally in
the offshore Gulf of Mexico region.
MERGER SUB
Merger Sub is a direct wholly owned subsidiary of Pogo organized in May 1998
for purposes of the Merger. Merger Sub has conducted no operations prior to
the Merger.
ARCH PETROLEUM INC.
Arch and its subsidiaries primarily engage in oil and natural gas
exploration, development, production, transportation and marketing in the
Southwestern United States and Western Canada. Arch and its subsidiaries are
also active in the acquisition of interests in both producing and non-
producing oil and gas leases. The following entities are owned by Arch: Arch
Petroleum Ltd. and Northern Arch Resources Ltd., each wholly-owned Canadian
subsidiaries; Arch Production Company, a wholly-owned Delaware subsidiary; and
Saginaw Pipeline Company, L.C. and Industrial Natural Gas, L.C., each of which
are owned 95% by Arch. Effective June 30, 1997, Arch sold its 50% membership
interest in Onyx Pipeline Company, L.C., Onyx Gathering
Company, L.C. and Onyx Gas Marketing Company, L.C.
18
<PAGE>
RISK FACTORS
In considering whether to vote for the proposal to adopt the Merger
Agreement, the stockholders of Arch should consider the following factors,
which could materially affect the value of the Pogo Common Stock to be
received by stockholders of Arch in connection with the Merger.
VOLATILITY OF OIL AND GAS MARKETS
Pogo's and Arch's profitability and cash flow are highly dependent upon the
prices of oil and natural gas, which historically have been seasonal, cyclical
and volatile. In general, prices of oil and gas are dependent upon numerous
factors beyond the control of Pogo and Arch, including various weather,
economic, political and regulatory conditions. During 1996, the average prices
that Pogo and Arch received for their crude oil, condensate and natural gas
production were substantially higher than they have been in recent years. In
1997 and the first quarter of 1998, the average prices that Pogo and Arch
received for their production were substantially less than those Pogo and Arch
received in 1996. In the past, when natural gas prices in the United States
were lower than they are currently, Pogo at times elected to curtail certain
quantities of its production. Should natural gas prices fall further in the
future, Pogo may again elect to curtail certain quantities of its natural gas
production. Any significant decline in oil or gas prices could have a material
adverse effect on Pogo's and Arch's operations and financial condition and
could, under certain circumstances, result in a reduction in funds available
under their respective bank credit agreements.
Because it is impossible to predict future oil and gas price movements with
any certainty, Pogo and Arch from time to time enter into contracts on a
portion of their production to hedge against the volatility in oil and gas
prices. Such hedging transactions, historically, have never exceeded 50% of
Pogo's or 15% of Arch's total oil and gas production on an energy equivalent
basis for any given period. While intended to limit the negative effect of
further price declines, such transactions could effectively limit Pogo's and
Arch's participation in price increases for the covered period, which
increases could be significant. Furthermore, no assurance can be given that
such transactions will reduce risk or mitigate the effect of any substantial
declines in oil and gas prices. As of June 10, 1998, Pogo was not a party to
any natural gas futures contracts or crude oil swap agreements, and Arch was
an indirect party to one natural gas futures contract and no crude oil swap
agreements. See "Information Regarding Arch--Business of Arch--Competition and
Market Conditions."
UNCERTAINTIES INHERENT IN ESTIMATES OF RESERVES AND FUTURE NET REVENUES
There are numerous uncertainties in estimating the quantity of proved
reserves and in projecting the future rates of production and timing of
development expenditures. Oil and gas reserve engineering must be recognized
as a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact way, and estimates of other engineers
might differ materially from those of Ryder Scott Company Petroleum Engineers
("Ryder Scott"), reserve engineers for Pogo and Arch. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may justify
revision of such estimate, which revisions may be material. Accordingly,
reserve estimates are often different from the quantities of oil and gas that
are ultimately recovered. In addition, estimates of Pogo's and Arch's future
net revenues from proved reserves and the present value thereof are based on
certain assumptions regarding future oil and gas prices, production levels and
operating and development costs that may not prove to be correct. Any
significant variance in these assumptions could materially affect the
estimates of reserves and future net revenues therefrom set forth in the
Reports or in Arch's Unaudited Supplemental Oil and Gas Disclosures set forth
on pages F-27 through F-31 of this Proxy Statement/Prospectus.
19
<PAGE>
OPERATING AND UNINSURED RISKS
Pogo and Arch must continually acquire or explore for and develop new oil
and natural gas reserves to replace those produced and sold. Without
successful drilling, acquisition or exploration operations, Pogo's and Arch's
hydrocarbon reserves and revenues would decline. Although Pogo and Arch have
historically maintained their reserves base primarily through successful
exploration and development operations, there can be no assurance that future
efforts will be similarly successful. Pogo's and Arch's operations are also
subject to risks inherent in the exploration for and production of oil and
natural gas, such as blowouts, cratering, explosions, uncontrollable flows of
oil, natural gas or well fluids, fires, pollution and other environmental
risks. Offshore oil and gas operations are subject to the additional hazards
of marine and helicopter operations, such as capsizing, collision and adverse
weather and sea conditions. These hazards could result in substantial losses
to Pogo or Arch due to injury or loss of life, severe damage to and
destruction of property and equipment, pollution and other environmental
damage and suspension of operations. Each of Pogo and Arch carries insurance
which it believes is in accordance with customary industry practices, but
neither is fully insured against all risks incident to its business.
Drilling activities are subject to numerous risks, including the risk that
no commercially productive hydrocarbon reserves will be encountered. The cost
of drilling, completing and operating wells and of installing production
facilities and pipelines is often uncertain. Pogo's and Arch's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, including title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery or
availability of equipment or fabrication yards. The availability of a ready
market for Pogo's and Arch's natural gas production depends on a number of
factors, including the demand for and supply of natural gas, the proximity of
natural gas reserves to pipelines, the available capacity of such pipelines
and government regulations. The marketing of offshore oil and gas production
is subject to the availability of pipelines and other transportation,
processing and refining facilities, as well as the existence of adequate
markets. As a result, even if hydrocarbons are discovered in commercial
quantities, a substantial period of time may elapse before commercial
production commences. If offshore pipeline facilities in an area are
insufficient, Pogo may have to await the construction or expansion of offshore
pipeline capacity before production from that area can be marketed. The
marketing of domestic onshore oil and gas production is also subject to the
availability of pipelines, crude oil hauling and other transportation,
processing and refining facilities as well as the existence of adequate
markets. See "--Additional Risks Related to Pogo's Operations in the Kingdom
of Thailand."
AVAILABILITY OF EQUIPMENT AND PERSONNEL
The recent increase in drilling activity throughout the world has increased
the demand for drilling rigs, drilling vessels, supply boats and personnel
experienced in the oil and gas industry in general, and the offshore oil and
gas industry in particular. Pogo and Arch have recently experienced difficulty
and delays in consistently obtaining certain services and equipment from
vendors, obtaining drilling rigs and other equipment at favorable rates, and
scheduling equipment fabrication at factories and fabrication yards. In
addition, the costs of many services, equipment and personnel have recently
risen significantly. No assurance can be given that such services, equipment
and personnel will be available in a timely manner, or that the cost thereof
will not increase significantly.
DEPENDENCE ON OTHER OPERATORS
A significant percentage of oil and gas properties owned by Pogo or Arch are
not operated by either Pogo or Arch. As a result, Pogo and Arch have limited
control over the manner in which operations are conducted on such non-operated
properties, including the safety and environmental standards maintained in
connection therewith. Pursuant to the operating agreements governing
operations on the properties in which Pogo or Arch has an interest, Pogo or
Arch, as the case may be, maintains significant influence or control over the
nature and timing of exploration and development activities on the majority of
its properties. Those agreements do not, however, allow Pogo or Arch such
influence or control with respect to a portion of its properties; in such
cases,
20
<PAGE>
the operators of such properties generally have control with respect to the
nature and timing of exploration or development activities. In those
instances, the operators of such properties could refuse to initiate
exploration or development projects, in which case Pogo or Arch would be
required to propose such activities and may be required to proceed with such
activities without receiving any funding from the operator, or the operators
may initiate exploration or development projects on a slower schedule than
that preferred by Pogo or Arch. Any of these events could have a significant
effect on Pogo's or Arch's anticipated exploration and development activities.
SUBSTANTIAL CAPITAL REQUIREMENTS
Pogo makes, and will continue to make, substantial expenditures for the
acquisition, development, production, exploration and abandonment of its oil
and natural gas reserves. Pogo intends to finance such capital and exploration
expenditures primarily with funds provided by operations and borrowings under
Pogo's bank credit agreement. Pogo increased its capital and exploration
expenditures from $205.8 million in 1996 (excluding purchased reserves and
interest capitalized) to $234.6 million in 1997 (excluding purchased reserves
and interest capitalized). Pogo has currently budgeted $230.0 million for
capital and exploration expenditures in 1998 (excluding purchased reserves and
interest capitalized). Arch has currently budgeted $16.6 million for capital
and exploration expenditures in 1998. As a result of the Merger, Pogo
currently anticipates that its capital and exploration budget could increase
modestly from its current level. While Pogo believes that its revenues from
operations and availability under Pogo's bank credit agreement and other
sources of liquidity will be sufficient to meet these significant future
capital requirements, its ability to meet its capital requirements will be
dependent upon its future performance, which, in turn, will be subject to
general economic conditions and to financial, business and other factors
affecting Pogo's operations, many of which are beyond Pogo's control.
COMPETITION
The oil and natural gas industry is highly competitive. Pogo and Arch
compete in the acquisition, development, production and marketing of oil and
natural gas with major oil companies, other independent oil and natural gas
concerns and individual producers and operators. Many of these competitors
have substantially greater financial and other resources than Pogo and Arch.
Furthermore, the oil and natural gas industry competes with other industries
in supplying the energy and fuel needs of industrial, commercial and other
consumers.
GOVERNMENT REGULATION AND ENVIRONMENTAL RISKS
Pogo's and Arch's businesses are subject to certain laws and regulations
relating to taxation, exploration for and development and production of oil
and gas, and environmental and safety matters in both the United States and
the foreign countries in which Pogo or Arch or any of their subsidiaries
operates or owns property. Various laws and regulations often require permits
for drilling wells and also cover spacing of wells, the prevention of waste of
oil and gas including maintenance of certain gas/oil ratios, rates of
production and other matters. See "Information Regarding Arch--Business of
Arch--Oil and Gas Operations." The effect of these statutes and regulations,
as well as other regulations that could be promulgated by the jurisdictions in
which Pogo or Arch has production, could be to limit the number of wells that
could be drilled on Pogo's or Arch's properties and to limit the allowable
production from the successful wells completed on Pogo's or Arch's properties,
thereby limiting Pogo's or Arch's revenues.
The discharge of oil, natural gas or other pollutants into the air, soil or
water may give rise to liabilities to the government and third parties and may
require Pogo or Arch to incur costs to remedy the discharge. Oil or natural
gas may be discharged in many ways, including from a well or drilling
equipment at a drill site, leakage from storage tanks, pipelines or other
gathering and transportation facilities and discharges resulting from damage
to oil or natural gas wells resulting from accidents during normal operations,
as well as blowouts, cratering and explosions. Discharged oil and gas may
migrate through soil to water supplies or adjoining properties, giving rise to
additional liabilities. A variety of laws and regulations govern the
environmental aspects of oil and gas production, transportation and processing
and may, in addition to other laws, impose liability in
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the event of discharges (whether or not accidental), for failure to notify the
proper authorities of a discharge and other failures to comply with those
laws. Environmental laws may also affect the costs of Pogo's or Arch's
acquisitions of oil and gas properties. Neither Pogo nor Arch believes that
its environmental risks are materially different from those of comparable
companies in the oil and gas industry. Nevertheless, no assurance can be given
that environmental laws will not, in the future, result in a curtailment of
production or a material increase in the costs of production, development or
exploration or otherwise adversely affect Pogo's or Arch's combined operations
and financial condition. Pollution and similar environmental risks generally
are not fully insurable.
RISKS OF FOREIGN OPERATIONS
Ownership of property interests and production operations in Thailand by
Pogo and in Canada by Arch, and in any other areas outside the United States
in which Pogo or Arch may choose to do business, are subject to the various
risks inherent in foreign operations. These risks may include, among other
things, currency restrictions and exchange rate fluctuations, loss of revenue,
property and equipment as a result of hazards such as expropriation,
nationalization, war, insurrection and other political risks, risks of
increases in taxes and governmental royalties, renegotiation of contracts with
governmental entities and quasi-governmental agencies, changes in laws and
policies governing operations of foreign-based companies and other
uncertainties arising out of foreign government sovereignty over Pogo's or
Arch's international operations. International operations may also be
adversely affected by laws and policies of the United States affecting foreign
trade, taxation and investment. In addition, in the event of a dispute arising
from foreign operations, Pogo or Arch may be subject to the exclusive
jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of the courts of the United States. Both Pogo and
Arch seek to manage these risks by concentrating their international
exploration efforts in areas where they believe that the existing government
is stable and favorably disposed towards United States exploration and
development companies.
ADDITIONAL RISKS RELATED TO POGO'S OPERATIONS IN THE KINGDOM OF THAILAND
Pogo's operations in the Kingdom of Thailand are subject to additional
risks. The marketing and sale of hydrocarbons produced from its Block B8/32
Concession located in the Gulf of Thailand (the "Thailand Concession") is
subject to numerous risks and uncertainties. For example, all natural gas
produced from the Thailand Concession is expected to be sold to The Petroleum
Authority of Thailand ("PTT"), which maintains a monopoly over gas
transmission and distribution in Thailand. The Thailand Concession is
traversed by two major natural gas pipelines that are owned and operated by
PTT. One of these pipelines is currently running at or near capacity and the
other pipeline may also become full as a result of production from the
Tantawan Field, the Benchamas Field and other fields in the Gulf of Thailand.
There can be no assurance, even if Pogo is successful in its exploration
efforts, that it will be able to successfully, economically and profitably
transport, process, refine and market the oil and gas it produces. PTT has
constructed a lateral pipeline from its main pipeline to the Tantawan
production area and has agreed to take the gas produced therefrom pursuant to
a Gas Sales Agreement (the "GSA"). In the event the required reserves or
production rates of natural gas at a specified quality level under the GSA are
not delivered, Pogo and its joint venture partners in the Tantawan production
area may be obligated to contribute to PTT's capital costs incurred in the
construction of the lateral pipeline. Also, under the GSA, the Tantawan joint
venturers' liability for failure to deliver the minimum contracted daily rate
is limited to PTT's right to take from subsequent deliveries an amount equal
to the quantity of natural gas not delivered at 75% of the contracted price.
Cash flows resulting from operations in Thailand are subject to Thai
governmental royalties, other governmental charges and income taxes. Since all
gas sales under the GSA are expected to be recognized in Baht, the Thai
currency, fluctuations in the exchange rate between Baht and dollars could
have an adverse effect on the anticipated profits of Pogo's operations in
Thailand.
SOUTHEAST ASIA ECONOMIC ISSUES
A substantial portion of Pogo's oil and gas operations is conducted in
Southeast Asia, and a substantial portion of its natural gas and liquid
hydrocarbon production is sold there. In recent months, Southeast Asia in
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general, and the Kingdom of Thailand in particular, have experienced severe
economic difficulties which have been characterized by sharply reduced
economic activity, illiquidity, highly volatile foreign currency exchange
rates and unstable stock markets. The government of the Kingdom of Thailand
and other governments in the region are currently acting to address these
issues. However, the economic difficulties currently being experienced in the
Kingdom of Thailand, together with the volatility of the Thai Baht against the
U.S. dollar, will continue to have a material impact on Pogo's operations in
the Kingdom of Thailand, together with the prices that Pogo receives for its
oil and natural gas production there. In early July 1997, the government of
the Kingdom of Thailand announced that the value of the Thai Baht would be set
against the U.S. dollar and other currencies under a "managed float" program
arrangement. Since that time the value of the Thai Baht has generally
declined. Pogo cannot predict what the Thai Baht to U.S. dollar exchange rate
may be in the future. Moreover, it is anticipated that this exchange rate will
remain volatile for the foreseeable future.
EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED
There can be no assurance that the expected benefits of the Merger as
described under "The Merger--Reasons for the Merger; Recommendation of the
Arch Board" will be achieved. The integration of operations, departments,
systems and procedures will present significant management challenges and
there can be no assurance that such actions will be successfully accomplished
within a specified time period or at all.
ANTICIPATED ACCOUNTING TREATMENT
Pogo and Arch anticipate that the Merger will be accounted for using the
"pooling of interests" method of accounting pursuant to Opinion No. 16 of the
Accounting Principles Board. The pooling of interests method of accounting
assumes that the combining companies have been merged from inception, and the
historical consolidated financial statements for periods prior to consummation
of the Merger are restated as though the companies have been combined from
inception. One of the conditions of the Merger is that Pogo will have
received, at or prior to the Closing, (i) written notification from the SEC or
(ii) the opinion of Arthur Andersen LLP that the Merger will qualify as a
"pooling" for financial accounting purposes. Based upon initial advice from
Arthur Andersen LLP, Pogo and Arch currently believe that this condition has
been satisfied. However, there can be no assurance that a change in
circumstances or assumptions upon which Arthur Andersen LLP's advice is based
will not occur, resulting in this condition to the consummation of the Merger
not being satisfied. See "The Merger--Accounting Treatment" and "Certain
Provisions of the Merger Agreement--Conditions to the Merger."
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THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to stockholders of Arch
in connection with the solicitation of proxies on behalf of the Arch Board for
use at the Special Meeting to be held on August 14, 1998 at the time and place
specified in the accompanying Notice of Special Meeting of Stockholders, and
at any adjournment or postponement thereof.
MATTER TO BE CONSIDERED
At the Special Meeting, including any adjournment or postponement thereof,
stockholders of Arch will consider and vote upon a proposal to approve and
adopt the Merger Agreement and the transactions contemplated thereby.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Arch Board has fixed the close of business on July 10, 1998 as the
Record Date for the determination of the Arch stockholders entitled to receive
notice of and to vote at the Special Meeting. As of the Record Date,
17,321,804 shares of Arch Common Stock were outstanding and held by
approximately 1,400 holders of record and 727,273 shares of Arch Preferred
Stock were outstanding and held by three holders of record. Each outstanding
share of Arch Common Stock is entitled to one vote, and each outstanding share
of Arch Preferred Stock is entitled to an equivalent of ten Arch Common Stock
votes (calculated on an "as converted" basis), on the matter to be considered
at the Special Meeting. The presence, either in person or by proxy, of the
holders of a majority of the issued and outstanding shares of Arch Common
Stock entitled to vote at the Special Meeting is necessary to constitute a
quorum for the transaction of business at the Special Meeting.
VOTES REQUIRED; EFFECT OF ABSTENTIONS AND NON-VOTES
To approve and adopt the Merger Agreement, the affirmative vote of the
holders of at least a majority of the outstanding shares of Arch Common Stock
entitled to vote on the matter (including the outstanding shares of Arch
Preferred Stock voting together with the Arch Common Stock on an "as
converted" basis) is required under Delaware law. In addition, the affirmative
vote of at least 66 2/3% of the outstanding shares of Arch Preferred Stock
voting as a separate class is required pursuant to the Certificate of
Designations for the Arch Preferred Stock.
The inspectors of election will treat shares of Arch Common Stock and Arch
Preferred Stock represented by properly signed and returned proxies that
reflect abstentions as shares that are present, entitled to vote and voting
for purposes of determining the presence of a quorum at the Special Meeting
and for purposes of determining the outcome of any question submitted to the
stockholders for a vote. The inspectors of election will treat "broker non-
votes" (i.e., shares held by brokers that are represented at a meeting but
with respect to which the broker does not have discretionary authority to
vote) as shares that are present and entitled to vote for purposes of
establishing a quorum. For purposes of determining the outcome of any question
as to which the broker has physically indicated on the proxy that it does not
have discretionary authority to vote, these shares will be treated as not
present and not entitled to vote with respect to that question, even though
those shares are considered entitled to vote for quorum purposes. Accordingly,
abstentions and broker non-votes will have the same effect as votes against
the approval and adoption of the Merger Agreement.
As of the Record Date, (i) Threshold Development Company ("TDC"), The
Travelers Life and Annuity Company, The Travelers Indemnity Company,
Connecticut General Life Insurance Company, CIGNA Mezzanine Partners III,
L.P., and The Lincoln National Life Insurance Company (together the
"Institutional Stockholders") collectively held approximately 39% of the
outstanding shares of Arch Common Stock (including shares of Arch Preferred
Stock that will vote with the Arch Common Stock on an "as converted"
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basis) and (ii) directors and executive officers of Arch and their affiliates
beneficially owned in the aggregate an additional 7% of the outstanding shares
of Arch Common Stock. The directors and officers of Arch and the Institutional
Stockholders have agreed to vote all of their shares of Arch Common Stock for
the approval and adoption of the Merger Agreement and the transactions
contemplated thereby. See "The Merger--Stockholder Agreements."
VOTING AND REVOCATION OF PROXIES
Shares of Arch Common Stock and Arch Preferred Stock represented by properly
executed proxies received at or prior to the Special Meeting, and which have
not been revoked, will be voted at the Special Meeting, or any adjournment or
postponement thereof, in accordance with the instructions of such proxies. If
a proxy is properly executed and returned by a stockholder of Arch without
indicating any voting instructions, the shares of Arch Stock represented by
such proxy will be voted at the Special Meeting FOR the approval and adoption
of the Merger Agreement and the transactions contemplated thereby.
A stockholder executing and returning a proxy has the power to revoke it at
any time before it is exercised either by executing and delivering a later-
dated proxy to the Secretary of Arch, by delivering a duly executed written
revocation of such proxy to the Secretary of Arch, or by voting in person at
the Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
In connection with the Special Meeting, proxies are being solicited by and
on behalf of the Arch Board. Arch will bear the cost of the solicitation of
proxies from its stockholders; provided, however, that pursuant to the Merger
Agreement, Pogo has agreed to pay for the printing and mailing costs of this
Proxy Statement/Prospectus. In addition to the solicitation of proxies by use
of mail, the directors, officers and regular employees of Arch may solicit
proxies from stockholders personally or by telephone, telegraph or facsimile
transmissions. Such directors, officers and employees will not receive any
additional compensation for such solicitation but may be reimbursed for out-
of-pocket expenses incurred in connection therewith. Arrangements will also be
made with brokerage houses, banks, fiduciaries and other custodians for the
forwarding of solicitation material to the beneficial owners of stock held of
record by such persons, and Arch will reimburse such persons for their
reasonable out-of-pocket expenses in connection therewith.
IF THE MERGER AGREEMENT IS APPROVED AND ADOPTED AND THE MERGER IS
CONSUMMATED, HOLDERS OF ARCH STOCK WILL BE SENT INSTRUCTIONS REGARDING THE
SURRENDER OF THEIR CERTIFICATES REPRESENTING SHARES OF ARCH STOCK. HOLDERS OF
ARCH STOCK SHOULD NOT SEND THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE THESE
INSTRUCTIONS.
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THE MERGER
Pogo, Arch and Merger Sub have entered into the Merger Agreement, which
provides that, subject to the satisfaction of certain conditions (see "Certain
Provisions of the Merger Agreement--Conditions to the Merger"), the Merger
will be effected. THE DESCRIPTION OF THE MERGER AGREEMENT CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS IS SUBJECT TO THE MORE COMPLETE INFORMATION
CONTAINED IN THE MERGER AGREEMENT, A COPY OF WHICH IS INCLUDED AS APPENDIX A
TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED IN ITS ENTIRETY HEREIN
BY REFERENCE.
GENERAL; MERGER CONSIDERATION
The Merger Agreement provides for the merger of Merger Sub with and into
Arch, Arch will be the surviving corporation and Arch will become a direct
wholly owned subsidiary of Pogo.
In the Merger, each outstanding share of Arch Common Stock will be converted
into 0.09615 of a duly authorized, validly issued, fully paid and non-
assessable share of Pogo Common Stock, together with any associated Rights to
purchase shares of Pogo Series A Preferred Stock. See "Description of Pogo
Capital Stock--Stockholder Rights Plan." This 0.09615 of a share of Pogo
Common Stock for each share of Arch Common Stock is referred to as the "Common
Exchange Ratio."
Each share of Arch Preferred Stock will be converted into 0.9615 of a duly
authorized, validly issued, fully paid and non-assessable share of Pogo Common
Stock, together with any associated Rights to purchase shares of Pogo Series A
Preferred Stock. See "Description of Pogo Capital Stock--Stockholder Rights
Plan." This 0.9615 of a share of Pogo Common Stock for each share of Arch
Preferred Stock is referred to as the "Preferred Exchange Ratio." Accrued but
unpaid dividends on each share of Arch Preferred Stock through the Effective
Time, whether or not declared, shall be paid in cash at the Effective Time.
Unless another date is agreed to by the parties, the Closing will occur on a
date no later than the second business day after the conditions to the Merger
contained in the Merger Agreement have been satisfied or waived. As soon as
practicable after the Closing, the parties shall cause a Certificate of Merger
to be filed with the Delaware Secretary of State and the time of such filing
will be the "Effective Time" unless otherwise provided in the Certificate of
Merger.
Pursuant to the Merger Agreement, the certificate of incorporation of Merger
Sub will be the certificate of incorporation of the surviving corporation of
the Merger (the "Surviving Corporation"). The Bylaws of Merger Sub will be the
Bylaws of the Surviving Corporation. The directors and officers of Merger Sub
immediately prior to the Effective Time will be the initial directors and
officers, respectively, of the Surviving Corporation.
Based upon the capitalization of Pogo and Arch as of March 31, 1998,
stockholders of Arch immediately prior to the Merger and the holders of the
Arch Notes would hold an aggregate of approximately 6% of the outstanding Pogo
Common Stock immediately after the Merger.
STOCKHOLDER AGREEMENTS
The Institutional Stockholders and Arch's officers and directors
(collectively, the "Affiliate Stockholders") collectively control
approximately 47% of the votes entitled to vote on the Merger in the Arch
Common Stock class. In addition, holders of the Arch Preferred Stock are also
entitled to vote separately on the Merger. In order to induce Pogo to enter
into the Merger Agreement with Arch, the Affiliate Stockholders concurrently
entered into Stockholder Agreements with Pogo (the "Stockholder Agreements").
In the Stockholder Agreements, each Affiliate Stockholder agreed to vote its
shares of Arch Stock in favor of the approval of the Merger Agreement and the
Merger.
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In addition, each Affiliate Stockholder agreed that it will not, and will
not authorize or permit any of its officers, directors, employees, partners,
agents, affiliates or other representatives (collectively, "Stockholder
Representatives") to, directly or indirectly, solicit or encourage any
prospective acquiror or the invitation or submission of any inquiries,
proposals or offers or any other efforts or attempts that constitute, or may
reasonably be expected to lead to, an Acquisition Proposal (as defined below).
Each Affiliate Stockholder has agreed that, while the Merger Agreement remains
in effect, it will promptly notify Pogo of its receipt of any requests for
information or of any Acquisition Proposal. In addition, it will advise Pogo
of the identity of the person or group engaging in such discussions or
negotiations, requesting such information or making such Acquisition Proposal,
and of the material terms and conditions of any Acquisition Proposal.
As used in the Merger Agreement and the Stockholder Agreements, "Acquisition
Proposal" means any proposal or offer, other than a proposal or offer by Pogo
or any of its affiliates, for, or that could be reasonably expected to lead
to, a tender or exchange offer, a merger, consolidation or other business
combination involving Arch or any of its Significant Subsidiaries (as defined
in the Merger Agreement) or any proposal to acquire in any manner a
substantial equity interest in, or any substantial portion of the assets of,
Arch or any of its Significant Subsidiaries.
The detailed provisions described in the preceding summary are contained in
the form of Stockholder Agreement, which is included in full as Appendix C to
this Proxy Statement/Prospectus and incorporated herein by reference.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
As of the Effective Time, Pogo will deposit, in trust with Harris Trust
Company of New York, New York (the "Exchange Agent"), (i) shares of Pogo
Common Stock, (ii) cash in lieu of fractional shares to be issued or paid
pursuant to the Merger Agreement and (iii) cash for the payment of accrued but
unpaid dividends in Arch Preferred Stock. As soon as reasonably practicable
after the Effective Time, the Exchange Agent will send a letter of transmittal
to each stockholder of Arch. The letter of transmittal will contain
instructions with respect to the surrender of certificates ("Certificates")
representing shares of Arch Common Stock and Arch Preferred Stock to be
exchanged in the Merger.
STOCKHOLDERS OF ARCH SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY CARD.
Upon the surrender of each Certificate by Arch stockholders and a letter of
transmittal, the Exchange Agent will issue a certificate representing the
whole number of shares of Pogo Common Stock and a check representing the
amount of any cash in lieu of fractional shares and unpaid dividends and
distributions which such holder is entitled to receive under the Merger
Agreement.
No dividends or other distributions declared or made after the Effective
Time with respect to shares of Pogo Common Stock will be paid to a holder of
any unsurrendered Certificate with respect to the shares of Pogo Common Stock
the holder is entitled to receive, and no cash payment in lieu of fractional
shares will be paid to any holder, until the surrender of such Certificate in
accordance with the Merger Agreement.
After the Effective Time, there shall be no transfers of Arch Stock on the
stock transfer books of the Surviving Corporation. If, after the Effective
Time, Certificates formerly representing shares of Arch Stock are presented to
the Surviving Corporation or the Exchange Agent, they will be canceled and
(subject to applicable abandoned property, escheat and similar laws) exchanged
for the number of shares of Pogo Common Stock and any cash a holder is
entitled to receive under the Merger Agreement.
Following the first anniversary of the Effective Time, the Exchange Agent
shall deliver to Pogo, upon demand, all cash and shares of Pogo Common Stock,
and thereafter Pogo will act as the Exchange Agent. Thereafter, each holder of
a Certificate may surrender such Certificate to Pogo and (subject to
applicable
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abandoned property, escheat and similar laws) receive in exchange therefor the
number of shares of Pogo Common Stock and any cash such holder is entitled to
receive under the Merger Agreement.
Neither Pogo nor Arch shall be liable to any holder of shares of Arch Stock
or Pogo Common Stock for any amount of property in respect of such shares (or
dividends or distributions with respect thereto) delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
law.
FRACTIONAL SHARES
No fractional shares of Pogo Common Stock will be issued to any stockholder
of Arch upon consummation of the Merger. For each fractional share that would
otherwise be issued, Pogo will pay an amount in cash (without interest) equal
to such fractional share multiplied by the Average Closing Price. The "Average
Closing Price" shall mean the average of the per share closing prices of Pogo
Common Stock as reported on the consolidated transaction reporting system for
securities traded on the NYSE for the twenty consecutive trading days ending
immediately prior to the second trading day prior to the closing date of the
Merger (the "Closing Date"), appropriately adjusted for any stock splits,
reverse stock splits, stock dividends, recapitalizations or similar
transactions.
BACKGROUND OF THE MERGER
On March 26, 1998, Paul G. Van Wagenen, Chairman of the Board, President and
Chief Executive Officer of Pogo, met with Johnny H. Vinson, Chairman of the
Board of Arch, and discussed, among other things, the possibility of a
business combination involving Pogo and Arch. Prior to such discussion, Arch
had not been seeking to enter into a merger or similar transaction that would
involve a change in control of Arch.
On April 2, 1998, Pogo and Arch entered into a mutual confidentiality
agreement pursuant to which Pogo would be provided information regarding Arch
to assist it in its analysis for continued discussions. Additional meetings
between representatives of Pogo and Arch were subsequently held in April and
early May, 1998 to discuss further the possibility of such a transaction.
On May 15-16, 1998, representatives of Pogo and Arch held discussions
concerning the structure and other terms of a possible business combination.
During these discussions, representatives of Pogo and Arch negotiated several
provisions of the Merger Agreement.
On May 19, 1998, Arch engaged Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") to review the fairness from a financial point of view to
Arch's non-affiliate stockholders of any business combination proposal
presented by Pogo to the Arch Board.
Drafts of the Merger Agreement in its May 16 form were distributed to the
Arch Board on May 18, 1998, together with drafts of the Stockholder
Agreements. In addition, each member of the Arch Board was provided with
copies of Pogo's recent public filings and other information concerning Pogo.
From May 18 to May 28, Arch representatives conferred with Pogo
representatives and negotiated the remaining terms, provisions and conditions
of the Merger Agreement, and representatives of Arch and the Affiliated
Stockholders conferred with Pogo representatives and negotiated the detailed
terms, provisions and conditions of the Stockholder Agreements.
On May 26, a board package was delivered to each member of the Arch Board
containing a revised Merger Agreement and form of Stockholder Agreement, a
summary of the Merger and information concerning the presentation to be made
by DLJ.
At a special meeting held on May 28, 1998, the Arch Board received detailed
reports of the negotiations with Pogo and the terms and provisions of the
Merger Agreement and the Stockholder Agreement. After receiving presentations
from Arch's financial and legal advisors, the Arch Board received the oral
opinion of
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DLJ (which opinion was subsequently confirmed by delivery of a written opinion
dated May 28, 1998) to the effect that, as of May 28, 1998, and based upon and
subject to certain factors, assumptions, qualifications and limitations stated
in such opinion, the Common Exchange Ratio is fair from a financial point of
view of the non-affiliate holders of Arch Common Stock. In addition, Arthur
Andersen LLP provided the Arch Board with initial advice regarding the tax and
financial accounting treatment for the Merger. The Arch Board then determined
that the terms of the Merger Agreement and the transactions contemplated
thereby were fair to, and in the best interests of, Arch and its stockholders,
and accordingly, the Arch Board approved, by a unanimous vote of directors,
the Merger Agreement and resolved to recommend that the Arch stockholders vote
for the approval and adoption of the Merger Agreement at the Special Meeting.
See "--Recommendation of the Arch Board; Reasons for the Merger."
On the evening of May 28, 1998, after the Arch Board's special meeting, the
Merger Agreement was executed. As soon as practicable on May 29, 1998, Pogo
and Arch issued a joint press release announcing the execution of the Merger
Agreement.
RECOMMENDATION OF THE ARCH BOARD; REASONS FOR THE MERGER
The Arch Board believes that the terms of the Merger are fair to and in the
best interests of Arch and its stockholders, and has unanimously approved the
Merger Agreement and unanimously recommends its approval and adoption by
Arch's stockholders.
In reaching its conclusion, the Arch Board considered many different
factors, including the following:
(i) the judgment, advice and analysis of Arch's senior management with
respect to the rationale behind the Merger, based in part upon the
financial performance and condition, business operations and prospects of
each of Arch and Pogo.
(ii) Current industry, economic and market conditions, which have
encouraged business combinations and other strategic alliances in the oil
and gas service industry.
(iii) Recent market prices of the Arch Common Stock and the Pogo Common
Stock. In particular, the Arch Board noted that the Pogo Common Stock at
the time of the announcement of the Merger (the "Announcement Date") was
trading near its 52-week low.
(iv) The structure of the transactions and terms of the Merger Agreement
and the Stockholder Agreements.
(v) The financial analyses and opinion of DLJ described below, including
DLJ's conclusion that the Common Exchange Ratio is fair, from a financial
point of view, to the non-affiliate holders of Arch Common Stock. The DLJ
opinion, dated May 28, 1998, is based upon and subject to the factors and
assumptions, qualifications and limitations set forth therein.
(vi) The fact that the Merger would provide holders of Arch Common Stock
with the opportunity to receive a premium over recent market prices for
Arch Common Stock.
(vii) Consolidation benefits that would be available to the combined
entity after the Merger that could allow Pogo to conclude it was
justifiable to pay greater consideration for the Arch Common Stock than it
would in the absence of such benefits.
(viii) The Arch Board's assessment of Arch's strategic alternatives to
the Merger, including remaining an independent company, conducting
acquisitions, and merging with a party other than Pogo.
(ix) The ability to consummate the Merger as a pooling-of-interests under
generally accepted accounting principles and as a tax-free reorganization
under Section 368(a) of the Code.
(x) The greater liquidity provided by Pogo Common Stock in contrast to
that provided by Arch Common Stock.
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(xi) Opportunities for Arch's employees (other than the Executives) in
the Pogo organization after the Merger. See "--Arch Employee Matters."
(xii) The ability of the Arch Board pursuant to the Merger Agreement to
consider superior unsolicited alternative proposals for a business
combination transaction, negotiate and give information to third parties
and, subject to the payment of a $3.0 million break-up fee to Pogo and
certain other conditions, terminate the Merger Agreement if the Arch Board
determines that any such action is necessary in order for the Arch Board to
act in a manner consistent with its fiduciary obligations under applicable
law.
The Arch Board believes that the Merger is an opportunity for Arch's
stockholders to participate in a combined enterprise that will have
significantly greater business and financial resources, better opportunities
for growth and expansion and an improved financial outlook compared to what
Arch would have if it were to continue on a stand-alone basis. There can be no
assurance, however, that the expected benefits of the Merger will be realized.
The foregoing discussion of the factors and information considered by the
Arch Board is not intended to be exhaustive. In view of the variety of factors
considered in connection with its evaluation of the Merger, the Arch Board did
not find it practicable to and did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination, and
individual directors may have applied different weights to different factors.
THE ARCH BOARD UNANIMOUSLY RECOMMENDS THAT THE ARCH STOCKHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
OPINION OF ARCH'S FINANCIAL ADVISOR
DLJ was asked by Arch, to render a written opinion to the Arch Board as to
the fairness to the non-affiliate stockholders of Arch, from a financial point
of view, of the Common Exchange Ratio pursuant to the Merger Agreement. On May
28, 1998, DLJ delivered a written opinion (the "Opinion") to the Arch Board to
the effect that as of such date and based upon and subject to the assumptions,
limitations and qualifications set forth in such Opinion the Common Exchange
Ratio was fair to the non-affiliate stockholders of Arch from a financial
point of view.
THE FULL TEXT OF THE WRITTEN OPINION OF DLJ, DATED MAY 28, 1998, WHICH SETS
FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS APPENDIX B.
ARCH STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE DLJ OPINION IN ITS
ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED
AND LIMITS OF THE REVIEW OF DLJ.
The Opinion was prepared for the Arch Board and is directed only to the
fairness of the Common Exchange Ratio to the non-affiliate stockholders of
Arch from a financial point of view and does not constitute a recommendation
to any Arch stockholder as to how such stockholder should vote at the Arch
Special Meeting.
The Opinion does not constitute an opinion as to the price at which Pogo
Common Stock will actually trade at any time. The Common Exchange Ratio was
determined in arm's-length negotiations between Arch and Pogo.
In arriving at its opinion, DLJ reviewed drafts of the Merger Agreement, the
Stockholder Agreement between Pogo and TDC the Stockholder Agreements between
Pogo and The Travelers Life and Annuity Company, The Travelers Indemnity
Company, Connecticut General Life Insurance Company, Cigna Mezzanine Partners
III, L.P., and The Lincoln National Life Insurance Company. DLJ has also
reviewed financial and other information that was publicly available or
furnished to DLJ by Arch and Pogo, including information provided during
discussions with their respective managements. Included in the information
provided during discussions
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with the respective managements were certain financial projections of Arch for
the period beginning January 1, 1998 and ending December 31, 2007 prepared by
the management of Arch. Also included were Ryder Scott reserve reports for
both Arch and Pogo as of December 31, 1997 and Arch's and Pogo's 1998 capital
and exploration budgets. In addition, DLJ compared certain financial and
securities data of Arch and Pogo with various other companies whose securities
are traded in public markets, reviewed the historical stock prices and trading
volumes of Arch Common Stock and Pogo Common Stock, reviewed prices and
premiums paid in certain other business combinations and conducted such other
financial studies, analyses and investigations as DLJ deemed appropriate for
purposes of the Opinion. DLJ was not requested to, nor did DLJ, solicit the
interest of any other party in acquiring Arch.
In rendering its Opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to it from public sources and that was provided to DLJ by Arch and Pogo or
their respective representatives. In particular, DLJ relied upon the estimates
of (i) Management of Arch of the operating synergies achievable as a result of
the merger and its discussion of such synergies with the Management of Pogo
and (ii) Ryder Scott as to the oil and gas reserves of each of Arch and Pogo.
With respect to the financial projections supplied to DLJ, DLJ assumed that
such projections were reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the management of Arch as to
the future operating and financial performance of Arch. DLJ did not assume any
responsibility for making an independent evaluation of Arch's and Pogo's
assets or liabilities or for making any independent verification of any of the
information reviewed by DLJ.
The Opinion is necessarily based on economic, market, financial and other
conditions as they existed on, and on the information made available to DLJ as
of, May 28, 1998. It should be understood that, although subsequent
developments may affect the Opinion, DLJ does not have any obligation to
update, revise or reaffirm the Opinion.
The following is a summary of the presentation made by DLJ in connection
with delivery of the Opinion to the Arch Board on May 28, 1998.
TRANSACTION ANALYSIS. DLJ reviewed publicly available information for a
number of selected transactions involving the combination of exploration and
production companies completed since January 1995. The transactions selected
were not intended to represent a complete list of exploration and production
transactions which have occurred during the last three years; rather they
included transactions involving combinations of companies with operating
characteristics, size or geographical focus believed to be comparable to such
characteristics of Arch. These selected transactions include: Lomak Petroleum,
Inc./Domain Energy Corporation; Atlantic Richfield Company/Union Texas
Petroleum Holdings, Inc.; Union Pacific Resources Group Inc./Norcen Energy
Resources Limited; Ocean Energy, Inc./United Meridian Corporation; Sonat
Inc./Zilkha Energy Company; Chesapeake Energy Corporation/Hugoton Energy
Corporation; Belco Oil & Gas Corp./Coda Energy, Inc.; Chesapeake Energy
Corporation/DLB Oil & Gas, Inc.; Titan Exploration, Inc./Offshore Energy
Development Corporation; Pioneer Natural Resources Company/Chauvco Resources,
Ltd.; Texaco Inc./Monterey/McFarland Resources, Inc.; Burlington Resources,
Inc./The Louisiana Land & Exploration Company; The Meridian Resource
Corporation/Cairn Energy USA, Inc.; Louis Dreyfus Natural Gas Corp./American
Exploration Company; Forcenergy Inc./Edisto Resources Corporation; Monterey
Resources, Inc./McFarland Energy, Inc.; Mesa Inc./Parker & Parsley Petroleum
Corporation; Texas Pacific, Inc./Belden & Blake Corporation; Bellwether
Exploration Company/Torch Energy Advisors Incorporated; Mesa Inc./Greenhill
Petroleum Corporation; Conoco Inc./TransTexas Transmission; Domain Energy
Corporation/El Paso Natural Gas Company; Lomak Petroleum, Inc./America
Cometra, Inc.; Forcenergy Inc./Great Western Resources, Inc.; KCS Energy,
Inc./Intercoast Energy Company; Devon Energy Corporation/Kerr-McGee
Corporation; Seagull Energy Corporation/Global Natural Resources Inc.; Noble
Affiliates, Inc./Energy Development Corp.; Enron Capital & Trade/Hardy Oil &
Gas; Apache Corporation/Phoenix Resource Companies, Inc.; Rainwater, Inc./Mesa
Inc.; Hunt Petroleum/W&T Offshore/Columbia Gas System; HS Resources, Inc./Tide
West Oil Company; Nuevo Energy Company/Torch Energy Advisors Incorporated;
Contour Production Company L.L.P./Kelley Oil & Gas Corporation; Apache
Corporation/Aquila Energy Resources Corporation; Enron Corp./Coda Energy,
Inc.; Tom
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Brown, Inc./Presidio Oil Company; Barrett Resources Corporation/Plains
Petroleum Company; Enserch Exploration, Inc./DALEN Corporation; and YPF
Sociedad Anonima/Maxus Energy Corporation, collectively, the "Company
Transactions." Although these Company Transactions were used for comparison
purposes, none of such transactions is directly comparable to the Merger.
DLJ reviewed the consideration paid in such Company Transactions in terms of
the market capitalization of common stock acquired plus total debt assumed
less cash and cash equivalents of the acquired company ("Adjusted Price") in
such transactions as a multiple of earnings before interest, taxes and
depletion, depreciation and amortization ("EBITDA") for the latest reported
twelve month period prior to the announcement ("LTM"), reserves and SEC PV-10%
(as defined) for the latest reported twelve months prior to the announcement
of such transaction. "SEC PV-10%" means the present value of estimated future
revenues to be generated from the production of proved reserves calculated in
accordance with SEC guidelines, net of estimated production and future
development costs, using prices and costs as of the date of estimation without
future escalation, except as otherwise provided by contract, without giving
effect to non-property related expenses such as general and administrative
expenses, debt service, future income tax expense and depreciation, depletion
and amortization, and discounted using an annual discount rate of 10%. The
median multiple of Adjusted Price to LTM EBITDA, computed based on the Company
Transactions was 7.3 times, with a high of 16.5 times and a low of 2.9 times.
This compares to 14.5 times LTM EBITDA for Arch based on the operating
performance of Arch for the twelve months ended March 31, 1998, and on the
implied Arch share price based on Pogo's stock price at May 27, 1998
multiplied by the Common Exchange Ratio (the "Implied Arch Per Share Value").
The median multiple of Adjusted Price to reserves, computed for the Company
Transactions was $1.07 per thousand cubic feet equivalent ("Mcfe"), with a
high of $2.93 per Mcfe and a low of $0.41 per Mcfe. This compares to $1.03 per
Mcfe for Arch, based on Arch's reported oil and gas reserves as of December
31, 1997 and the Implied Arch Per Share Value. The median ratio of Adjusted
Price to SEC PV-10%, computed for the Company Transactions was 121.3 percent,
with a high of 221.2 percent and a low of 41.1 percent. This compares to 165.7
percent SEC PV-10% for Arch based on Arch's SEC PV-10% as of December 31, 1997
and the Implied Arch Per Share Value.
DLJ also reviewed the consideration paid in such Company Transactions in
terms of the market capitalization of common stock acquired as a multiple of
net income plus deferred taxes, depletion, depreciation and amortization
("CFFO") per share of Arch. The median multiple of stock price to LTM CFFO per
share computed for the Company Transactions was 7.3 times, with a high of 22.7
times and a low of 3.8 times. This compares to 10.4 times LTM CFFO per share
for Arch based on Arch's CFFO per share as of March 31, 1998 and the Implied
Arch Per Share Value.
In addition, DLJ reviewed publicly available information for a number of
selected transactions involving reserve acquisitions. The transactions
selected are not intended to represent the complete list of reserve
acquisitions which have occurred during the last three years; rather they
included only transactions involving acquisitions of assets with operating
characteristics, size or geographical focus believed to be comparable to such
characteristics of Arch. These selected transactions include: Cross Timbers
Oil Company/Santa Fe Minerals Holdings; Louis Dreyfus Natural Gas
Corp./Affiliates/American Exploration Company; Apache Corporation/Aquila
Energy Resources Corporation; Energen Corp./United Meridian
Corporation/Pennzoil Company; MCN Energy Group Inc./CONSOL Energy Inc.; Plains
Resources, Inc./USX-Marathon Group; Questar Corp./PMC Reserve Acquisition Co.;
Alliance Resources plc/LaTex Resources Inc.; Bellwether Exploration
Company/Torch Energy Advisors Incorporated; Magnum Hunter Resources,
Inc./Burlington Resources Company; Mesa Inc./MAPCO Inc.; Southwest Royalties
Inc./Conoco Inc. (DuPont); Titan Exploration, Inc./Pioneer Natural Resources
Company; Anadarko Petroleum Corporation/Occidental Petroleum Corporation;
Chesapeake Energy Corporation/Occidental Petroleum Corporation; ONEOK
Inc./Occidental Petroleum Corporation; Queen Sand Resources Inc./J.P. Morgan;
Seagull Energy Corporation/BRG Petroleum Inc.; and Lomak Petroleum, Inc./Trend
Exploration Co., collectively, the "Reserve Acquisitions." Although these
various Reserve Acquisitions were used for comparison purposes, none of such
transactions is directly comparable to the Merger.
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DLJ reviewed the consideration paid in such Reserve Acquisitions in terms of
the Adjusted Price of such transactions as a multiple of reserves as of the
date of the latest reserve report prior to the announcement of such
transaction. The median multiple of Adjusted Price to reserves, computed for
the selected Reserve Acquisitions was $0.80 per Mcfe, with a high of $1.30 per
Mcfe and a low of $0.39 per Mcfe. This compares to $1.03 per Mcfe for Arch,
based on Arch's reported oil and gas reserves as of December 31, 1997 and the
Implied Arch Per Share Value.
ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. To provide contextual
data and comparative market information, DLJ compared selected share price,
earnings, and operating and financial ratios for Arch to the corresponding
data and ratios of certain other companies whose securities are publicly
traded. DLJ believes the selected companies to be appropriate comparisons to
Arch because of similar operating characteristics, size or geographical focus
believed to be comparable to such characteristics of Arch. These selected
companies included: Abraxas Petroleum Corporation, Bellwether Exploration
Company, Coho Energy, Inc., Costilla Energy, Inc., National Energy Group,
Inc., and The Wiser Oil Company. Such data and ratios included Adjusted Price
as a multiple of reserves and SEC PV-10% for the year end 1997. The median
multiple of Adjusted Price to 1997 year end reserves for the comparable
companies was $0.98 per Mcfe, with a high of $1.49 per Mcfe and a low of $0.76
per Mcfe. This compares to $1.03 per Mcfe for Arch based on Arch's reported
oil and gas reserves as of December 31, 1997 and the Implied Arch Per Share
Value. The median ratio of Adjusted Price to 1997 year-end SEC PV-10% for the
comparable companies was 109.9 percent, with a high of 149.1 percent and a low
of 96.2 percent. This compares to 165.7 percent SEC PV-10% for Arch based on
Arch's SEC PV-10% as of December 31, 1997 and the Implied Arch Per Share
Value. In addition, DLJ examined the ratios of current stock prices as a
multiple of LTM CFFO per share of Arch and to estimated fiscal year 1998 and
1999 CFFO per share based upon certain financial projections of Arch prepared
by management of Arch (the "Arch Projections"). The median multiple of stock
price to LTM CFFO per share computed for the selected comparable companies was
4.5 times, with a high of 8.6 times and a low of 3.0 times. This compares to
10.4 times LTM CFFO per share for Arch based on Arch's CFFO per share as of
March 31, 1998 and the Implied Arch Value Per Share. The median multiple of
stock price to 1998 CFFO per share for the comparable companies was 3.9 times,
with a high of 5.7 times and a low of 3.5 times. This compares to 7.2 times
CFFO per share for Arch based on the Implied Arch Per Share Value. The median
multiple of stock price to 1999 CFFO per share for the comparable companies
was 2.8 times, with a high of 3.3 times and a low of 2.4 times. This compares
to 5.6 times CFFO per share for Arch based on the Implied Arch Per Share
Value. DLJ also examined the ratios of Adjusted Price as a multiple of LTM
EBITDA of Arch and to estimated fiscal year 1998 and 1999 EBITDA based upon
the Arch Projections. The median multiple of Adjusted Price to LTM EBITDA
computed for the selected comparable companies was 7.0 times, with a high of
9.5 times and a low of 4.8 times. This compares to 14.5 times LTM EBITDA for
Arch based on Arch's LTM EBITDA as of March 31, 1998 and the Implied Arch Per
Share Value. The median multiple of Adjusted Price to 1998 EBITDA for the
comparable companies was 8.6 times, with a high of 10.3 times and a low of 4.3
times. This compares to 9.8 times EBITDA for Arch based on the Implied Arch
Per Share Value. The median multiple of stock price to 1999 EBITDA for the
comparable companies was 5.7 times, with a high of 7.7 times and a low of 3.6
times. This compares to 7.9 times EBITDA per share for Arch based on the
Implied Arch Per Share Value.
DISCOUNTED CASH FLOW ANALYSIS. DLJ also performed a discounted cash flow
("DCF") analysis of Arch using the Arch Projections. DLJ analyzed Arch's
proved, probable and possible reserves (as provided by Arch and reviewed by
Ryder Scott) and projected future oil and gas production volumes using an
escalated price forecast and a range of various discount rates. In addition,
DLJ analyzed Arch's undeveloped acreage and exploration inventory calculating
the discounted present value of future net cash flows attributable to
exploration activities utilizing various assumptions regarding capital
expenditures, finding and development costs and reserve risk factors. The
natural gas and oil price forecast was based on projections provided by Arch
for spot market sales for 1998, 1999 and 2000 with adjustments made to reflect
transportation charges and quality differentials. The forecast for gas prices
per thousand cubic feet ("Mcf") for years 1998 through 2000 was $2.20, $2.27
and $2.33, respectively, and were assumed to escalate at 3% per year
thereafter. The forecast for oil prices per barrel of oil ("Bbl") for years
1998 through 2000 was $15.00, $18.00 and $19.00, respectively. DLJ applied
discount
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rates of 10%-16% to calculate the present value of the cash flow stream
generated by this production and EBITDA multiples of 5.0 times to 8.0 times to
calculate terminal values.
By discounting the projected net cash flows generated by Arch and deducting
net liabilities, DLJ arrived at a net asset reference value per share for Arch
Common Stock of $0.08 to $2.96. In each case, per share amounts were
determined using a fully diluted 26.7 million shares of Arch Common Stock
outstanding.
PRO FORMA MERGER ANALYSIS. DLJ also performed pro forma merger analysis to
determine the impact of the Merger to the stockholders of Pogo. DLJ analyzed
the impact of the Merger on Pogo net income per share ("EPS") and CFFO per
share. DLJ determined that the Merger was accretive to CFFO per share in both
1998 and 1999 by 3.5% and 1.4%, respectively, and accretive to EPS in 1998 by
5.0% and dilutive to EPS in 1999 by 1.6%. DLJ included synergies related to
the elimination of redundant public company expenses as well as an estimation
of savings of other operating expenses in its analysis.
The summary set forth above does not purport to be a complete description of
the analyses performed by DLJ in connection with the preparation of the
Opinion. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Each of the
analyses conducted by DLJ was carried out in order to provide a different
perspective on the transaction and add to the total mix of information
available. DLJ did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion
as to fairness from a financial point of view. Rather, in reaching its
conclusion, DLJ considered the results of the analyses in light of each other
and ultimately reached its opinion based on the results of all analyses taken
as a whole. DLJ did not place particular reliance or weight on any individual
analysis, but instead concluded that its analyses, taken as a whole, supported
its determination. Accordingly, notwithstanding the separate factors
summarized above, DLJ believes that its analyses must be considered as a whole
and that selecting portions of its analysis and the factors considered by it,
without considering all analyses and factors, could create an incomplete view
of the evaluation process underlying its opinions. In performing its analyses,
DLJ made numerous assumptions with respect to industry performance, business
and economic conditions and other matters. The analyses performed by DLJ are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based on numerous
factors or events beyond the control of the parties or their respective
advisors, none of Arch, Pogo, DLJ or any other person assumes responsibility
if future results are materially different from those forecast.
Pursuant to the terms of an engagement letter dated May 28, 1998, Arch has
agreed to pay DLJ $400,000, payable in cash, for rendering of the Opinion.
Arch has also agreed to reimburse DLJ promptly for certain out-of-pocket
expenses (including reasonable fees and out-of-pocket expenses of counsel)
incurred by DLJ in connection with its engagement, and to indemnify DLJ and
certain related persons against certain liabilities in connection with its
engagement, including liabilities under the federal securities laws. The terms
of the fee arrangement with DLJ, which DLJ and Arch believe are customary in
transactions of this nature, were negotiated at arm's length between Arch and
DLJ and the Arch Board was aware of such arrangement.
The Arch Board selected DLJ to render a fairness opinion because it is a
nationally recognized investment banking firm and the principals of DLJ have
substantial experience in transactions similar to the Merger and are familiar
with Arch and its business. In the ordinary course of business, DLJ may trade
the securities of both Arch and Pogo for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short
position in such securities. DLJ, as part of its investment banking services,
is regularly engaged in the valuation of businesses and securities in
connection with mergers, acquisitions, underwritings, sales and distributions
of listed and unlisted securities, private placements and valuations for
corporate and other purposes.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a general discussion of the material U.S. federal income
tax consequences of the Merger prepared by Arthur Andersen LLP, tax advisor to
Arch. This discussion does not purport to be a complete analysis of all
potential tax consequences of the Merger. This discussion is based upon laws,
regulations, rulings and judicial decisions now in effect, all of which are
subject to change, possibly on a retroactive basis, and any such change could
affect the continuing validity of this discussion. This discussion does not
address all aspects of federal income taxation that may be relevant to a
particular holder of shares of Arch Stock in light of its individual
investment circumstances or to certain types of holders subject to special
treatment under the federal income tax laws (for example, non-United States
persons, dealers in securities, financial institutions, insurance companies
and tax-exempt organizations), nor does it discuss any aspect of state, local
or foreign taxation.
In the opinion of Arthur Andersen LLP, tax advisor, for federal income tax
purposes:
(1) The Merger will be treated as a reorganization within the meaning of
Section 368(a) of the Code;
(2) Pogo, Merger Sub and Arch will each be a party to the reorganization
within the meaning of Section 368(b) of the Code;
(3) No gain or loss will be recognized by Arch, Pogo or Merger Sub (other
than possibly cancellation of indebtedness income to Arch upon the exchange
of the Arch Notes for Pogo Common Stock); and
(4) No gain or loss will be recognized by the stockholders of Arch upon
the exchange of their shares solely for shares of Pogo Common Stock and
Rights pursuant to the Merger (except with respect to any cash received in
lieu of fractional shares or any cash received by holders of Arch Preferred
Stock in payment of accrued but unpaid dividends pursuant to Section 2.1(d)
of the Merger Agreement).
In rendering its opinion, Arthur Andersen LLP, tax advisor, has relied upon
and assumed as accurate and correct on the date hereof, and will rely and
assume as accurate and correct as of the Effective Time, certain
representations made by Arch and Pogo. Any inaccuracy or change with respect
to such representations, or any past or future actions by Arch or Pogo
contrary to such representations, could adversely affect the conclusions
reached in the opinion.
This opinion represents advisor's best judgment as to the tax treatment of
the Merger, but is not binding on the Internal Revenue Service (the
"Service"). Additionally, neither Arch nor Pogo intends to request a ruling
from the Service with respect to the tax consequences of the proposed
transactions.
This discussion assumes that the Arch Stock is or will be held as a capital
asset within the meaning of Section 1221 of the Code by the holder thereof as
of the Effective Time of the Merger.
With respect to opinion (3) above, cancellation of indebtedness income will
only be recognized by Arch if the outstanding principal amount on the Arch
Notes plus any accrued but unpaid interest due thereon exceeds the fair market
value of the shares of Pogo Common Stock received by the holders of such Arch
Notes upon the exchange of the Arch Notes for Pogo Common Stock. Accordingly,
Arch does not anticipate that the amount of cancellation of indebtedness
income that would be recognized, if any, will be material.
Cash received by a holder of shares of Arch Stock in lieu of a fractional
share will be treated as received from Pogo in exchange for such fractional
share, and gain or loss will be recognized for federal income tax purposes
measured by the difference between the amount of cash received and the portion
of the basis of the Arch Stock allocable to such fractional share. Such gain
or loss will be capital gain or loss and will be long-term if the shares of
Arch Stock exchanged for such fractional share have been held for the
requisite period at the Effective Time.
The aggregate tax basis of the shares of Pogo Common Stock received by a
stockholder of Arch in the Merger will be the same as the aggregate tax basis
of the shares of Arch Stock surrendered in exchange therefor,
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(i) increased, in the case of holders of Arch Preferred Stock, by the amount
of gain or income recognized on account of cash received in payment of accrued
but unpaid dividends, and (ii) decreased by the amount of such tax basis
allocable to any fractional shares for which cash is received and, in the case
of holders of Arch Preferred Stock, by the amount of cash received in payment
of accrued, but unpaid, dividends. A holder's holding period in such shares of
Pogo Common Stock will include its holding period in such shares of Arch
Stock.
THE GENERAL SUMMARY SET FORTH ABOVE IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR ARCH STOCKHOLDER.
BECAUSE THE PARTICULAR TAX ATTRIBUTES OF EACH ARCH STOCKHOLDER WILL VARY,
HOLDERS OF ARCH STOCK SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY
AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE EFFECT OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), exemptions from the filing and notification
requirements of the HSR Act exist for certain qualified transactions. Pogo and
Arch have determined, on advice of counsel, that it is not necessary for
either party to file notifications with either the FTC or the Antitrust
Division of the Department of Justice (the "DOJ").
At any time before or after the Effective Time, the DOJ, the FTC, a State or
a private person or entity could seek under the antitrust laws, among other
things, to enjoin the Merger or to cause Pogo to divest itself, in whole or in
part, of Arch or of other businesses conducted by Pogo. There can be no
assurance that a challenge to the Merger will not be made or that, if such a
challenge is made, Pogo will prevail. The obligations of Pogo and Arch to
consummate the Merger are subject to the condition that there be no order or
injunction of a court of competent jurisdiction that prohibits the
consummation of the Merger, and the obligations of Pogo are subject to the
condition that no order or injunction that imposes specified limitations on
Pogo or Arch be in effect, and no suit by a governmental authority seeking any
order or injunction described in this sentence be pending. See "Certain
Provisions of the Merger Agreement--Conditions to the Merger," "--Termination"
and "--Expenses and Termination Fees."
The Merger is also subject to the provisions of the Investment Canada Act.
Pursuant thereto, Pogo is required to make a notification filing within 30
days after the Closing Date with respect to a change in control of Arch's two
Canadian subsidiaries. Pogo has indicated that all such necessary filings
pursuant to the Investment Canada Act will be made within the prescribed time
periods.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the
recorded historical cost basis of the assets and liabilities of Pogo and Arch
will be carried forward to the operations of the combined companies at
recorded amounts and results of operations of the combined companies will
include income of Pogo and Arch for the entire fiscal year in which the
combination occurs. In addition, the historical results of operations of the
separate companies for all periods prior to the Merger will be combined and
restated from their inception.
Pogo and Arch have been initially advised by their independent public
accountants, Arthur Andersen LLP, based in part on certain assumptions, facts
and representations, that following the Merger, the combined companies should
be accounted for as a "pooling of interests" in conformity with generally
accepted accounting principles described in Opinion No. 16 of the Accounting
Principles Board. Certain events, including certain transactions with respect
to Pogo Common Stock or Arch Common Stock by affiliates of Pogo or Arch,
respectively, may prevent the Merger from qualifying as a pooling of interests
for accounting and financial
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reporting purposes. For information concerning certain restrictions to be
imposed on the transferability of Pogo Common Stock to be received by
affiliates in order, among other things, to ensure the availability of pooling
of interests accounting treatment, see "--Resales of Pogo Common Stock."
ARCH EMPLOYEE MATTERS
All persons, other than the executive officers listed on Schedule 5.7 of the
Merger Agreement (the "Executives"), who are employed by Arch or its
subsidiaries immediately prior to the Effective Time, shall be employed by the
Surviving Corporation immediately after the Effective Time, it being
understood that Pogo and the Surviving Corporation shall not have any
obligations to continue employing such employees for any length of time
thereafter. Prior to the Effective Time, Arch has agreed to make no
representations or promises, oral or written, to employees of Arch concerning
either (a) employment or (b) compensation, in each case, in respect to such
employees after the Effective Time without the prior consent of Pogo. Pogo and
Arch have further agreed that any person (other than the Executives) who is
employed by Arch or any of its subsidiaries immediately prior to the Effective
Time shall be entitled to participate, from and after the Effective Time, in
all pension and benefit plans that are available to similarly situated
salaried Pogo employees, generally, who reside in the United States. All
persons (other than the Executives) who are employed by Arch or any of its
Subsidiaries immediately prior to the Effective Time shall, from and after the
Effective Time, be considered employees of Pogo, or a subsidiary of Pogo, as
applicable, for purposes of participation and vesting under any existing or
future Pogo salaried employee benefit or pension plan. Service by such
employee with Arch and its subsidiaries prior to the Effective Time shall not
(i) constitute service for any purposes under any of the Pogo salaried
employee benefit plans or (ii) constitute service for participation and
vesting purposes under any Pogo pension plans. Persons (other than Executives)
who are employed by Arch or any of its subsidiaries prior to the Effective
Time who remain with Arch until the Effective Time and are terminated at the
Effective Time or within six months following the Effective Time (other than
for cause) shall receive a one time severance payment equal to three weeks
salary for each year of continuous service with Arch or any of its
subsidiaries. For purposes of calculating the one-time severance payment, an
employee's salary shall be the higher of such employee's salary at either (x)
the Effective Time or (y) such employee's termination; and the severance
payment for any partial year of such continuous service shall be prorated.
Each of the Executives has agreed to terminate his employment with Arch at
the Effective Time of the Merger. Each of the Executives has an existing
employment agreement with Arch that provides for the payment of a lump sum
severance amount (equal to one or two times the Executive's annual
compensation depending upon the Executive's agreement) in connection with such
Executive's termination of employment with Arch. Such severance payments are
not contingent upon a change in control of Arch or any other corporate action.
Rather, Arch is required to make such payments at any time such Executives
terminate their employment with Arch. The aggregate amount of such severance
payments will be approximately $1.6 million.
TREATMENT OF ARCH STOCK OPTIONS
The Merger Agreement provides that at the Effective Time, each outstanding
option to purchase Arch Common Stock that has been granted pursuant to the
Arch stock option plan ("Arch Stock Option") shall be assumed by Pogo. As so
assumed and in accordance with the Arch stock option plan, such option shall
be fully vested and be deemed to constitute an option to acquire, on the same
terms and conditions as were applicable under such Arch Stock Option, a number
of shares of Pogo Common Stock equal to the number of shares of Arch Common
Stock purchasable pursuant to such exercisable portion of such Arch Stock
Option multiplied by the Common Exchange Ratio, at a price per share equal to
the per-share exercise price for the shares of Arch Common Stock, purchasable
pursuant to such Arch Stock Option divided by the Common Exchange Ratio;
provided, however, that the number of shares of Pogo Common Stock that may be
purchased upon exercise of such Arch Stock Option shall not include any
fractional share and, upon exercise of such Arch Stock Option, a cash payment
shall be made for any fractional share based upon the arithmetic average of
the high and low trading prices, regular way, of a share of Pogo Common Stock
on the NYSE on the date of exercise; and provided, further, that in the case
of any option to which Section 421 of the Code applies by reason of its
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qualification under any of Sections 422-424 of the Code, the option price, the
number of shares purchasable pursuant to such option and the terms and
conditions of exercise of such option shall be determined in order to comply
with Section 424(a) of the Code.
INTERESTS OF CERTAIN PERSONS
In considering the recommendation of the Arch Board with respect to the
Merger, stockholders should be aware that certain members of Arch's management
and the Arch Board have certain interests in the Merger (including severance
arrangements) that are in addition to the interests of the stockholders of
Arch generally. Such severance arrangements were not entered into in
contemplation of the Merger, but were in place pursuant to certain existing
executive employment agreements. The Arch Board was aware of these interests
and considered them in connection with the consideration of the Merger, the
Merger Agreement and the transactions contemplated thereby. See "--Arch
Employee Matters" for information concerning employment agreements, severance
benefits and other employee benefit matters and "--Treatment of Arch Stock
Options" and "Information Regarding Arch--Market for Arch Common Stock and
Related Stockholder Matters" for information concerning the treatment of the
options previously granted employees of Arch. See "Certain Provisions of the
Merger Agreement--Indemnification" for information concerning indemnification
of directors and executive officers.
RESALES OF POGO COMMON STOCK
The issuance of Pogo Common Stock to stockholders of Arch in the Merger has
been registered under the Securities Act. All shares of Pogo Common Stock
received by stockholders of Arch upon consummation of the Merger will be
freely transferable by those holders who are not deemed to be "affiliates" (as
defined under the Securities Act but generally including executive officers,
directors and ten percent or more stockholders) of Arch.
Pursuant to the Merger Agreement, Arch has agreed to cause to be prepared
and delivered to Pogo a list identifying all persons who, at the time of the
Special Meeting, may be deemed to be "affiliates" of Arch (the "Affiliates").
Arch will use its best efforts to cause each person who is identified as an
Affiliate in such list to deliver to Pogo at or prior to the Effective Time a
written agreement that such Affiliate will not sell, pledge, transfer or
otherwise dispose of any shares of Pogo Common Stock issued to such Affiliate
pursuant to the Merger, except pursuant to an effective registration statement
or in compliance with Rule 145 under the Securities Act or an exemption from
the registration requirements of the Securities Act. Arch will also use its
best efforts to cause each person who is identified as an Affiliate in such
list to sign, on or prior to the thirtieth day prior to the Effective Time, a
written agreement, in the form to be approved by Pogo and Arch, that, with
certain exceptions, such party will not sell or in any other way reduce such
party's risk relative to any shares of Pogo Common Stock to be received in the
Merger until such time as financial results covering at least 30 days of post-
merger operations have been published.
NYSE LISTING OF COMMON STOCK
It is a condition to the Merger that the shares of Pogo Common Stock to be
issued pursuant to the Merger be authorized for listing on the NYSE, subject
to official notice of issuance. Pogo Common Stock is traded on the NYSE and
the Pacific Stock Exchange under the symbol "PPP."
NO DISSENTERS' RIGHTS
Under Delaware law, Arch stockholders will not be entitled to any appraisal
or dissenters' rights in connection with the Merger.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The detailed terms of and conditions to the Merger are contained in the
Merger Agreement, which is included in full as Appendix A to this Proxy
Statement/Prospectus and incorporated herein by reference. The following
summary description of certain provisions of the Merger Agreement is subject
to the more complete information set forth in the Merger Agreement.
CONDITIONS TO THE MERGER
Conditions to Obligation of Each Party to Effect the Merger
The respective obligation of each party to effect the Merger is subject to
the satisfaction or waiver (if applicable) prior to the Closing of the
following conditions:
Arch Stockholder Approval. The Merger Agreement and the Merger shall have
been approved and adopted by the affirmative vote of the holders of (i) a
majority of the outstanding shares of Arch Common Stock entitled to vote
thereon (including the holders of Arch Preferred Stock voting on an "as
converted" basis) and (ii) at least 66 2/3% of the Arch Preferred Stock voting
as a separate class.
NYSE Listing. The shares of Pogo Common Stock issuable to Arch stockholders
pursuant to the Merger Agreement and such other shares of Pogo Common Stock
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on the NYSE subject to official notice of
issuance.
Other Approvals. All filings required to be made prior to the Effective Time
with, and all consents, approvals, permits and authorizations required to be
obtained prior to the Effective Time from any governmental entity in
connection with the execution and delivery of the Merger Agreement and the
consummation of the transactions contemplated thereby by Arch, Pogo and Merger
Sub shall have been made or obtained (as the case may be), except where the
failure to obtain such consents, approvals, permits, and authorizations would
not be reasonably likely to result in a Material Adverse Effect (as defined in
the Merger Agreement) on Pogo or Arch (assuming the Merger has taken place) or
to materially adversely affect the consummation of the Merger, and no such
consent, approval, permit or authorization shall impose terms or conditions
that would have, or would be reasonably likely to have, a Material Adverse
Effect on Pogo or Arch (assuming the Merger has taken place). Unless otherwise
agreed to by Pogo, no such consent, approval, permit or authorization shall
then be subject to appeal.
Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceeding seeking a stop order.
No Injunctions or Restraints. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition ("Injunction") preventing
the consummation of the Merger shall be in effect.
Additional Conditions to Obligations of Pogo and Merger Sub
The obligations of Pogo and Merger Sub to effect the Merger are subject to the
satisfaction of the following conditions, any or all of which may be waived in
whole or in part by Pogo and Merger Sub:
Representations and Warranties. Each of the representations and warranties
of Arch set forth in the Merger Agreement shall be true and correct in all
material respects as of May 28, 1998 and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date, except where the failure to
be so true and correct would not have a Material Adverse Effect on Arch,
except for general economic changes or changes that may affect the oil and gas
industry generally.
Performance of Obligations of Arch. Arch shall have performed in all
material respects all obligations required to be performed by it under the
Merger Agreement at or prior to the Closing Date.
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Letters from Arch Affiliates. Pogo shall have received signed copies of the
agreements referred to under "The Merger--Resales of Pogo Common Stock" from
all parties deemed to be Affiliates of Arch.
Absence of Certain Actions. No Injunction shall be in effect as a result of
or related to the Merger (i) imposing any limitation upon the ability of Pogo
or any of its subsidiaries effectively to control the business or operations
of Pogo, Arch or any of their respective subsidiaries or (ii) prohibiting or
imposing any limitation upon Pogo's or Arch's or any of their subsidiaries'
ownership or operation of all or any portion of the business or assets or
properties of Pogo or Arch or any of their respective subsidiaries or
compelling Pogo or Arch or any of their respective subsidiaries to divest or
hold separate all or any portion of the business or assets or properties of
Pogo or Arch or any of their respective subsidiaries, or imposing any other
limitation upon any of them in the conduct of their businesses, and no suit or
proceeding by a governmental authority seeking such an Injunction or an
Injunction preventing or making illegal the consummation of the Merger shall
be pending.
Conversion of Arch Notes. At or prior to the Closing, holders of all of the
Arch Notes shall have converted the outstanding principal amount of their Arch
Notes into Pogo Common Stock as contemplated in Section 2.3(a) of the Merger
Agreement.
Affiliate Notes. All holders of the notes receivable from, and loans to,
officers of Arch set forth on Schedule 2.3(b) of the Merger Agreement (the
"Affiliate Notes") shall have made the election to either have their Affiliate
Notes repaid in full or amended and restated as contemplated in Section 2.3(b)
of the Merger Agreement.
Pooling. Either (i) Pogo shall have received written notification from the
SEC that the Merger will qualify as a "pooling" for financial accounting
purposes or (ii) the written opinion from Arthur Andersen LLP, that the Merger
will qualify as a "pooling" for financial accounting purposes, shall not have
been modified or rescinded, nor shall there be any material changes in the
facts or assumptions which are the basis thereof, which would cause the Merger
to fail to qualify as a "pooling" for financial accounting purposes except to
the extent that any such failure to so qualify is attributable to actions
taken, or failed to be taken, by Pogo after May 28, 1998.
Resignation and Release. Pogo shall have received from each of the Arch
officers named on Schedule 5.7 of the Merger Agreement a written resignation
and release effecting the resignation of those officers from their respective
positions and employment with Arch.
Additional Conditions to Obligation of Arch
The obligation of Arch to effect the Merger is subject to the satisfaction
of the following conditions, any or all of which may be waived in whole or in
part by Arch:
Representations and Warranties. Each of the representations and warranties
of Pogo and Merger Sub set forth in the Merger Agreement shall be true and
correct in all material respects as of May 28, 1998 and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, except where the
failure to be so true and correct would not have a Material Adverse Effect on
Pogo, except for general economic changes or changes that may affect the oil
and gas industry generally.
Performance of Obligations of Pogo and Merger Sub. Pogo and Merger Sub shall
have performed in all material respects all obligations required to be
performed by them under the Merger Agreement at or prior to the Closing Date.
Tax Opinion. Arch shall have received an opinion of Arthur Andersen LLP, tax
advisors, dated the Closing Date, reasonably satisfactory to Arch (a copy of
which shall be delivered to Pogo), to the effect that, if the Merger is
consummated in accordance with the terms of the Merger Agreement, for federal
income tax purposes, (i) the Merger will be treated as a reorganization within
the meaning of Section 368(a) of the Code, (ii) Pogo,
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Merger Sub and Arch will each be a party to the reorganization within the
meaning of Section 368(b) of the Code, (iii) no gain or loss will be
recognized by Arch, Pogo or Merger Sub (other than possibly cancellation of
indebtedness income to Arch upon the exchange of the Arch Notes for Pogo
Common Stock) and (iv) no gain or loss will be recognized by the stockholders
of Arch upon the exchange of their shares solely for shares of Pogo Common
Stock and Rights pursuant to the Merger (except with respect to any cash
received in lieu of fractional shares or any cash received by holders of Arch
Preferred Stock in payment of accrued but unpaid dividends). The party
rendering such opinion may receive and rely upon representations contained in
certain certificates of Pogo, Merger Sub and Arch contemplated by the Merger
Agreement. Arch received an initial opinion from Arthur Andersen LLP, tax
advisors, to a similar effect on May 29, 1998. See "The Merger--Certain
Federal Income Tax Consequences."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by each
of Pogo, Merger Sub and Arch relating to, among other things, (i) each of
their and certain of their respective subsidiaries' organization and similar
corporate matters, (ii) each of their capital structures, (iii) authorization,
execution, delivery, performance and enforceability of the Merger Agreement
and related matters, and the absence of conflicts, violations of or defaults
under the Certificates of Incorporation, as amended, or Bylaws, as amended, of
each of Pogo and Arch, or any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement (including, without limitation, any pre-
emptive rights or rights of first refusal with respect to oil and gas
interests), instrument, permit, concession, franchise, license, joint
operating agreement or joint venture or other ownership arrangement, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Pogo
or Arch or any of their respective subsidiaries or any of their respective
properties or assets, (iv) the documents and reports filed by each of them
with the SEC and the accuracy of the information contained therein, (v) the
accuracy of the information provided by each of them with respect to the
Registration Statement and this Proxy Statement/Prospectus, (vi) the absence
of certain events, changes or effects, (vii) the absence of undisclosed
material liabilities, (viii) the absence of certain defaults or violations,
(ix) compliance with certain laws, (x) litigation, (xi) the stockholder vote
required to approve the Merger Agreement, (xii) beneficial ownership of the
other party's common stock, and (xiii) broker's or similar fees.
The Merger Agreement also contains representations and warranties by (i)
Arch relating to (a) taxes, (b) retirement and other employee plans and
matters relating to the Employee Retirement Income Security Act of 1974, as
amended, (c) employee representation by labor unions or employee involvement
in any other organizational activity, (d) authority to use patents, trademarks
and other intellectual property, (e) compliance with environmental laws, (f)
rights with respect to maps, geological, geophysical libraries and other
proprietary information, (g) maintenance of insurance, (h) certain accounting
matters, (i) title to and other matters regarding business properties
(including oil and gas and other properties), (j) material oil and gas
contracts and the performance of obligations and absence of defaults under
those contracts, (k) the condition of personalty, equipment and fixtures
equipment, (l) allowable production of oil and gas from wells and the terms of
the oil and gas leases, and (m) certain marketing matters with respect to oil
and gas (including "take or pay" payments); and (ii) by Pogo and Merger Sub
regarding the interim operations of Merger Sub.
CERTAIN COVENANTS--CONDUCT OF BUSINESS OF ARCH
During the period from May 28, 1998 through the Effective Time, Arch has
agreed as to itself and its subsidiaries that (except as expressly
contemplated or permitted by the Merger Agreement, or to the extent that Pogo
has otherwise consented in writing):
Ordinary Course. Each of Arch and its subsidiaries will carry on its
businesses in the ordinary course in substantially the same manner as
heretofore conducted and will use all reasonable efforts to preserve intact
its present business organizations, keep available the services of its current
officers and employees, and endeavor to preserve its relationships with
customers, suppliers and others having business dealings with it.
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Dividends, Changes in Stock. Arch will not and it will not permit any of its
subsidiaries to: (i) declare or pay any dividends on or make other
distributions in respect of any of its capital stock, except for the
declaration and payment of dividends from a subsidiary of Arch to Arch or
another subsidiary of Arch and except for cash dividends paid to holders of
Arch Preferred Stock or distributions paid in the ordinary course of business
and consistent with past practices on or with respect to the membership
interests of Saginaw Pipeline Company, L.C. and Industrial Natural Gas, L.C.;
(ii) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of Arch capital stock other than as
contemplated in the Merger Agreement; or (iii) repurchase, redeem or otherwise
acquire, or permit any of its subsidiaries to purchase, redeem or otherwise
acquire, any shares of its capital stock.
Issuance of Securities. Arch will not and it will not permit any of its
subsidiaries to issue, deliver or sell, or authorize or propose to issue,
deliver or sell, any shares of its capital stock of any class, any Voting Debt
(as defined in the Merger Agreement) or any securities convertible into, or
any rights, warrants or options to acquire, any such shares, Voting Debt or
convertible securities, other than: (i) the issuance of Arch Common Stock upon
the exercise of stock options granted under the Arch stock option plan that
are outstanding on May 28, 1998, or in satisfaction of stock grants or stock
based awards made prior to May 28, 1998 pursuant to the Arch stock option
plan; and (ii) issuances by a wholly owned subsidiary of its capital stock to
its parent.
Governing Documents. Except as contemplated by the Merger Agreement, Arch
will not amend or propose to amend its Certificate of Incorporation or Bylaws.
No Acquisitions. Arch will not, and it will not permit any of its
subsidiaries to acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial equity interest in or a substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof.
No Dispositions. Other than: (i) dispositions in the ordinary course of
business consistent with past practice that are not material, individually or
in the aggregate, to Arch and its subsidiaries taken as a whole and (ii)
product sales in the ordinary course of business consistent with past
practice, Arch will not, and it will not permit any of its subsidiaries to,
sell, lease, encumber or otherwise dispose of, or agree to sell, lease
(whether such lease is an operating or capital lease), encumber or otherwise
dispose of, any of its assets.
No Dissolution, Etc. Except as otherwise permitted or contemplated by the
Merger Agreement, Arch will not authorize, recommend, propose or announce an
intention to adopt a plan of complete or partial liquidation or dissolution of
such party or any of its subsidiaries.
Certain Employee Matters. Arch will not and it will not permit any of its
subsidiaries to: (i) grant any increases in the compensation of any of its
directors, officers or employees, except increases to employees who are not
officers or directors in the ordinary course of business and in accordance
with past practice; (ii) pay or agree to pay any pension, retirement allowance
or other employee benefit not required or contemplated by any of the existing
Arch Employee Benefit Plans or Arch Pension Plans (as each are defined in the
Merger Agreement) as in effect on May 28, 1998 to any director, officer or
employee, whether past or present; (iii) enter into any new, or amend any
existing, employment or severance or termination agreement with any director,
officer or key employee; (iv) become obligated under any new Arch Employee
Benefit Plan or Arch Pension Plan, which was not in existence prior to May 28,
1998, or amend any such plan or arrangement in existence on May 28, 1998 if
such amendment would have the effect of materially enhancing any benefits
thereunder, or (v) terminate the employment of any executive or employee of
Arch without cause.
Indebtedness; Leases; Capital Expenditures. Arch will not, nor will Arch
permit any of its subsidiaries to, (i) incur any indebtedness for borrowed
money (except for working capital under Arch's existing credit facilities, and
refinancings of existing debt that permit prepayment of such debt without
penalty (other than LIBOR breakage costs)) or guarantee any such indebtedness
or issue or sell any debt securities or warrants or rights to acquire any debt
securities of such party or any of its subsidiaries or guarantee any debt
securities of others, (ii)
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except in the ordinary course of business, enter into any lease (whether such
lease is an operating or capital lease) or create any mortgages, liens,
security interests or other encumbrances on the property of Arch or any of its
subsidiaries in connection with any indebtedness thereof, or (iii) commit to
aggregate capital expenditures in excess of $500,000 outside the capital
budget dated as of May 1, 1998, as amended and approved by Arch prior to May
28, 1998.
NO SOLICITATION OF ACQUISITION PROPOSALS
From and after May 28, 1998, Arch will not, and will not authorize or permit
any of its officers, directors, employees, agents or other representatives or
those of any of its subsidiaries (collectively, "Arch Representatives") to,
directly or indirectly, solicit or knowingly encourage (including by way of
providing information) any prospective acquiror or the invitation or
submission of any inquiries, proposals or offers or any other efforts or
attempts that constitute, or may reasonably be expected to lead to, an
Acquisition Proposal (as defined herein) from any person or engage in any
discussions or negotiations with respect thereto or otherwise cooperate with
or assist or participate in or facilitate any such proposal; provided,
however, that (i) the Arch Board may take and disclose to Arch's stockholders
a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act or
make any other disclosure to Arch's stockholders if failure to so disclose
would be inconsistent with the fiduciary duties of the Arch Board to its
stockholders under applicable law and (ii) following receipt from a third
party (without any solicitation, initiation, encouragement, discussion or
negotiation, directly or indirectly, by or with Arch or any Arch
Representatives) of a bona fide Acquisition Proposal that is financially
superior to the Merger and reasonably capable of being financed (as determined
in each case in good faith by the Arch Board after consultation with Arch's
financial advisors), (x) Arch may engage in discussions or negotiations with
such third party and may furnish such third party information concerning Arch
and its business, properties and assets if such third party executes a
confidentiality agreement in reasonably customary form and (y) the Arch Board
may withdraw, modify or not make its recommendation to approve and adopt the
Merger Agreement or may terminate the Merger Agreement in accordance with the
Merger Agreement, but in each case referred to in the foregoing clauses (i)
and (ii) only to the extent that the Arch Board shall conclude in good faith
after consultation with Arch's outside counsel that such action is necessary
in order for the Arch Board of Directors to act in a manner that is consistent
with its fiduciary obligations under applicable law notwithstanding any
concessions that may be offered by Pogo. The "no solicitation" provisions of
the Stockholder Agreements (see "The Merger--Stockholder Agreements") do not
prohibit any Stockholder Representative who is also an Arch Representative
from taking actions permitted by the foregoing provisions of the Merger
Agreement. As used in the Merger Agreement, "Acquisition Proposal" means any
proposal or offer, other than a proposal or offer by Pogo or any of its
affiliates, for, or that could be reasonably expected to lead to, a tender or
exchange offer, a merger, consolidation or other business combination
involving Arch or any Significant Subsidiary of Arch or any proposal to
acquire in any manner a substantial equity interest in, or any substantial
portion of the assets of, Arch or any of its subsidiaries.
Prior to taking any action referred to in the foregoing paragraph, if Arch
intends to participate in any such discussions or negotiations or provide any
such information to any such third party, Arch is required to give notice to
Pogo of such action. Arch must promptly notify Pogo of any such requests for
such information or the receipt of any Acquisition Proposal, including the
identity of the person or group engaging in such discussions or negotiations,
requesting such information or making such Acquisition Proposal, and the
material terms and conditions of any Acquisition Proposal.
ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, Pogo and Arch have agreed that (i) they
will prepare and file with the SEC the Proxy Statement/Prospectus and have it
mailed to stockholders of Arch at the earliest practicable date, Pogo will
prepare and file with the SEC the Registration Statement, and each will use
all reasonable efforts to have the Registration Statement declared effective,
(ii) they will each afford to the other access to their respective properties,
books, contracts, commitments and records and, if during the review of those
documents either Arch
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or Pogo gains actual knowledge of any information that would cause a
representation or warranty in the Merger Agreement to be inaccurate in any
material respect, it will promptly advise the other party, (iii) subject to
the fiduciary duties of the directors under applicable law, Arch will call a
meeting of its stockholders to be held as promptly as practicable, (iv) they
will comply with all legal requirements imposed on each other with respect to
the Merger and furnish information to the other in connection with such legal
requirements, (v) Pogo will take action necessary to permit it to issue shares
of Pogo Common Stock pursuant to the Merger and will use all reasonable
efforts to have approved for listing on the NYSE, subject to official notice
of issuance, the shares of Pogo Common Stock to be issued in the Merger and
shares of Pogo Common Stock issued or reserved for issuance under the Arch
stock option plan, (vi) certain employee matters will be dealt with as agreed
to in the Merger Agreement (see "The Merger--Arch Employee Matters"), (vii)
Pogo will assume certain outstanding stock options to purchase Arch Common
Stock, which will become options to purchase Pogo Common Stock based on the
Common Exchange Ratio and subject to treatment of fractional shares (see "The
Merger--Treatment of Arch Stock Options") and file a registration statement
with respect to the Pogo Common Stock subject to the options, (viii) Pogo will
take certain actions with respect to Arch's bank credit facilities, (ix) Arch
will not, with certain exceptions, take certain actions to modify any
indebtedness of, or to, Arch, (x) they will cooperate and use reasonable
efforts to defend any claim arising from or in connection with the Merger,
(xi) Arch will not take or fail to take, as the case may be, any reasonable
action requested by Pogo that would affect the accounting treatment of the
Merger as a "pooling of interests," (xii) they will cooperate and consult with
the other regarding press releases, (xiii) they will confer and will advise
each other of changes or events that may have a Material Adverse Effect, (xiv)
they will not take any action that would affect the qualification of the
Merger as a reorganization described in Section 368(a) of the Code and (xv)
Pogo will use all reasonable efforts to publicly publish the results of the
first full calendar month of combined operations of Pogo and Arch as soon as
is commercially practicable after the end of that calendar month, but in no
event more than 60 days after the end of that calendar month.
In addition, pursuant to Section 5.4 of the Merger Agreement, Pogo and Arch
have agreed to: (a) use all reasonable efforts to cooperate with one another
in (i) determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or authorizations
are required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions in connection with the execution and delivery of the Merger
Agreement and the consummation of the Merger and the transactions contemplated
thereby and (ii) timely making all such filings and timely seeking all such
consents, approvals, permits or authorizations; (b) furnish the other with
copies of all correspondence, filings and communications (and memoranda
setting forth the substance thereof) between them and their affiliates and
their respective representatives, on the one hand, and any governmental or
regulatory authority or members or their respective staffs, on the other hand,
with respect to the Merger Agreement and the transactions contemplated by the
Merger Agreement; (c) furnish the other with such necessary information and
reasonable assistance as such other parties and their respective affiliates
may reasonably request in connection with their preparation of necessary
filings, registrations or submissions of information to any governmental or
regulatory authorities; and (d) use their commercially reasonable efforts to
take, or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make effective
the Merger and the transactions contemplated by the Merger Agreement
including, without limitation, the resolution of objections, if any, as may be
asserted by any governmental authority with respect to the Merger and the
transactions contemplated thereby under any antitrust or trade or regulatory
laws or regulations of any governmental authority; provided that Pogo and Arch
will not be required to take any action that could have any adverse effect on
the business, operations, prospects, assets, condition (financial or
otherwise) or results of operations of Pogo or Arch (including any
subsidiaries thereof).
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TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, whether before or after approval of the
matters presented in connection with the Merger by the stockholders of Arch:
(a) by mutual written consent of Arch and Pogo, or by mutual action of
their respective Boards of Directors;
(b) by either Arch or Pogo if (i) the Merger shall not have been
consummated by September 30, 1998 (provided that the right to terminate the
Merger Agreement shall not be available to any party whose failure to
fulfill any covenant or agreement under the Merger Agreement has been the
cause of or resulted in the failure of the Merger to occur on or before
such date); (ii) any court of competent jurisdiction, or some other
governmental body or regulatory authority, shall have issued an order,
decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and non-appealable; or (iii)
any required approval of Arch's stockholders shall not have been obtained
by reason of the failure to obtain the required vote upon a vote held at a
duly held meeting of stockholders or at any adjournment thereof;
(c) by Pogo if (i) for any reason Arch fails to call and hold a
stockholders meeting for the purpose of voting upon the Merger Agreement
and the Merger by September 1, 1998 (provided that this right to terminate
the Merger Agreement shall not be available to Pogo if Arch would be
entitled to terminate the Merger Agreement under certain circumstances);
(ii) Arch shall have failed to comply in any material respect with any of
the covenants or agreements contained in the Merger Agreement to be
complied with or performed by Arch at or prior to such date of termination
(provided such breach has not been cured within 15 days following receipt
by Arch of notice of such breach and is existing at the time of termination
of the Merger Agreement); (iii) any representation or warranty of Arch
contained in the Merger Agreement shall not be true in all material
respects when made (provided such breach has not been cured within 15 days
following receipt by Arch of notice of such breach and is existing at the
time of termination of the Merger Agreement) or on and as of the time of
such termination as if made on and as of such time (except to the extent it
relates to a particular date), except where the failure to be so true and
correct would not have a Material Adverse Effect on Arch, except for
general economic changes or changes that may affect the oil and gas
industry generally; or (iv) after May 28, 1998 there has been any Material
Adverse Change with respect to Arch, except for general economic changes or
changes that may affect the oil and gas industry generally or for changes
in the business and operations of Arch proximately caused by its entering
into the Merger Agreement or performing its obligations thereunder;
(d) by Arch if (i) Pogo or Merger Sub shall have failed to comply in any
material respect with any of the covenants or agreements contained in the
Merger Agreement to be complied with or performed by it at or prior to such
date of termination (provided such breach has not been cured within 15 days
following receipt by Pogo of notice of such breach and is existing at the
time of termination of the Merger Agreement); (ii) any representation or
warranty of Pogo or Merger Sub contained in the Merger Agreement shall not
be true in all material respects when made (provided such breach has not
been cured within 15 days following receipt by Pogo of notice of such
breach and is existing at the time of termination of the Merger Agreement)
or on and as of the time of such termination as if made on and as of such
time (except to the extent it relates to a particular date), except where
the failure to be so true and correct would not have a Material Adverse
Effect on Pogo, except for general economic changes or changes that may
affect the oil and gas industry generally; or (iii) after May 28, 1998
there has been any Material Adverse Change with respect to Pogo, except for
general economic changes or changes that may affect the oil and gas
industry generally;
(e) by Pogo if (i) the Arch Board shall have withdrawn or modified, in
any manner which is adverse to Pogo, its recommendation or approval of the
Merger or the Merger Agreement and the transactions contemplated thereby or
shall have resolved to do so, or (ii) the Arch Board shall have recommended
to the stockholders of Arch any Acquisition Proposal or any transaction
described in the definition of Acquisition Proposal, or shall have resolved
to do so;
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(f) by Arch if Arch shall exercise the right of termination referred to
under "--No Solicitation of Acquisition Proposals"; provided that Arch may
not effect such termination unless and until (i) Pogo receives at least
three business days' prior written notice from Arch of its intention to
effect such termination pursuant to this provision; (ii) during such
period, Arch shall, and shall cause its respective financial and legal
advisors to, consider any adjustment in the terms and conditions of the
Merger Agreement that Pogo may propose; and (iii) Arch pays Pogo a
termination fee of $3.0 million (see "--Expenses and Termination Fees")
concurrently with such termination; or
(g) by Pogo if any Governmental Entity (as defined in the Merger
Agreement) shall have issued any Injunction or taken any other action
permanently imposing, prohibiting or compelling any of the limitations,
prohibitions or compulsions set forth under "--Additional Conditions to
Obligations of Pogo and Merger Sub--Absence of Certain Actions" and such
Injunction or other action shall have become final and non-appealable.
EXPENSES AND TERMINATION FEE
Each of Pogo and Arch is required to pay all costs and expenses incurred by
it in connection with the Merger Agreement and all the transactions
contemplated thereby, whether or not the Merger is consummated, except that
the filing fees for registering shares of Pogo Common Stock pursuant to the
Registration Statement and the printing and mailing costs of the Proxy
Statement/Prospectus will be paid by Pogo.
The Merger Agreement provides that Arch will pay Pogo a termination fee of
$3.0 million upon termination of the Merger Agreement pursuant to the
provisions of clauses (e) or (f) under "--Termination" above.
INDEMNIFICATION
Arch will, and from and after the Effective Time, Pogo and the Surviving
Corporation will, indemnify, defend and hold harmless each person who is now,
or has been at any time prior to May 28, 1998 or who becomes prior to the
Effective Time, an officer or director of Arch or any of its subsidiaries (the
"Indemnified Parties") against all losses, claims, damages, costs, expenses
(including attorneys' fees), liabilities or judgments or amounts that are paid
in settlement with the approval of the indemnifying party (which approval
shall not be unreasonably withheld) of or in connection with any threatened or
actual claim, action, suit, proceeding or investigation based in whole or in
part on or arising in whole or in part out of the fact that such person is or
was a director, officer, or such employee of Arch or any subsidiary of Arch
whether pertaining to any matter existing or occurring at or prior to the
Effective Time and whether asserted or claimed prior to, or at or after, the
Effective Time ("Indemnified Liabilities"), including all Indemnified
Liabilities based in whole or in part on, or arising in whole or in part out
of, or pertaining to the Merger Agreement or the transactions contemplated
thereby, in each case to the full extent permitted under applicable Delaware
law (and Pogo and the Surviving Corporation, as the case may be, will pay
expenses in advance of the final disposition of any such action or proceeding
to each Indemnified Party to the full extent permitted by law). Without
limiting the foregoing, in the event any such claim, action, suit, proceeding
or investigation is brought against any of the Indemnified Parties (whether
arising before or after the Effective Time), (i) the Indemnified Parties may
retain counsel satisfactory to Pogo and Arch (or to them and Pogo and the
Surviving Corporation after the Effective Time) and Arch (or after the
Effective Time, Pogo and the Surviving Corporation) will pay all fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received, and (ii) Arch (or after the Effective Time, Pogo and
the Surviving Corporation) will use all reasonable efforts to assist in the
vigorous defense of any such matter, provided that none of Arch, Pogo or the
Surviving Corporation will be liable for any settlement effected without its
written consent, which consent, however, shall not be unreasonably withheld.
Any Indemnified Party wishing to claim indemnification, upon learning of any
such claim, action, suit, proceeding or investigation, will notify Arch (or
after the Effective Time, Pogo and the Surviving Corporation), but the failure
so to notify will not relieve a party from any liability that it may have
under the Merger Agreement except to the extent such failure materially
prejudices such party. The Indemnified Parties as a group may retain only one
law firm to represent them with respect to each such matter unless there is,
under applicable standards of professional conduct, a
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conflict on any significant issue between the positions of any two or more
Indemnified Parties. Arch, Pogo and Merger Sub agree that all rights to
indemnification, including provisions relating to advances of expenses
incurred in defense of any action or suit, existing in favor of the
Indemnified Parties (including in Arch's Certificate of Incorporation or
Bylaws or in the indemnification agreements with Arch's directors made
available to Pogo) with respect to matters occurring through the Effective
Time, will survive the Merger and will continue in full force and effect for a
period of six years from the Effective Time; provided, however, that all
rights to indemnification in respect of any Indemnified Liabilities asserted
or made within such period will continue until the disposition of such
Indemnified Liabilities. In the event Pogo or the Surviving Corporation or any
of their respective successors or assigns (i) consolidates with or merges with
or into any other person and is not the surviving corporation in that
consolidation or merger and (ii) transfers all or substantially all of its
assets and properties to any person, then, in each such case, proper provision
will be made so that the successors and assigns of Pogo or the Surviving
Corporation, as the case may be, honor these indemnification obligations.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties thereto, by action taken
or authorized by their respective Boards of Directors, at any time before or
after approval of the matters presented in connection with the Merger by the
stockholders of Arch, but, after any such approval, no amendment which by law
requires further approval by such stockholders shall be made without obtaining
such further approval.
At any time prior to the Effective Time, each party may by action taken by
its Board of Directors, to the extent legally allowed: (i) extend the time for
the performance of any of the obligations or other acts of the other parties;
(ii) waive any inaccuracies in the representations and warranties made to such
party contained in the Merger Agreement or in any document delivered pursuant
thereto; and (iii) waive compliance with any of the agreements or conditions
for the benefit of such party contained in the Merger Agreement. Any agreement
on the part of a party to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
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DESCRIPTION OF POGO CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of Pogo consists of 100,000,000 shares of Pogo
Common Stock, of which 37,574,182 shares were issued and outstanding as of
June 10, 1998; and 2,000,000 shares of preferred stock, par value $1.00 per
share ("Pogo Preferred Stock"), of which no shares are issued or outstanding.
The following summary description of the capital stock of Pogo is qualified in
its entirety by reference to Pogo's Restated Certificate of Incorporation and
Bylaws, copies of which are filed as exhibits to documents filed with the SEC
and which are available upon request.
POGO COMMON STOCK
Subject to any preferential rights of any outstanding shares of Pogo
Preferred Stock, the holders of the Pogo Common Stock are entitled to such
dividends as may be declared from time to time in the discretion of Pogo's
Board of Directors out of funds legally available therefor. Holders of Pogo
Common Stock are entitled to share ratably in the net assets of Pogo upon
liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any Pogo Preferred Stock then outstanding.
The rights of holders of Pogo Common Stock are subject to the rights of
holders of any Pogo Preferred Stock which may be issued in the future. The
holders of Pogo Common Stock have no pre-emptive rights to purchase additional
shares of capital stock of Pogo. Shares of Pogo Common Stock are not subject
to any redemption or sinking fund provisions and are not convertible into any
other securities of Pogo. All outstanding shares of Pogo Common Stock are, and
all shares of Pogo Common Stock issuable in exchange for Arch Stock and upon
conversion of the Arch Notes will be when so issued, validly issued, fully
paid and non-assessable and free of pre-emptive rights.
The holders of shares of Pogo Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of holders of Pogo Common Stock.
The Pogo Common Stock does not have cumulative voting rights, which means that
the holders of a majority of the shares of Pogo Common Stock outstanding can
elect all the directors standing for election at any given time if they choose
to do so. In such event, the holders of the remaining shares will not be able
to elect any directors.
POGO PREFERRED STOCK
Pogo's Board of Directors is empowered, without approval of the
stockholders, to cause shares of Pogo Preferred Stock to be issued in one or
more series, with the number of shares of each series and the rights,
preferences and limitations of each series to be determined by it. Among the
specific matters that may be determined by Pogo's Board of Directors are the
description and number of shares to constitute each series, the annual
dividend rate, whether such dividends shall be cumulative, the time and price
of redemption and the liquidation preference applicable to the series, whether
the series will be subject to the operation of a "sinking" or "purchase" fund
and, if so, the terms and provisions thereof, whether the shares of such
series shall be convertible into shares of any other class or classes and the
terms and provisions of such conversion rights, and the voting powers, if any,
of the shares of such series. Pogo's Board of Directors may change the
designation, rights, preferences, descriptions and terms of, and the number of
shares in, any series of which no shares have theretofore been issued.
The issuance of one or more series of Pogo Preferred Stock could adversely
affect the voting power of the holders of Pogo Common Stock and could have the
effect of discouraging or making more difficult any attempt by a person or
group to obtain control of Pogo.
The Board has reserved for issuance pursuant to the Stockholder Rights Plan
described below, a total of 1,000,000 shares of Pogo Series A Preferred Stock.
No shares of Series A Junior Participating Preferred Stock have been issued by
Pogo at the date hereof.
LISTINGS
Pogo Common Stock is traded on the New York Stock Exchange and the Pacific
Stock Exchange under the symbol "PPP".
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TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Pogo Common Stock is Harris Trust
Company of New York, New York.
STOCKHOLDER RIGHTS PLAN
Pogo has a Stockholder Rights Plan pursuant to which one preferred share
purchase Right is attached to each outstanding share of Pogo Common Stock. The
Rights become exercisable under certain circumstances, including in the event
that any person or group (an "Acquiring Person") becomes the beneficial owner
of 20% or more of the outstanding Pogo Common Stock, subject to certain
exceptions. Each Right entitles the registered holder to purchase from Pogo
one one-hundredth of a share of Pogo Series A Preferred Stock at an exercise
price of $80, subject to adjustment under certain circumstances. Upon the
occurrence of certain events specified in the Stockholder Rights Plan, each
holder of a Right (other than the Acquiring Person) will have the right, upon
exercise of such Right, to receive that number of shares of Pogo Common Stock
(or, in certain circumstances, cash, property or other securities) that, at
the time of the transaction, would have a market value of two times the
exercise price of the Right. Rights are redeemable by action of the Pogo's
Board of Directors for $0.01 per Right at any time prior to the tenth day
after a person or group becomes an Acquiring Person. The Stockholder Rights
Plan and the Rights expire in April 2004.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Pursuant to provisions of the General Corporation Law of the State of
Delaware ("DGCL"), Pogo has included in its Restated Certificate of
Incorporation a provision that, to the fullest extent permitted by the DGCL,
Pogo's directors will not be liable for monetary damages for breach of their
fiduciary duty of care to Pogo and its stockholders. The DGCL provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability (i) for
any breach of their duty of loyalty to Pogo or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (unlawful
payments of dividends or unlawful stock repurchases or redemptions), or (iv)
for any transaction from which the director derived an improper personal
benefit. This provision also does not affect a director's responsibilities
under any other laws, such as the federal securities laws or state or federal
environmental laws.
Pogo's Bylaws also contain provisions that require Pogo to indemnify its
directors, officers, employees or other agents to the fullest extent permitted
by the DGCL, and to advance expenses to its officers and directors as
incurred. In addition, Pogo has in place employment agreements with certain of
its officers providing coverage that is substantially identical to the
indemnification provisions in the Bylaws.
CERTAIN ANTI-TAKEOVER PROVISIONS
The provisions of Pogo's Restated Certificate of Incorporation summarized in
the succeeding paragraphs may be deemed to have an anti-takeover effect and
may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in such stockholder's best interest, including
those attempts that might result in a premium over the market price for the
shares of Pogo Common Stock held by stockholders.
The affirmative vote of the holders of at least 80% of the outstanding
shares of Pogo Common Stock is required (i) to approve a merger or similar
reorganization or certain other transactions involving Pogo if the other party
to such transaction already beneficially owns 5% or more of the outstanding
Pogo Common Stock and the Board of Directors of Pogo has not approved the
transaction prior to the time such other party becomes a 5% beneficial owner;
(ii) to approve an amendment to Pogo's Restated Certificate of Incorporation
to alter or change the provision establishing a "classified" Board of
Directors, elected approximately one-third annually; and (iii) to amend the
foregoing and certain other provisions of the Restated Certificate of
Incorporation.
Pogo's Board of Directors is divided into three classes having staggered
terms, with approximately one-third of the directors being elected annually
for a term of three years. Pogo's capital stock has noncumulative voting
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rights, meaning that the holders of more than 50% of the voting power of the
shares voting for the election of directors can elect 100% of the directors if
they choose to do so. In such event, the holders of the remaining less-than-
50% of the voting power of the shares voting for the election of directors
will not be able to elect any directors.
Pursuant to Pogo's Restated Certificate of Incorporation, the Board of
Directors of Pogo by resolution may establish one or more additional series of
Pogo Preferred Stock having such number of shares, designation, relative
voting rights, dividend rates, liquidation and other rights, preferences and
limitations as may be fixed by the Board of Directors of Pogo without any
further stockholder approval. Such rights, preferences, privileges and
limitations as may be established could have the effect of impeding or
discouraging the acquisition of control of Pogo. See "--Stockholders Rights
Plan."
Pogo's Restated Certificate of Incorporation and Bylaws further provides
that (i) stockholders may act only at an annual or special meeting of
stockholders and may not act by written consent; and (ii) special meetings of
stockholders cannot be called by stockholders.
Pogo's Bylaws establish advance notice procedures with regard to the
nomination, other than by or at the direction of Pogo's Board of Directors or
a committee thereof, of candidates for election as directors and with regard
to certain matters to be brought before an annual meeting of stockholders of
Pogo. These procedures provide that the notice of proposed stockholder
nominations for the election of directors must be timely given in writing to
the Secretary of Pogo prior to the meeting at which directors are to be
elected. The procedures also provide that at an annual meeting, and subject to
any other applicable requirements, only such business may be conducted as has
been brought before the meeting by, or at the direction of, the Pogo's Board
of Directors or by a stockholder who has given timely prior written notice to
the Secretary of Pogo of such stockholder's intention to bring such business
before the meeting. In all cases, to be timely, notice must be received at the
principal executive offices of Pogo not less than 80 days nor more than 110
days prior to the meeting (or if fewer than 90 days' notice or prior public
disclosure of the meeting date is given or made by Pogo, not later than the
10th day following the day on which the notice was mailed or such public
disclosure was made). The notice must contain certain information specified in
the Bylaws.
Pogo is a Delaware corporation and is subject to Section 203 of DGCL. The
following summary of Section 203 does not purport to be complete and is
qualified in its entirety by reference thereto. In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three
years following the date such person became an interested stockholder unless
(i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or (iii) following the transaction in which such person
became an interested stockholder, the business combination is approved by the
board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
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COMPARISON OF STOCKHOLDER RIGHTS
As a result of the Merger, holders of Arch Stock will become stockholders of
Pogo, and the rights of the former holders of Arch Stock will thereafter be
governed by Pogo's Restated Certificate of Incorporation, Pogo's Bylaws and
the DGCL. The rights of Arch's stockholders currently are governed by Arch's
Certificate of Incorporation (including the Certificate of Designation for the
Arch Preferred Stock), Arch's Bylaws and the DGCL. Because Pogo and Arch are
both Delaware corporations, the law governing the rights of Arch stockholders
will not change. The following summary sets forth the material differences
between the Certificates of Incorporation and Bylaws of Pogo and Arch.
BUSINESS COMBINATIONS
Under Delaware law, approval by the affirmative vote of the holders of a
majority of the outstanding stock of a corporation entitled to vote generally
is required for a merger or consolidation or sale, lease or exchange of all or
substantially all of the corporation's assets. Unless the corporate charter
provides otherwise, no vote of the stockholders of a surviving corporation is
required to approve a merger if (i) the merger does not amend in any respect
the surviving corporation's charter, (ii) each share of the surviving
corporation's stock outstanding immediately prior to the merger is to remain
outstanding unchanged, and (iii) the number of shares of common stock of the
surviving corporation to be issued or delivered under the plan of merger (plus
those issuable upon conversion of any securities to be issued under the plan)
does not exceed 20% of the surviving corporation's common stock outstanding
immediately prior to the merger. Additionally, when certain conditions are
met, no vote of stockholders is required for the merger of a Delaware
corporation into a corporation that holds at least 90% of the outstanding
shares of each class of the corporation. Arch's Certificate of Incorporation
specifically provides that Arch will not be governed by these provisions of
the DGCL.
Pogo's Restated Certificate of Incorporation requires the affirmative vote
of the holders of not less than 80% of each class of shares outstanding and
entitled to vote to approve any merger, consolidation, sale of substantially
all of assets of Pogo or a purchase by Pogo of assets of another corporation
having a value of $5.0 million or more in exchange for voting stock (or
securities convertible or exchangeable for voting stock) of Pogo (each, a
"Business Combination") if, as of the record date for the determination of
stockholders entitled to vote on the Business Combination, or as of the time
that Pogo's Board of Directors approved a memorandum of understanding or Pogo
entered into an agreement contemplating a Business Combination, the other
party to the Business Combination owned 5% or more of the outstanding shares
of any class or series of voting stock of Pogo. Arch's Certificate of
Incorporation has no comparable provision.
AMENDMENTS TO CHARTER
Section 242 of the DGCL provides that an amendment to a corporation's
certificate of incorporation must be adopted by a resolution of the board of
directors declaring the advisability of the amendment and approved by the
affirmative vote of the holders of at least a majority of the outstanding
stock entitled to vote thereon, and a majority of the outstanding stock of
each class entitled to vote thereon, unless the certificate of incorporation
requires a greater percentage. Pogo's Restated Certificate of Incorporation
requires the affirmative vote of holders of not less than 80% of the
outstanding shares of Pogo Common Stock and of not less than 80% of the
outstanding shares of Pogo Preferred Stock, voting as separate classes, to
approve certain amendments to Pogo's Restated Certificate of Incorporation,
including amendments to the articles related to Business Combinations, the
classification of the Board of Directors, stockholder action by written
consent and the article pertaining to amendments. Arch's Certificate of
Incorporation has no comparable provisions.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
Under Section 228 of the DGCL, stockholders may, unless otherwise provided
in the certificate of incorporation, act without a meeting, without prior
notice and without a vote, by written consent of holders of outstanding stock
having not less than the minimum number of votes necessary to take such action
at a meeting at which all shares entitled to vote were present and voted. The
Restated Certificate of Incorporation of Pogo provides that stockholders may
not act by written consent. Arch's Certificate of Incorporation has no
comparable restriction, consequently its stockholders may act by written
consent without a meeting.
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SPECIAL MEETINGS OF STOCKHOLDERS
Pogo's Bylaws provide that special meetings of the stockholders may be
called at any time by Pogo's Board of Directors, the Chairman of the Board of
Directors, the Executive Committee of the Board of Directors and the President
of Pogo. Special meetings of the stockholders of Pogo may not be called by any
other person. Arch's Bylaws provide that special meetings of the stockholders
of Arch may be called at any time by the Chairman of the Board, the President
or any director of Arch.
CLASSIFICATION OF BOARD OF DIRECTORS
Pogo's Restated Certificate of Incorporation provides that the number of
directors shall be fixed from time to time by Pogo's Bylaws or an amendment
thereto duly adopted by the Board of Directors or by the stockholders. Pogo's
Restated Certificate of Incorporation and Bylaws, collectively, provide that
Pogo's Board of Directors shall consist of a minimum of three and a maximum of
12 directors. Pogo's Restated Certificate of Incorporation provides that the
directors of Pogo will be divided into three classes serving staggered three-
year terms such that approximately one-third of Pogo's Board of Directors is
elected each year. Arch's Bylaws provide that the number of directors shall be
fixed from time to time by a majority of the directors then in office or by a
resolution of the stockholders, but shall be not less than one and that all
directors shall stand for re-election at each annual meeting.
REMOVAL OF DIRECTORS
Under Section 141 of the DGCL, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares entitled to vote at an election of directors, except (i) in the case of
a corporation having a classified board, stockholders may effect such removal
only for cause, unless the certificate of incorporation otherwise provides,
and (ii) in the case of a corporation having cumulative voting, if less than
the entire board is to be removed, no director may be removed without cause if
the votes cast against such director's removal would be sufficient to elect
such director if then cumulatively voted at an election of the entire board of
directors or, if the board is classified, at an election of the class of
directors of which he is a part. Pogo's Restated Certificate of Incorporation
provides that no director may be removed from his office during his term by
vote or other action of the stockholders or otherwise except for cause. Arch's
Bylaws provide that any director may be removed, with or without cause, by the
affirmative vote of the holders of a majority of the shares then entitled to
vote on the election of directors; provided, however, that the director
elected by holders of the Preferred Stock may only be removed by the
affirmative vote of such holders.
CUMULATIVE VOTING
Under Section 214 of the DGCL, the certificate of incorporation of a
corporation may provide for cumulative voting in the election of directors.
Neither Pogo's Restated Certificate of Incorporation nor Arch's Certificate of
Incorporation provides for cumulative voting.
NO PRE-EMPTIVE RIGHTS
The DGCL does not provide for any required pre-emptive rights of
stockholders. None of Pogo's Restated Certificate of Incorporation, Pogo's
Bylaws, Arch's Certificate of Incorporation or Arch's Bylaws mention pre-
emptive rights.
ADVANCE NOTICE BYLAWS
Pogo's Bylaws establish advance notice procedures with regard to the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors and with regard to
certain matters to be brought before an annual meeting of stockholders of
Pogo. Arch's Bylaws provide for advance notice to stockholders of the place,
day and time of each meeting of the stockholders and, in the case of a special
meeting, the purpose or purposes for which such meeting has been called. See
"Description of Pogo Capital Stock--Certain Anti-takeover Provisions."
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INFORMATION REGARDING ARCH
BUSINESS OF ARCH
Overview
Arch and its subsidiaries primarily engage in oil and natural gas
exploration, development, production, transportation and marketing in the
Southwestern United States and Western Canada. Arch and its subsidiaries are
also active in the acquisition of interests in both producing and non-
producing oil and gas leases. The following entities are owned by Arch: Arch
Petroleum Ltd. ("APL") and Northern Arch Resources Ltd. ("NARL"), each wholly-
owned Canadian subsidiaries; Arch Production Company, a wholly-owned Delaware
subsidiary; and Saginaw Pipeline Company, L.C. ("Saginaw") and Industrial
Natural Gas, L.C. ("ING"), each of which are owned 95% by Arch. Effective June
30, 1997, Arch sold its 50% membership interest in Onyx Pipeline Company,
L.C., Onyx Gathering Company, L.C. and Onyx Gas Marketing Company, L.C.
(together, "Onyx").
Oil and Gas Operations
As of June 19, 1998, Arch owned interests in 1,393 onshore wells, located
primarily in Texas, New Mexico and Western Canada, 377 of which were operated
by Arch.
All of Arch's Canadian operations are conducted through APL. In January
1996, Arch acquired Trax Petroleums Limited ("Trax"), a Canadian oil and gas
exploration and development company headquartered in Calgary, Alberta, Canada,
for approximately $7.6 million. The acquisition was made pursuant to a merger
transaction among NARL, Trax and a merger subsidiary. Arch changed the name of
Trax to APL effective March 31, 1997.
On March 31, 1994, Arch consummated an agreement with Chevron USA Inc. to
purchase certain oil and gas properties for cash consideration of $17.9
million. These properties, located in Lea County, New Mexico, included
interests in approximately 130 producing oil and gas wells. Arch operates and
has a significant working interest in the majority of these properties. In
addition, Arch has drilled and recompleted approximately 75 wells in this area
since the original purchase.
In November 1992, Arch sold a volumetric production payment (the "VPP") to
Enron Reserve Acquisition Corp. ("Enron") for $24.3 million. Arch agreed to
deliver to Enron the equivalent of approximately 17.9 billion cubic feet
("Bcf") of natural gas from Arch operated properties in the Keystone
Ellenburger Field ("Keystone") from December 1992 through July 1998. Arch is
responsible for all costs of production, development and marketing of such
dedicated gas. The deferred revenue associated with the VPP is attributable to
the dedicated gas delivered to Enron. In May 1993, the Texas Railroad
Commission ("RRC") amended the field rules reducing the allowable production
of all producers in Keystone. Consequently, since such rule amendment, Arch
has been unable to produce sufficient gas to satisfy its monthly delivery
obligation to Enron, resulting in a gas delivery deficiency under the VPP. In
April 1997, the RRC further reduced the allowable production from Keystone,
further increasing Arch's gas delivery deficiency. Arch is required to
continue delivering gas to Enron pursuant to the VPP until such time that the
commitment is fully satisfied. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Arch" and Note 5 to Arch's
consolidated financial statements.
Natural Gas Pipeline Operations
In July 1992, Arch, Central States Energy Corporation ("CSE") and certain
other minority interest holders formed Saginaw and ING. Concurrently, Saginaw
acquired a six inch pipeline that extends approximately 100 miles from Wichita
Falls, Texas to Saginaw, Texas. ING markets the sale and transmission of
natural gas through the Saginaw pipeline. On September 27, 1995, Arch
completed a buyout of CSE's membership interest in Saginaw and ING, giving
Arch a 95% membership interest in each of these entities. Currently,
unaffiliated third parties own the remaining 5% interest in Saginaw and ING.
53
<PAGE>
Principal Products and Markets
Arch's principal products are oil and natural gas. The marketing of oil and
gas production is subject to the availability of pipelines, crude oil hauling
and other transportation, processing and refining facilities as well as the
existence of adequate markets. Arch markets its products principally where its
oil and gas properties are physically located. Such products are sold at the
wellhead to appropriate gathering companies operating in the geographic area
of production. In its natural gas marketing and transmission activities, Arch
buys and resells natural gas, receiving a gross margin or spread equal to the
difference between the purchase price and the resale price of such natural
gas. In addition, Arch receives a fee for transmission of natural gas through
its pipeline system.
Customers
Arch has sold and will continue to market its oil and gas products to a
number of purchasers. During the year ended December 31, 1997, Arch sold to
three customers that represented 62% of total revenues from oil and gas sales:
Genesis Crude Oil, LP (29%), Richardson Products Company (21%) and Enron Gas
Marketing (12%). Even though Arch has significant sales concentrated with
these three customers, Arch does not believe that the loss of any single
purchaser of its crude oil, condensate or natural gas production would
adversely affect its operations in any material respect because of the
abundance of other suitable purchasers in the geographic areas in which Arch
operates or holds interests.
Competition and Market Conditions
Arch experiences competition from other oil and gas companies in all phases
of its operations, as well as competition from other energy related
industries. Arch's profitability and cash flow are highly dependent upon the
prices of oil and natural gas, which historically have been seasonal, cyclical
and volatile. In general, prices of oil and gas are dependent upon numerous
factors beyond the control of Arch, including various weather, economic,
political and regulatory conditions. Any significant decline in oil or gas
prices could have a material adverse effect on Arch's operations and financial
condition and could, under certain circumstances, result in a reduction in
funds available under Arch's bank credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Arch--Liquidity and Capital Resources."
Because it is impossible to predict future oil and gas price movements with
any certainty, Arch occasionally enters into contracts on a portion of its
production to hedge against the volatility in oil and gas prices. In the past
five years, such hedging transactions have not exceeded 15% of Arch's total
oil and gas production on an energy equivalent basis for any given period.
While intended to limit the negative effect of price declines, such
transactions could effectively limit Arch's participation in price increases
for the covered period, which increases could be significant. As of June 10,
1998, Arch is an indirect participant in one gas futures contract on a portion
of its daily natural gas production through December 31, 1998 (24 million
british thermal units ("MMBtu") per month during June and 20 MMBtu per month
through the remainder of the contract term) at varying prices ranging from
approximately $2.25 to $2.28 per thousand british thermal units. Such contract
will expire at the end of 1998. When Arch does engage in such hedging
activities, it may satisfy its obligations with its own production or by the
purchase (or sale) of third party production. Arch may also cancel all
delivery obligations by offsetting such obligations with equivalent
agreements, thereby effecting a purely cash transaction.
Employees
Arch had 40 full-time employees as of June 10, 1998. None of Arch's
employees are represented by labor unions and Arch considers its employee
relations to be satisfactory.
Operating and Uninsured Risks
Arch's operations are subject to risks inherent in the exploration for and
production of oil and natural gas, such as blowouts, cratering, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, pollution and
54
<PAGE>
other environmental risks. These hazards could result in substantial losses to
Arch due to injury or loss of life, severe damage to and destruction of
property and equipment, pollution and other environmental damage and
suspension of operations. Arch carries insurance which it believes is in
accordance with customary industry practices, but is not fully insured against
all risks incident to its business.
Drilling activities are subject to numerous risks, including the risk that
no commercially productive hydrocarbon reserves will be encountered. The cost
of drilling, completing and operating wells and of installing production
facilities and pipelines is often uncertain. Arch's drilling operations may be
curtailed, delayed or canceled as a result of numerous factors, including
title problems, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery or availability of material, equipment
and fabrication yards. The availability of a ready market for Arch's natural
gas production depends on a number of factors, including the demand for and
supply of natural gas, the proximity of natural gas reserves to pipelines, the
capacity of such pipelines and government regulations.
Risks of Foreign Operations
Ownership of property interests and production operations in Canada, and in
any other areas outside the United States in which Arch may choose to do
business, are subject to the various risks inherent in foreign operations.
These risks may include, among other things, currency restrictions and
exchange rate fluctuations, loss of revenue, property and equipment as a
result of hazards such as expropriation, nationalization, war, insurrection
and other political risks, risks of increases in taxes and governmental
royalties, renegotiation of contracts with governmental entities, changes in
laws and policies governing operations of foreign-based companies and other
uncertainties arising out of foreign government sovereignty over Arch's
international operations. Arch's international operations may also be
adversely affected by laws and policies of the United States affecting foreign
trade, taxation and investment. In addition, in the event of a dispute arising
from foreign operations, Arch may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons to the
jurisdiction of the courts of the United States. Arch seeks to manage these
risks by concentrating its international exploration efforts in areas where
Arch believes that the existing government is stable and favorably disposed
towards United States exploration and production companies.
Reservoir Risks
There are numerous uncertainties in estimating the quantity of proved
reserves and in projecting the future rates of production and timing of
development expenditures. Oil and gas reserve engineering must be recognized
as a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact way, and estimates of other engineers
might differ materially from those of Ryder Scott, Arch's reserve engineers.
The accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. Results of
drilling, testing and production subsequent to the date of the estimate may
justify revision of such estimate, which revisions may be material.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered.
Arch is periodically required to file estimates of its oil and gas reserve
data with various U.S. governmental regulatory authorities and agencies,
including the Federal Energy Regulatory Commission ("FERC") and the Federal
Trade Commission and, with respect to reserves located in Canada, the Alberta
Energy Utilities Board. In addition, estimates are from time to time furnished
to governmental agencies in connection with specific matters pending before
such agencies. The basis for reporting reserves to these agencies, in some
cases, is not comparable to that furnished by Ryder Scott in accordance with
SEC guidelines because of the nature of the various reports required. The
major differences generally include differences in the time as of which such
estimates are made, differences in the definition of reserves, requirements to
report in some instances on a gross, net or total operator basis and
requirements to report in terms of smaller geographical units. During 1997, no
estimates by Arch of its total proved net oil and gas reserves were filed with
or included in reports to any governmental authority or agency other than the
SEC and, with respect to reserves relating to Arch's properties located in
Canada, the Alberta Energy Utilities Board.
55
<PAGE>
GOVERNMENT REGULATION
Arch's operations are affected from time to time in varying degrees by
political developments and governmental laws and regulations. Rates of
production of oil and gas have for many years been subject to governmental
conservation laws and regulations, and the petroleum industry has been subject
to federal and state tax laws dealing specifically with it.
Federal Income Tax
Arch's operations are significantly affected by certain provisions of the
federal income tax laws applicable to the petroleum industry. The principal
provisions affecting Arch are those that permit Arch, subject to certain
limitations, to deduct as incurred, rather than to capitalize and amortize,
its domestic "intangible drilling and development costs" and to claim
depletion on a portion of its domestic oil and gas properties based on 15% of
its oil and gas gross income from such properties (up to an aggregate of 1,000
Bbls per day of domestic crude oil and/or equivalent units of domestic natural
gas) even though Arch has little or no basis in such properties. Under certain
circumstances, however, a portion of such intangible drilling and development
costs and the percentage depletion allowed in excess of basis will be tax
preference items that will be taken into account in computing Arch's
alternative minimum tax.
Environmental Matters
Domestic oil and gas operations are subject to extensive federal regulation
and, with respect to federal leases, to interruption or termination by
governmental authorities on account of environmental and other considerations
including the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as the "Superfund Law." The recent trend towards
stricter standards in environmental legislation and regulation may continue,
and this could increase costs to Arch and others in the industry. Oil and gas
lessees are subject to liability for the costs of clean-up of pollution
resulting from a lessee's operations, and may also be subject to liability for
pollution damages. Arch maintains insurance against costs of clean-up
operations, but is not fully insured against all such risks. A serious
incident of pollution may also result in the Department of the Interior
requiring lessees under federal leases to suspend or cease operation in the
affected area.
Arch's operations are also subject to numerous United States federal, state,
and local laws and regulations controlling the discharge of materials into the
environment or otherwise relating to the protection of the environment
including CERCLA. Such laws and regulations, among other things, impose
absolute liability on the lessee under a lease for the cost of clean-up of
pollution resulting from a lessee's operations, subject the lessee to
liability for pollution damages, may require suspension or cessation of
operations in affected areas, and impose restrictions on the injection of
liquids into subsurface aquifers that may contaminate groundwater. Such laws
could have a significant impact on the operating costs of Arch, as well as the
oil and gas industry in general. Federal, state and local initiatives to
further regulate the disposal of oil and gas wastes are also pending in
certain states, and these initiatives could have a similar impact on Arch.
In the course of conducting its oil and gas operations in a prudent and safe
manner, Arch from time to time incurs costs associated with environmental
controls; however, Arch does not separately budget for environmental control
costs. Arch does not believe that its environmental control costs for 1996 or
1997 were material to Arch and Arch does not anticipate any material costs
related specifically to environmental controls in 1998.
Other Laws and Regulations
Various laws and regulations often require permits for drilling wells and
also cover spacing of wells, the prevention of wasting oil and gas including
maintenance of certain gas/oil ratios, rates of production and other matters.
The effect of these laws and regulations, as well as other regulations that
could be promulgated by the
56
<PAGE>
jurisdictions in which Arch has production, could be to limit the number of
wells that could be drilled on Arch's properties and to limit the allowable
production from the successful wells completed on Arch's properties, thereby
limiting Arch's revenues.
The FERC has recently embarked on regulatory initiatives relating to its
jurisdiction over rates for natural gas gathering services provided by
interstate pipelines and to the availability of market-based and other
alternative rate mechanisms to such pipelines for transmission and storage
services. Among the FERC initiatives is the creation of a pilot program to
determine the effect on rates of lifting price caps on the rates for
interruptible transportation, short-term firm transportation, and for
transportation using capacity released by the firm transportation customers of
interstate pipelines. In addition, the FERC has announced and implemented a
policy allowing pipelines and transportation customers to negotiate rates
above the otherwise applicable maximum lawful cost-based rates on the
condition that the pipelines alternatively offer so-called recourse rates
equal to the maximum lawful cost-based rates. This negotiated/recourse rate
policy has been challenged in the United States Court of Appeals for the
District of Columbia, and the appeal remains pending. With respect to
gathering services, the FERC has issued orders declaring that certain
facilities owned by interstate pipelines primarily perform a gathering
function, and may be transferred to affiliated and non-affiliated entities
that are not subject to the FERC's rate jurisdiction. These orders have been
generally upheld on appeal to the courts. Arch cannot predict the ultimate
outcome of these developments, nor the effect of these developments on
transportation rates. Inasmuch as the rates for these pipeline services can
affect the gas prices received by Arch for the sale of its production, the
FERC's actions may have an impact on Arch. However, the impact should not be
substantially different on Arch than it will be with respect to other
similarly situated gas producers and sellers.
PROPERTIES
General
Arch's corporate headquarters occupy approximately 9,700 square feet of
leased office space located in Fort Worth, Texas. In addition, Arch leases
approximately 2,200 square feet of office space in Midland, Texas, APL leases
approximately 4,900 square feet of office space in Calgary, Alberta, Canada,
and Saginaw leases approximately 500 square feet of office space in Wichita
Falls, Texas. Arch maintains field offices in Kermit, Texas, and in Eunice and
Artesia, New Mexico.
Oil and Gas Reserves
A description of Arch's net quantity of oil and gas reserves is contained in
the Unaudited Supplemental Oil and Gas Disclosures of the accompanying
consolidated financial statements. All domestic oil and gas reserves were
estimated by Ryder Scott, independent petroleum engineers, and are detailed in
a report prepared for the exclusive use of Arch. Oil and gas reserves for APL
were estimated by Ryder Scott and Sproule Associates Limited, both independent
petroleum engineers in Canada in 1997 and 1996, respectively. All such
estimations were made in accordance with regulations promulgated by the SEC.
Such reserve reports are available for examination at Arch's corporate
headquarters.
Arch has no long-term supply or similar agreements with foreign governments
or authorities. Arch has not filed with or included in reports to any federal
authority or agency, other than the SEC, any estimate of total proved net oil
and gas reserves since December 31, 1996. All of Arch's production, acreage
and drilling activity is located in the United States and Western Canada.
57
<PAGE>
The following table sets forth a summary of Arch's oil and gas reserve
quantities and present value of future net cash flows associated therewith at
the dates indicated.
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
Present value of discounted future net
cash flows
before income taxes
December 31, 1997................... $ 60,289,500 $ 8,422,300 $ 68,711,800
December 31, 1996................... 101,701,100 11,775,700 113,476,800
December 31, 1995................... 64,296,200 -- 64,296,200
Proved developed and undeveloped re-
serves:
Oil (Bbls)
December 31, 1997................... 5,060,500 812,900 5,873,400
December 31, 1996................... 3,861,000 856,900 4,717,900
December 31, 1995................... 4,030,200 -- 4,030,200
Gas (Mcf)
December 31, 1997................... 68,430,700 6,575,000 75,005,700
December 31, 1996................... 59,120,900 1,136,000 60,256,900
December 31, 1995................... 61,286,300 -- 61,286,300
Proved developed reserves:
Oil (Bbls)
December 31, 1997................... 4,475,600 693,800 5,169,400
December 31, 1996................... 3,128,400 809,900 3,938,300
December 31, 1995................... 2,993,600 -- 2,993,600
Gas (Mcf)
December 31, 1997................... 65,324,800 6,489,000 71,813,800
December 31, 1996................... 54,981,200 504,000 55,485,200
December 31, 1995................... 55,628,500 -- 55,628,500
</TABLE>
The United States figures above exclude 1.9 Bcf, 8.7 Bcf and 11.9 Bcf of
proved gas reserves and $436,400, $2,960,600 and $11,672,700 of discounted
future net cash flows (after operating expenses and severance taxes) at
December 31, 1997, 1996 and 1995, respectively, which were sold to Enron in
the VPP. See the Unaudited Supplemental Oil and Gas Disclosures in the
accompanying consolidated financial statements for key factors and additional
information related to Arch's reserve estimates.
58
<PAGE>
Wells Drilled
The following table sets forth the number of productive, dry and total wells
drilled by or participated in by Arch since 1995. Gross wells refer to the
total number of wells in which Arch has an interest. Net wells are the gross
wells multiplied by Arch's working interest in each well. A dry well is one
that is found to be incapable of producing commercial amounts of oil or gas,
and a productive well is one that is not dry.
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
-------------------- --------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- -----
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
United States--Exploratory.......... 2 1 3 1.5 1.0 2.5
United States--Development.......... 127 1 128 32.2 .5 32.7
Canada--Exploratory................. -- 2 2 -- 1.8 1.8
Canada--Development................. 7 -- 7 1.6 -- 1.6
Year Ended December 31, 1996:
United States--Exploratory.......... 1 2 3 .3 1.3 1.6
United States--Development.......... 150 -- 150 24.4 -- 24.4
Canada--Exploratory................. 1 1 2 .3 .7 1.0
Canada--Development................. 3 -- 3 1.1 -- 1.1
Year Ended December 31, 1995:
United States--Exploratory.......... -- 4 4 -- 2.2 2.2
United States--Development.......... 110 -- 110 13.4 -- 13.4
Canada--Exploratory................. -- -- -- -- -- --
Canada--Development................. -- -- -- -- -- --
</TABLE>
Leases and Wells Owned
At December 31, 1997, Arch owned interests in the following acreage.
<TABLE>
<CAPTION>
UNITED STATES CANADA TOTAL
------------- ------- -------
<S> <C> <C> <C>
Developed acres:
Gross........................................... 67,017 35,223 102,240
Net............................................. 16,950 3,810 20,760
Undeveloped acres:
Gross........................................... 74,435 106,705 181,140
Net............................................. 23,452 51,777 75,229
</TABLE>
As of December 31, 1997, Arch's interests in wells owned were as follows:
<TABLE>
<CAPTION>
UNITED
TOTAL STATES CANADA
----------- ----------- -----------
GROSS NET GROSS NET GROSS NET
TYPE WELLS WELLS WELLS WELLS WELLS WELLS
---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Oil......................................... 1,209 363.7 1,076 344.8 133 18.9
Gas......................................... 134 62.8 131 62.2 3 0.6
----- ----- ----- ----- --- ----
1,343 426.5 1,207 407.0 136 19.5
===== ===== ===== ===== === ====
</TABLE>
59
<PAGE>
Production
The following table reflects net quantities of oil (including condensate and
natural gas liquids) and of gas produced by Arch, the average price received
per barrel of oil and per Mcf of gas and the average production (lifting) cost
per equivalent barrel.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Oil volumes (Bbl):
United States.............................. 528,400 459,300 382,100
Canada..................................... 128,600 120,300 --
---------- ---------- ----------
Total.................................... 657,000 579,600 382,100
========== ========== ==========
Average Oil Prices (U.S.$/Bbl):
United States.............................. $ 19.47 $ 21.59 $ 17.28
Canada..................................... 19.17 18.81 --
Composite................................ $ 19.41 $ 21.02 $ 17.28
Gas volumes (Mcf):
United States (1).......................... 5,076,500 6,596,400 7,382,900
Canada..................................... 182,500 152,200 --
---------- ---------- ----------
Total.................................... 5,259,000 6,748,600 7,382,900
========== ========== ==========
Average Gas Prices (U.S.$/Mcf):
United States (1).......................... $ 2.10 $ 1.73 $ 1.32
Canada..................................... 1.08 1.06 --
Composite................................ $ 2.07 $ 1.72 $ 1.32
Average Lifting Cost per Equivalent Bar-
rel(2):
United States.............................. $ 5.76 $ 4.87 $ 4.45
Canada..................................... 6.47 4.80 --
Composite................................ $ 5.83 $ 4.86 $ 4.45
</TABLE>
- --------
(1) Includes production payment natural gas volumes (Mcf) of 1,713,900,
2,751,100 and 3,090,400 at an average price of $1.20, $0.83 and $1.11 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(2) Equivalent barrels are calculated using a conversion factor of six Mcf of
gas to one barrel of oil. Costs include severance and ad valorem taxes.
LEGAL PROCEEDINGS
From time to time Arch is involved in litigation arising in the normal
course of business. In the opinion of management, Arch's ultimate liability,
if any, from lawsuits currently pending would not materially affect Arch's
financial condition or operations.
60
<PAGE>
MARKET FOR ARCH COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Arch Common Stock trades on the Nasdaq National Market under the symbol
"ARCH". The following table sets forth the high and low prices of Arch Common
Stock as reported by Nasdaq for each quarterly period in 1996 and 1997 and for
the first quarter of 1998. These price quotations represent prices between
dealers, do not include retail mark ups, mark downs, commissions or other
adjustments and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
MARKET PRICE
-------------
FISCAL YEAR ENDED DECEMBER 31, HIGH LOW
- ------------------------------ ------ ------
<S> <C> <C>
1996
First Quarter.................................................... $2.938 $1.938
Second Quarter................................................... 2.688 2.000
Third Quarter.................................................... 2.750 1.688
Fourth Quarter................................................... 3.031 2.250
1997
First Quarter.................................................... $3.375 $2.250
Second Quarter................................................... 3.281 2.438
Third Quarter.................................................... 3.875 2.938
Fourth Quarter................................................... 3.688 2.219
1998
First Quarter.................................................... $2.750 $2.000
Second Quarter (through June 10)................................. 2.625 2.000
</TABLE>
On May 28, 1998 (the day before the public announcement of the signing of the
Merger Agreement), the closing sales price of Arch Common Stock was $2.47 per
share and on June 10, 1998, the closing sales price was $2.00 per share.
There were approximately 1,400 stockholders of record of Arch Common Stock as
of June 10, 1998.
61
<PAGE>
The following table sets forth, as of June 10, 1998, the shares of Arch
Common Stock (including securities currently convertible into Arch Common
Stock) held by persons known by Arch to be the beneficial owner of more than
5% of any class of Arch's common equity, each director of Arch, and all
directors and officers of Arch as a group, and the effect the Merger would
have on such holdings by such persons:
<TABLE>
<CAPTION>
PERCENTAGE SHARES OF POGO PERCENTAGE
SHARES OF OF CLASS OF COMMON STOCK OF CLASS OF
ARCH COMMON ARCH COMMON TO BE RECEIVED POGO COMMON
NAME STOCK HELD STOCK (9) IN MERGER STOCK (10)
---- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
The Travelers Indemnity
Company.................. 5,454,547(1) 20.7% 524,454 1.3%
One Tower Square, 9PB
Hartford, Connecticut
06183-2030
CIGNA Corporation......... 2,841,106(2) 10.8% 273,172 *
900 Cottage Grove Road,
S-307
Hartford, Connecticut
06152-2307
The Lincoln National Life
Insurance Company........ 795,255(3) 3.0% 76,463 *
Renaissance Square
200 East Berry Street
Fort Wayne, Indiana 46802
Threshold Development
Company.................. 2,400,914 13.9% 230,847 *
777 Taylor Street, Suite
II-D
Fort Worth, Texas 76102
Amon G. Carter Foundation. 900,000 5.2% 86,535 *
500 West 7th Street,
Suite 1212
Fort Worth, Texas 76102
Johnny Vinson............. 3,061,464(4) 17.7% 294,359 *
777 Taylor Street, Suite
II-A
Fort Worth, Texas 76102
Larry Kalas............... 556,786 3.2% 53,534 *
777 Taylor Street, Suite
II-A
Fort Worth, Texas 76102
Randall W. Scroggins...... 2,730,914(4) 15.8% 262,577 *
777 Taylor Street, Suite
II-A
Fort Worth, Texas 76102
Fred Cantu................ 130,000(5) * 12,499 *
777 Taylor Street, Suite
II-A
Fort Worth, Texas 76102
Troy O. Welch............. 55,500(6) * 2,451 *
777 Taylor Street, Suite
II-A
Fort Worth, Texas 76102
Dale R. Haley............. 7,900 * 759 *
BJ Services Company,
U.S.A.
309 West 7th Street,
Suite 1520
Fort Worth, Texas 76102
Richard O. Harris......... 34,000(7) * 3,269 *
807 Indiana Street
Wichita Falls, Texas
76301
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE SHARES OF POGO PERCENTAGE
SHARES OF OF CLASS OF COMMON STOCK OF CLASS OF
ARCH COMMON ARCH COMMON TO BE RECEIVED POGO COMMON
NAME STOCK HELD STOCK (9) IN MERGER STOCK (10)
---- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
C. Randall Hill........... 20,000(8) * 1,923 *
Vista Resources, Inc.
550 W. Texas Avenue,
Suite 700
Midland, Texas 79701
All Directors and Execu- 4,165,650 24.0% 400,527 1.0%
tive Officers of Arch as
a Group (8 persons)......
</TABLE>
- --------
* less than 1%
(1) Consists of 4,363,640 shares of Arch Common Stock issuable upon conversion
of shares of Arch Preferred Stock beneficially owned by The Travelers
Indemnity Company and 1,090,909 shares of Arch Common Stock issuable upon
conversion of $3.0 million original principal amount of the Arch Notes
beneficially owned by The Travelers Life and Annuity Company. Currently,
The Travelers Indemnity Company owns 60% of the outstanding Arch Preferred
Stock.
(2) Consists of 1,874,545 shares of Arch Common Stock issuable upon conversion
of shares of Arch Preferred Stock beneficially owned by CIGNA Mezzanine
Partners III, L.P. ("Mezzanine"), 468,727 shares of Arch Common Stock
issuable upon conversion of $1,289,000 original principal amount of the
Arch Notes beneficially owned by Mezzanine, 398,295 shares of Arch Common
Stock issuable upon conversion of shares of Arch Preferred Stock
beneficially owned by Connecticut General Life Insurance Company
("CGLIC"), and 99,539 shares of Arch Common Stock issuable upon conversion
of $273,734 original principal amount of the Arch Notes beneficially owned
by CGLIC. Currently, Mezzanine and CGLIC collectively own 31.3% of the
outstanding Arch Preferred Stock. CGLIC and the general partner of
Mezzanine are wholly owned subsidiaries of CIGNA Corporation. CIGNA
Investments, Inc. ("CII"), a wholly owned subsidiary of CIGNA Corporation,
has voting control with respect to shares owned by Mezzanine, and CIGNA
Investment Advisory Company, Inc., a wholly owned subsidiary of CIGNA
Corporation, has voting control with respect to shares owned by CGLIC.
(3) Consists of 636,250 shares of Arch Common Stock issuable upon conversion
of shares of Arch Preferred Stock and 159,000 shares of Arch Common Stock
issuable upon conversion of $437,266 original principal amount of the Arch
Notes. Currently, The Lincoln National Life Insurance Company ("Lincoln
National") owns 8.7% of the outstanding Arch Preferred Stock. Pursuant to
an Investment Administration Agreement, dated January 1, 1998, between CII
and Lincoln National, CII has voting (but not dispositive) control over
the shares owned by Lincoln National.
(4) Includes 2,400,914 shares of Arch Common Stock owned of record by TDC.
Messrs. Vinson and Scroggins, by virtue of their ownership of shares of
TDC and their positions as officers or directors of TDC, control the
voting and disposition of shares of Arch Common Stock owned by TDC, and,
therefore, each are deemed to beneficially own those shares.
(5) Includes options currently exercisable for 40,000 shares of Arch Common
Stock.
(6) Includes options currently exercisable for 30,000 shares of Arch Common
Stock and options for 20,000 shares of Arch Common Stock that will become
exercisable upon consummation of the Merger.
(7) Includes options currently exercisable for 16,690 shares of Arch Common
Stock.
(8) Consists solely of options to acquire shares of Arch Common Stock.
(9) Percentages for The Travelers Indemnity Company, CIGNA Investments, Inc.
and The Lincoln National Life Insurance Company are calculated using the
aggregate number of shares of Arch Common Stock assumed to be outstanding
upon conversion of all of the Arch Preferred Stock and the Arch Notes.
Percentages for all others calculated using the aggregate number of shares
of Arch Common Stock outstanding as of June 10, 1998.
(10) Based upon 40,100,000 shares of Pogo Common Stock estimated to be
outstanding upon consummation of the Merger.
63
<PAGE>
As of June 10, 1998, Messrs. Cantu, Harris, Hill and Welch owned options to
acquire 40,000, 16,690, 20,000, and 50,000 shares of Arch Common Stock,
respectively. Pursuant to the Merger Agreement, all such options to acquire
Arch Common Stock will become options to acquire Pogo Common Stock upon
consummation of the Merger. Consequently, at the time of the Merger, the
options held by Messrs. Cantu, Harris, Hill and Welch will become exercisable
for 3,846, 1,604, 1,923 and 4,807 shares of Pogo Common Stock, respectively.
See "The Merger--Treatment of Arch Stock Options."
SELECTED FINANCIAL DATA
The selected financial information set forth below was derived from the
consolidated financial statements of Arch included elsewhere in this Proxy
Statement/Prospectus and should be read in conjunction with such financial
statements, including the notes thereto, and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Arch." Selected
unaudited financial data for the three months ended March 31, 1998 and 1997
include all adjustments (consisting only of normally recurring adjustments)
that Arch considers necessary for a fair presentation of consolidated
operating results and financial position for such interim periods. Results for
the interim periods are not necessarily indicative of results for the full
year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
31, YEAR ENDED DECEMBER 31,
--------------- -----------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues(1). $5,891 $33,142 $80,862 $99,926 $66,590 $82,696 $44,148
Oil and gas sales..... 4,538 6,520 23,622 23,748 16,379 8,730 8,105
Pipeline sales........ 1,227 26,441 51,392 74,309 49,249 73,525 35,572
Exploration expense... 88 75 1,134 593 898 1,641 157
Net income (loss)..... (803) 900 2,828 3,022 (164) (1,830) 176
Preferred stock
dividends............ 400 400 1,600 1,600 1,600 311 --
Net income (loss)
available per common
share--basic and
diluted(2)........... (0.07) 0.03 0.07 0.08 (0.10) (0.12) 0.01
Weighted average
common shares
outstanding.......... 17,322 17,289 17,294 17,159 17,141 17,183 17,054
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $1,382 $ 3,068 $ 2,160 $ 3,192 $ 2,574 $ 1,553 $ 1,579
Total assets.......... 93,737 95,361 93,171 101,039 79,672 78,025 51,069
Deferred revenue...... 1,222 12,009 2,123 12,528 16,037 20,690 21,499
Non-recourse
production payment
obligation........... 14,545 -- 13,317 -- -- -- --
Long-term debt, less
current maturities... 32,000 29,937 30,000 30,134 17,821 9,632 6,500
Convertible
subordinated notes... 5,000 5,000 5,000 5,000 5,000 5,000 --
Convertible preferred
stock................ 20,000 20,000 20,000 20,000 20,000 20,000 --
Shareholder's
equity(3)............ 8,966 9,477 10,138 9,065 7,595 9,490 11,679
</TABLE>
- --------
(1) Operating revenues for 1997 include a gain of $5,046,000 from the sale of
Onyx. See "Information Regarding Arch--Business of Arch" and Note 3 to
Arch's consolidated financial statements included elsewhere in this Proxy
Statement/Prospectus. Operating revenues for 1996 include a gain of
$1,037,000 from the sale of certain oil and gas properties. See Note 2 to
Arch's consolidated financial statements.
(2) Earnings per share amounts for 1996 and prior years have been restated to
conform with SFAS No. 128 presentation requirements.
(3) No cash dividends were declared or paid on Arch Common Stock during any of
the periods presented.
64
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ARCH
With the exception of historical information, the matters discussed herein
are forward-looking statements that involve risks and uncertainties including,
but not limited to, oil and gas price fluctuations, economic conditions,
reserve estimates, interest rate fluctuations, regulatory and political
environments, estimated volumes of gas to be delivered pursuant to the VPP and
other risks indicated in filings with the SEC.
Arch operates in an industry that is subject to price volatility. Cash flows
from operations may be affected to a significant degree by fluctuations in
prices that are brought on by factors beyond Arch's control.
The discussion of results of operations of Arch for the years ended December
31, 1997, 1996 and 1995 set forth below should be read in conjunction with
Arch's consolidated financial statements included elsewhere in this Proxy
Statement/Prospectus.
RESULTS OF OPERATIONS
Three months ended March 31, 1998 compared to three months ended March 31,
1997
Arch recorded a net loss before dividends of $803,000 in 1998 as compared to
net income of $900,000 before dividends in 1997. Total revenues and expenses
decreased as a result of diminished natural gas pipeline segment operations
after the sale of a pipeline subsidiary effective June 30, 1997. Net income
was decreased primarily as a result of lower oil and gas prices during 1998.
Revenues from oil and gas sales decreased $1,982,000 in 1998 as compared to
1997. Oil production increased to 161,000 barrels in 1998 as compared to
142,000 barrels in 1997, resulting in a $414,000 sales increase. Arch has
begun realizing production from new wells drilled during 1997. The average
price received for oil was $14.50 per barrel in 1998 as compared to $22.03 per
barrel in 1997, resulting in a $1,210,000 sales decrease. Gas production in
1998 decreased to 1,376,000 Mcf as compared to 1,513,000 Mcf in 1997,
resulting in a $307,000 sales decrease. The decrease in gas production is
attributable primarily to the reduced allowable production from the Keystone.
The average price received for gas decreased to $1.60 per Mcf in 1998 as
compared to $2.24 per Mcf in 1997, resulting in a $879,000 sales decrease. The
average price received for gas excluding certain production payment volumes
was $1.82 per Mcf in 1998 as compared to $3.12 per Mcf in 1997.
Lease operating expenses ("LOE") related to oil and gas properties increased
$228,000 as a result of the new wells drilled during 1998 and general
increases in the cost of field services. Lifting costs per equivalent barrel
increased in 1998 to $5.97 from $5.33 in 1997 as a result of increases in the
cost of services as well as decreased gas production from Keystone. Interest
expense increased $97,000 in 1998 due entirely to interest associated with the
accounting treatment of volume deficiencies related to the production payment
obligation. Interest related to the production payment obligation of $339,000
and $224,000 in 1998 and 1997, respectively, is a non-cash item that is added
back to cash flows in the Consolidated Statements of Cash Flows.
Year ended December 31, 1997 compared to year ended December 31, 1996
Arch recorded net income before dividends of $2,828,000 in 1997 as compared
to net income of $3,022,000 before dividends in 1996. Total revenues and
expenses decreased as a result of diminished natural gas pipeline segment
operations after the sale of Onyx effective June 30, 1997. Net income
decreased primarily as a result of lower oil and gas prices during 1997.
Revenues from oil and gas sales decreased $126,000 in 1997 as compared to
1996. Oil production increased to 657,000 barrels in 1997 as compared to
580,000 barrels in 1996, resulting in a $1,622,000 sales increase. The average
price received for oil was $19.41 per barrel in 1997 as compared to $21.02 per
barrel in 1996, resulting
65
<PAGE>
in a $1,052,000 sales decrease. Gas production in 1997 decreased to 5,259,000
Mcf as compared to 6,749,000 Mcf in 1996, resulting in a $2,553,000 sales
decrease. The decrease in gas production is attributable primarily to the
reduced allowable production from Keystone. The average price received for gas
increased to $2.07 per Mcf in 1997 as compared to $1.72 per Mcf in 1996,
resulting in a $1,857,000 sales increase. The average price received for gas
excluding certain production payment volumes was $2.72 per Mcf in 1997 as
compared to $2.32 Mcf in 1996.
LOE related to oil and gas properties increased $680,000 as a result of the
new wells drilled during 1997 and general increases in the cost of services.
Lifting costs per equivalent barrel increased in 1997 to $5.83 from $4.86 in
1996, primarily as a result of decreased gas production from Keystone.
Exploration expense increased $541,000 as a result of three uneconomic
exploratory wells drilled by Arch during the current year.
Depletion, depreciation and amortization increased only $207,000 in 1997
primarily as a result of the decreased gas production from Keystone. General
and administrative expenses remained relatively constant primarily as a result
of the Onyx sale effective June 30, 1997. Interest expense increased
$1,183,000 in 1997 due to interest of $1,049,000 related to the Remedy
Adjustment. See "--Liquidity and Capital Resources."
Arch recognizes a deferred tax asset in APL. No valuation allowance was
provided against this deferred tax asset since it is management's belief that
it is more likely than not that this deferred tax asset will be utilized. See
Note 8 to Arch's consolidated financial statements.
Year ended December 31, 1996 compared to year ended December 31, 1995
Arch recorded net income before dividends of $3,022,000 in 1996 as compared
to a net loss of $164,000 before dividends in 1995. Net income increased due
to higher oil and gas sales and improved margins on pipeline sales. In
addition, Arch recognized a pre-tax gain of $1,037,000 on the sale of certain
oil and gas properties located in West Texas, in April 1996. There was also a
corresponding increase in almost all categories of costs and expenses.
Pipeline sales increased $25,060,000 in 1996 as compared to 1995, but were
offset by an increase in natural gas purchases of $24,450,000. The increase in
sales and purchases is due primarily to the increase in the cost of gas that
averaged $2.19 per Mcf in 1996 as compared to $1.52 per Mcf in 1995. During
1996, natural gas was sold at an average price of $2.38 per Mcf as compared to
$1.58 per Mcf in 1995. Gross margin increased by $610,000 in 1996 to
$3,000,000.
Revenues from oil and gas sales increased $7,369,000 in 1996 as compared to
1995. Oil and gas revenues attributable to APL were $2,425,000 during 1996.
Increased production from the New Mexico properties as a result of the
development and exploitation program and higher average oil and gas prices
also contributed to the increase in sales. Oil production increased to 580,000
barrels in 1996 as compared to 382,000 barrels in 1995, resulting in a
$3,414,000 sales increase. The increase in oil production is due to Arch's
successful drilling and development program in New Mexico as well as the APL
production (120,000 barrels). The average price received for oil was $21.02
per barrel in 1996 as compared to $17.28 per barrel in 1995, resulting in a
$2,163,000 sales increase. Gas production in 1996 decreased to 6,749,000 Mcf
as compared to 7,383,000 Mcf in 1995, resulting in a $840,000 sales decrease.
The decrease in gas production is attributable primarily to the reduced
allowable production from Keystone. The average price received for gas
increased to $1.72 per Mcf in 1996 as compared to $1.32 per Mcf in 1995,
resulting in a $2,632,000 sales increase. The average price received for gas
excluding certain production payment volumes was $2.32 per Mcf in 1996.
LOE related to oil and gas properties increased $905,000 primarily as a
result of the addition of the APL operations. LOE was $699,000 for APL during
1996. New wells successfully completed in New Mexico also added to LOE.
Lifting costs per equivalent barrel (including APL operations) increased in
1996 to $4.86 from $4.45 in 1995. Exploration expense decreased $305,000 in
1996 as compared to 1995. Depletion, depreciation and amortization ("DD&A")
increased $1,515,000 in 1996 as a result of increased production, primarily
from the New Mexico operations, as well as the added APL operations. DD&A was
$1,139,000 for APL in 1996.
66
<PAGE>
General and administrative expenses increased $852,000 in 1996 as compared
to 1995, as a result of increased personnel costs and the addition of APL.
General and administrative expense was $589,000 for APL in 1996. Interest
expense increased $992,000 as a result of the increased outstanding bank debt
during 1996.
For the years ended December 31, 1996 and 1995, Arch recorded a provision
(benefit) for income taxes of $1,438,000 and ($86,000), respectively,
resulting in effective tax rates of 32.3% and (34.0%). Arch's provision for
income taxes was less than the statutory federal rate of 34% due to statutory
depletion deductions in 1996. Arch also recognized a deferred tax asset
related to APL. No valuation allowance was provided against this deferred tax
asset since it was management's belief that it was more likely than not that
this deferred tax asset would be utilized. See Note 8 to Arch's consolidated
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Arch presently has borrowing capacity under two separate revolving credit
facilities: the Third Restated Revolving Credit Loan Agreement among Arch and
Bank One, Texas, NA, the U.S. Agent bank, and other lenders (the "Domestic
Revolver"), and the Credit Agreement among APL and Bank of Montreal, the
Canadian Agent bank (the "Canadian Revolver" and together with the Domestic
Revolver, the "Revolvers"). The lenders under the Revolvers, including the
U.S. Agent bank and the Canadian Agent bank, are referred to collectively as
the "Lenders."
The Revolvers are in place for use by Arch at its discretion for certain
activities including drilling, development and acquisition of oil and gas
properties. Arch has borrowed $18.0 million and $14.0 million against the
Domestic Revolver and Canadian Revolver at March 31, 1998, respectively. The
borrowing base is the amount that the Lenders commit to loan to Arch based on
the designated loan value established by the Lenders at their sole discretion
and assigned to certain of Arch's oil and gas properties which serve as
collateral for any loan which may be outstanding under the Revolvers. The
aggregate borrowing capacity under the Revolvers is $50.0 million. The
borrowing base is currently allocated $23.0 million to the Domestic Revolver
and $14.0 million to the Canadian Revolver. The borrowing base under the
Revolvers is reviewed semiannually by the Lenders at their discretion. A
commitment fee of one half of one percent of the unused borrowing base accrues
and is payable quarterly. Both of the Revolvers mature on May 1, 1999.
Borrowings under the Revolvers will, at Arch's option, bear interest either at
the Lenders' Base Rate or a rate based on the London Interbank Offered Rate
(LIBOR). The effective interest rate on the Revolvers was 8.3% at March 31,
1998.
The Revolvers contain standard covenants generally found in lending
agreements. Among other things, these covenants prohibit the declaration and
payment of cash dividends on Arch's Common Stock. In addition, the covenants
stipulate the maintenance of financial criteria including: a minimum level of
net worth, a certain current ratio, a certain debt to net worth ratio and a
defined net income in excess of scheduled interest and principal payments.
Arch is currently in compliance with the covenants in the Revolvers. Arch has
no other unused lines of credit.
Arch sold 727,273 shares of Arch Preferred Stock having a liquidation
preference of $20.0 million and $5.0 million original principal amount of the
Arch Notes to certain institutional investors in 1994. The Arch Preferred
Stock accrues annual dividends at the rate of $2.20 per share, payable
semiannually. The Arch Notes bear interest at 9.75% per annum, and interest on
the unpaid principal balance thereof is payable quarterly.
The VPP sold to Enron generated $24.3 million cash in 1992. Arch contracted
to deliver to Enron the equivalent of approximately 17.9 Bcf of natural gas
volumes from Keystone beginning December 1, 1992. Arch is responsible for all
costs of production, development and marketing of these dedicated gas volumes.
The VPP gas reserves dedicated to Enron are excluded from the Unaudited
Supplemental Oil and Gas Disclosures, contained elsewhere in this Proxy
Statement/Prospectus.
Certain rulings by the RRC in May 1993 and in April 1997, which affected all
the Keystone operators, curtailed the production of natural gas from this
field. These production curtailments created delays in Arch's
67
<PAGE>
scheduled volume deliveries to Enron. The VPP provides a mechanism to remedy
both under and over delivery of scheduled volumes. The under deliveries of
production payment volumes are converted into a volumetric obligation which is
denominated in dollars (the "Remedy Adjustment"), and which is calculated on a
monthly basis by multiplying the deficient volumes by the market price of the
gas at the end of that month. In addition, the VPP provides for interest at
10% per year on the outstanding Remedy Adjustment. This Remedy Adjustment is
satisfied by proceeds received from the sale of dedicated hydrocarbons from
Keystone in excess of the future scheduled volume deliveries. Arch remitted
$0.3 million, $1.2 million and $1.2 million to Enron during 1997, 1996 and
1995, respectively, in satisfaction of a portion of the Remedy Adjustment.
In April 1997, the RRC imposed further production limitations of natural gas
from Keystone. It became evident at that time that Arch would incur
significant future deficiencies and interest under the VPP. Accordingly, in
1997 Arch reclassified amounts due under the Remedy Adjustment from Deferred
revenue to Non-recourse production payment obligation in the accompanying
financial statements. At December 31, 1997, Arch treated the past deficiencies
as a repurchase of the volumetric production payment and therefore
approximately 6.0 Bcf associated with these deficiencies were restored to
Arch's Unaudited Supplemental Oil and Gas disclosures, herein.
Arch anticipates that the RRC will continue to impose production limitations
for Keystone in 1998 that will create additional deficiencies in scheduled
volume deliveries. The scheduled volumes deliverable during 1998 under the VPP
are approximately 1.9 Bcf. In 1997, interest expense of $1.0 million relating
to the Remedy Adjustment is reflected in the accompanying consolidated
financial statements of Arch. See "Risk Factors--Governmental Regulation and
Environmental Risks."
In 1997, Arch's chief sources of funds were: $8.1 million from the sale of
Onyx, $6.3 million from operations and $1.4 million (net) from the Revolvers.
These funds were primarily used to: fund $11.1 million of domestic drilling,
primarily in New Mexico and North Texas, $3.1 million for the drilling of new
wells in Canada, including construction of supporting facilities and pipelines
and $1.6 million for dividends on the Arch Preferred Stock.
Arch has budgeted approximately $16.6 million for oil and gas capital
expenditures program in 1998. Currently, Arch plans to drill approximately
thirty new wells and the recompletion of approximately twenty-one existing
wells in the United States in 1998 for approximately $7.1 million. Of these
planned development efforts, eight new wells and fifteen recompletion wells
are located in southeast New Mexico and are expected to cost approximately
$4.7 million to complete. In Western Canada, Arch currently plans to drill
eighteen new wells at an estimated cost of approximately $9.5 million.
In addition to its existing business of gas transportation and marketing,
Saginaw is evaluating its participation in several power generation projects.
Most of these projects represent opportunities for profitable activities in
Arch's existing lines of business while adding another dimension to Arch's
future potential.
Arch believes that it has sufficient cash flows and available borrowing base
under the Revolvers to fund its anticipated drilling, development and
acquisition programs for 1998 as well as its debt service and preferred stock
dividend requirements. Additionally, Arch expects to meet its current
operating cash requirements from cash flows provided by current operations.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is whether a company's computer systems will properly
recognize date sensitive information when the year changes to 2000, or "00."
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. Arch uses purchased software
programs for a variety of functions, including general ledger, accounts
payable and accounts receivable accounting packages and reserve analysis.
Responsibility for Year 2000 compliance has been analyzed and testing is
currently ongoing for many of the financial and reserves applications and
individual work stations. Preliminary tests on applications have
68
<PAGE>
proven them to be compliant, but further testing is warranted. Arch believes
that the Year 2000 Issue will not pose significant operational problems for
Arch's computer systems and, therefore, will not have a material impact on the
financial position or the operations of Arch.
LEGAL MATTERS
Certain legal matters in connection with the Merger and the shares of Pogo
Common Stock and Rights issued in connection with the Merger are being passed
on for Pogo by Gerald A. Morton, Vice President--Law and Corporate Secretary
of Pogo.
EXPERTS
The consolidated financial statements of Pogo in the Pogo Annual Report on
Form 10-K for the year ended December 31, 1997, incorporated by reference in
this Proxy Statement/Prospectus have been audited by Arthur Andersen LLP,
independent accountants, as indicated in their report with respect thereto,
and are included in such Pogo Form 10-K and has been incorporated by reference
herein in reliance upon the authority of said firm as experts in accounting
and auditing in giving said report.
The consolidated financial statements of Arch as of December 31, 1997 and
for the year ended December 31, 1997, included in this Proxy
Statement/Prospectus and elsewhere in the registration statement have been
audited by Arthur Andersen LLP, independent accountants, as set forth in their
report, and has been included herein in reliance upon the authority of such
firm as experts in accounting and auditing in giving said report.
The consolidated financial statements of Arch as of December 31, 1996 and
for the years ended December 31, 1996 and 1995, included in this Proxy
Statement/Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in auditing and accounting.
Arthur Andersen LLP, tax advisor, has delivered an opinion to Arch regarding
certain tax consequences related to the Merger. In addition, Arthur Andersen
LLP, tax advisor, has prepared the disclosure set forth in this Proxy
Statement/Prospectus under "The Merger--Certain Federal Income Tax
Consequences of the Merger." See "The Merger--Certain Federal Income Tax
Consequences of the Merger."
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ARCH PETROLEUM INC. AND SUBSIDIARIES
Report of Independent Public Accountants--Arthur Andersen LLP........... F-2
Report of Independent Accountants--Price Waterhouse LLP................. F-3
Consolidated Balance Sheets at March 31, 1998 (unaudited) and December
31, 1997 and 1996...................................................... F-4
Consolidated Statements of Operations for the three months ended March
31, 1998 and 1997 (unaudited).......................................... F-5
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1997......................................... F-6
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years in the period ended December 31, 1997 and for the three
months ended March 31, 1998 (unaudited)................................ F-7
Consolidated Statements of Cash Flows for the three months ended March
31, 1998 and 1997 (unaudited).......................................... F-8
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997......................................... F-9
Notes to Consolidated Financial Statements.............................. F-10
Unaudited Supplemental Oil and Gas Disclosures.......................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Arch Petroleum Inc.
We have audited the accompanying consolidated balance sheet of Arch
Petroleum Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Arch Petroleum Inc. and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
April 15, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Arch Petroleum Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Arch Petroleum Inc. and its subsidiaries at December 31, 1996 and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Fort Worth, Texas
March 25, 1997
F-3
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
ASSETS (UNAUDITED)
------ -----------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents.......... $ 1,382,000 $ 2,160,000 $ 3,192,000
Accounts receivable--trade......... 2,881,000 3,585,000 15,948,000
Accounts receivable--related
parties........................... 613,000 729,000 423,000
Prepaid expenses and other......... 399,000 544,000 968,000
------------ ------------ ------------
Total current assets............. 5,275,000 7,018,000 20,531,000
Property and Equipment, at cost:
Oil and gas properties accounted
for by successful efforts method.. 102,464,000 99,178,000 81,620,000
Natural gas pipelines.............. 5,940,000 5,657,000 12,361,000
Furniture, fixtures and other
equipment......................... 1,043,000 1,033,000 1,038,000
------------ ------------ ------------
109,447,000 105,868,000 95,019,000
Less accumulated depletion,
depreciation and amortization..... 26,870,000 25,320,000 19,617,000
------------ ------------ ------------
Net property and equipment....... 82,577,000 80,548,000 75,402,000
Accounts receivable--related parties. 1,458,000 1,406,000 1,403,000
Notes receivable--related parties.... 1,905,000 1,874,000 1,759,000
Deferred income taxes................ 1,640,000 1,511,000 705,000
Other................................ 882,000 814,000 1,239,000
------------ ------------ ------------
$ 93,737,000 $ 93,171,000 101,039,000
============ ============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current Liabilities:
Accounts payable................... $ 5,563,000 $ 6,239,000 $ 16,193,000
Accounts payable--related parties.. -- -- 1,971,000
Current maturities of long-term
debt.............................. -- -- 1,119,000
Preferred stock dividends payable.. 711,000 311,000 311,000
------------ ------------ ------------
Total current liabilities........ 6,274,000 6,550,000 19,594,000
Long-term debt, less current
maturities.......................... 32,000,000 30,000,000 30,134,000
Non-recourse production payment
obligation.......................... 14,545,000 13,317,000 --
Deferred revenue..................... 1,222,000 2,123,000 12,528,000
Convertible subordinated notes....... 5,000,000 5,000,000 5,000,000
Deferred federal income taxes........ 5,431,000 5,770,000 3,450,000
Other liabilities.................... 299,000 273,000 186,000
Minority interest in consolidated
subsidiaries........................ -- -- 1,082,000
Exchangeable convertible preferred
stock, $.01 par value, 727,273
shares authorized, issued and
outstanding......................... 20,000,000 20,000,000 20,000,000
Shareholders' Equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized,
727,273 issued as exchangeable
convertible preferred stock....... -- -- --
Common stock, $.01 par value,
50,000,000 shares authorized,
17,321,804, 17,321,804 and
17,271,804 shares issued and
outstanding, respectively......... 173,000 173,000 172,000
Additional paid-in capital......... 6,137,000 6,137,000 6,012,000
Employee notes for stock purchases. (1,064,000) (1,047,000) (1,022,000)
Treasury stock, 100,000 shares..... (206,000) (206,000) (206,000)
Cumulative translation adjustment.. (171,000) (219,000) 37,000
Retained earnings.................. 4,097,000 5,300,000 4,072,000
------------ ------------ ------------
Total shareholders' equity....... 8,966,000 10,138,000 9,065,000
------------ ------------ ------------
Commitments and contingencies (Note
11)................................. -- -- --
$ 93,737,000 $ 93,171,000 $101,039,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
REVENUES:
Oil and gas sales.................................... $ 4,538,000 $6,520,000
Pipeline sales....................................... 1,227,000 26,441,000
Interest and other................................... 126,000 181,000
----------- ----------
5,891,000 33,142,000
COSTS AND EXPENSES:
Oil and gas lease operations......................... 2,330,000 2,102,000
Natural gas purchases and pipeline operations........ 1,160,000 25,323,000
Exploration.......................................... 88,000 75,000
Depletion, depreciation and amortization............. 1,582,000 1,667,000
General and administrative........................... 1,014,000 1,238,000
Interest--banks and other............................ 748,000 766,000
Interest--production payment obligation.............. 339,000 224,000
Foreign currency transaction (gain) loss............. (112,000) 107,000
Minority interest in net income of consolidated
subsidiaries........................................ -- 306,000
----------- ----------
7,149,000 31,808,000
----------- ----------
Income (loss) before income taxes and dividends........ (1,258,000) 1,334,000
Income tax expense (benefit)........................... (455,000) 434,000
----------- ----------
Net income (loss) before dividends..................... (803,000) 900,000
Dividends on preferred stock........................... 400,000 400,000
----------- ----------
Net income (loss) available to common shareholders..... $(1,203,000) $ 500,000
=========== ==========
Net income (loss) available per common share--basic and
diluted............................................... $ (0.07) $ 0.03
=========== ==========
Weighted average common shares outstanding--basic...... 17,322,000 17,289,000
=========== ==========
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Oil and gas sales....................... $23,622,000 $23,748,000 $16,379,000
Pipeline sales.......................... 51,392,000 74,309,000 49,249,000
Interest and other...................... 802,000 832,000 962,000
Gain on sale of properties.............. 5,046,000 1,037,000 --
----------- ----------- -----------
80,862,000 99,926,000 66,590,000
COSTS AND EXPENSES:
Oil and gas lease operations............ 8,761,000 8,081,000 7,176,000
Natural gas purchases and pipeline
operations............................. 49,175,000 71,309,000 46,859,000
Exploration............................. 1,134,000 593,000 898,000
Depletion, depreciation and
amortization........................... 7,111,000 6,904,000 5,389,000
General and administrative.............. 5,197,000 5,060,000 4,208,000
Interest................................ 4,040,000 2,857,000 1,865,000
Foreign currency transaction loss....... 492,000 40,000 --
Minority interest in income of
consolidated subsidiaries.............. 448,000 622,000 445,000
----------- ----------- -----------
76,358,000 95,466,000 66,840,000
----------- ----------- -----------
Income (loss) before income taxes and
dividends................................ 4,504,000 4,460,000 (250,000)
Income tax expense (benefit).............. 1,676,000 1,438,000 (86,000)
----------- ----------- -----------
Net income (loss) before dividends........ 2,828,000 3,022,000 (164,000)
Dividends on preferred stock.............. 1,600,000 1,600,000 1,600,000
----------- ----------- -----------
Net income (loss) available to common
shareholders............................. $ 1,228,000 $ 1,422,000 $(1,764,000)
=========== =========== ===========
Net income (loss) available per common
share--basic and diluted................. $ 0.07 $ 0.08 $ (0.10)
=========== =========== ===========
Weighted average common shares
outstanding--basic....................... 17,294,000 17,159,000 17,141,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND THE THREE MONTHS ENDED MARCH
31, 1998
<TABLE>
<CAPTION>
EMPLOYEE
ADDITIONAL NOTES FOR CUMULATIVE
COMMON TREASURY COMMON PAID-IN TREASURY STOCK TRANSLATION RETAINED SHAREHOLDERS'
SHARES SHARES SHARES CAPITAL STOCK PURCHASES ADJUSTMENT EARNINGS EQUITY
---------- -------- -------- ---------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--
December 31,
1994........... 17,186,404 -- $172,000 $5,809,000 -- $ (905,000) -- $ 4,414,000 $ 9,490,000
Preferred stock
dividends...... -- -- -- -- -- -- -- (1,600,000) (1,600,000)
Purchase of
treasury
shares......... -- 100,000 -- -- $(206,000) -- -- -- (206,000)
Issue stock as
compensation... 30,000 -- -- 60,000 -- -- -- -- 60,000
Issue stock for
interest in
subsidiary..... 25,000 -- -- 75,000 -- -- -- -- 75,000
Repayment of
employee note.. -- -- -- -- -- 14,000 -- -- 14,000
Interest on
employee notes. -- -- -- -- -- (74,000) -- -- (74,000)
Net loss........ -- -- -- -- -- -- -- (164,000) (164,000)
---------- ------- -------- ---------- --------- ----------- --------- ----------- -----------
Balance--
December 31,
1995........... 17,241,404 100,000 172,000 5,944,000 (206,000) (965,000) -- 2,650,000 7,595,000
Preferred stock
dividends...... -- -- -- -- -- -- -- (1,600,000) (1,600,000)
Exercise of
stock options.. 400 -- -- 1,000 -- -- -- -- 1,000
Issue stock as
compensation... 30,000 -- -- 67,000 -- -- -- -- 67,000
Interest on
employee notes. -- -- -- -- -- (57,000) -- -- (57,000)
Translation
adjustment..... -- -- -- -- -- -- $ 37,000 -- 37,000
Net income...... -- -- -- -- -- -- -- 3,022,000 3,022,000
---------- ------- -------- ---------- --------- ----------- --------- ----------- -----------
Balance--
December 31,
1996........... 17,271,804 100,000 172,000 6,012,000 (206,000) (1,022,000) 37,000 4,072,000 9,065,000
Preferred stock
dividends...... -- -- -- -- -- -- -- (1,600,000) (1,600,000)
Exercise of
stock options.. 20,000 -- -- 39,000 -- -- -- -- 39,000
Issue stock as
compensation... 30,000 -- 1,000 86,000 -- -- -- -- 87,000
Interest on
employee notes. -- -- -- -- -- (64,000) -- -- (64,000)
Repayment of
employee note.. -- -- -- -- -- 39,000 -- -- 39,000
Translation
adjustment..... -- -- -- -- -- -- (256,000) -- (256,000)
Net income...... -- -- -- -- -- -- -- 2,828,000 2,828,000
---------- ------- -------- ---------- --------- ----------- --------- ----------- -----------
Balance--
December 31,
1997........... 17,321,804 100,000 173,000 6,137,000 (206,000) (1,047,000) (219,000) 5,300,000 10,138,000
Preferred stock
dividends...... -- -- -- -- -- -- -- (400,000) (400,000)
Interest on
employee notes. -- -- -- -- -- (17,000) -- -- (17,000)
Translation
adjustment..... -- -- -- -- -- -- 48,000 -- 48,000
Net loss........ -- -- -- -- -- -- -- (803,000) (803,000)
---------- ------- -------- ---------- --------- ----------- --------- ----------- -----------
Balance--March
31, 1998....... 17,321,804 100,000 $173,000 $6,137,000 $(206,000) $(1,064,000) $(171,000) $ 4,097,000 $ 8,966,000
========== ======= ======== ========== ========= =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ (803,000) $ 900,000
Adjustments to reconcile to net cash provided
(used) by operations:
Depletion, depreciation and amortization......... 1,582,000 1,667,000
Deferred revenue................................. (386,000) (684,000)
Income taxes..................................... (455,000) 434,000
Dry hole costs and other......................... 33,000 --
Interest on production payment obligation........ 339,000 224,000
Interest on notes receivable and other........... (78,000) (44,000)
Foreign currency transaction (gain) loss......... (112,000) 107,000
Minority interest in net income of consolidated
subsidiaries.................................... -- 306,000
----------- -----------
120,000 2,910,000
Change in accounts receivable...................... 781,000 7,176,000
Change in other current assets..................... 145,000 (155,000)
Change in accounts payable and other current
liabilities....................................... (695,000) (7,049,000)
Change in accounts receivable--related parties..... 94,000 (72,000)
Production payment remedy adjustment............... (55,000) (59,000)
----------- -----------
Net operating cash flows............................. 390,000 2,751,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (3,038,000) (2,525,000)
Notes receivable and other assets.................. (130,000) (153,000)
----------- -----------
Net investing cash flows............................. (3,168,000) (2,678,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing....................... 3,000,000 2,000,000
Payments of bank debt.............................. (1,000,000) (2,279,000)
Proceeds from note payable--minority
interestholder.................................... -- 82,000
----------- -----------
Net financing cash flows............................. 2,000,000 (197,000)
----------- -----------
Change in cash and cash equivalents.................. (778,000) (124,000)
Cash and cash equivalents at beginning of period..... 2,160,000 3,192,000
----------- -----------
Cash and cash equivalents at end of period........... $ 1,382,000 $ 3,068,000
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
F-8
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ 2,828,000 $ 3,022,000 $ (164,000)
Adjustments to reconcile to net cash
provided (used) by operations:
Depletion, depreciation and
amortization....................... 7,111,000 6,904,000 5,389,000
Income taxes........................ 1,676,000 1,438,000 (86,000)
Deferred revenue.................... (2,050,000) (2,309,000) (3,457,000)
Dry hole costs and other............ 915,000 387,000 340,000
Interest on production payment
obligation......................... 1,049,000 -- --
Interest on notes receivable and
other.............................. (179,000) (213,000) (198,000)
Issue shares for compensation....... 87,000 64,000 35,000
Minority interest in net income of
consolidated subsidiaries.......... 448,000 622,000 445,000
Foreign currency transaction loss... 492,000 40,000 --
Gain on sale of assets.............. (5,046,000) (1,037,000) --
----------- ----------- -----------
7,331,000 8,918,000 2,304,000
Change in accounts receivable......... 3,299,000 (8,266,000) 319,000
Change in other current assets........ 308,000 (406,000) 93,000
Change in accounts payable and other
current liabilities.................. (3,882,000) 7,466,000 (352,000)
Change in accounts receivable--related
parties.............................. (401,000) (612,000) --
Production payment remedy adjustment.. (312,000) (1,200,000) (1,196,000)
----------- ----------- -----------
Net operating cash flows................ 6,343,000 5,900,000 1,168,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. (14,551,000) (9,334,000) (6,428,000)
Proceeds from sale of assets, net of
cash disposed........................ 7,260,000 1,601,000 --
Notes receivable and other assets..... (80,000) (181,000) (101,000)
Acquisition of subsidiary............. -- (7,645,000) --
----------- ----------- -----------
Net investing cash flows................ (7,371,000) (15,559,000) (6,529,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing.......... 13,000,000 26,504,000 11,800,000
Payments of bank debt................. (11,564,000) (15,371,000) (3,612,000)
Proceeds from note payable--minority
interestholder....................... 82,000 744,000 --
Purchase of treasury shares from
related party........................ -- -- (206,000)
Preferred stock dividends............. (1,600,000) (1,600,000) (1,600,000)
Other................................. 78,000 -- --
----------- ----------- -----------
Net financing cash flows................ (4,000) 10,277,000 6,382,000
----------- ----------- -----------
Change in cash and cash equivalents..... (1,032,000) 618,000 1,021,000
Cash and cash equivalents at beginning
of period.............................. 3,192,000 2,574,000 1,553,000
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 2,160,000 $ 3,192,000 $ 2,574,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation:
Arch Petroleum Inc., a Delaware corporation, (together with its
subsidiaries, "the Company") engages primarily in oil and natural gas
exploration, development, production, transportation and marketing in the
Southwestern United States and Western Canada. The Company is also active in
the acquisition of interests in oil and gas leases, both producing and non-
producing. Threshold Development Company ("TDC"), an oil and gas exploration
company, owns approximately 13.9% of the Company's common stock as of December
31, 1997. Two of TDC's shareholders are also officers and directors of the
Company.
The Company acquired Trax Petroleums Ltd. on January 31, 1996, which was
subsequently renamed Arch Petroleum Limited ("APL") effective March 31, 1997.
See Note 4. The Company's consolidated financial statements include the
results of APL from the January 31, 1996 acquisition date.
In a special meeting on January 31, 1995, the Company's shareholders
approved an amendment to the Company's articles of incorporation whereby the
number of authorized shares of the Company's capital stock was increased from
26,000,000 shares to 51,000,000 shares. Common stock is designated for
50,000,000 shares and preferred stock is designated for the remaining
1,000,000 shares. The Company has reserved 9,090,909 shares of common stock
for issuance upon conversion of the securities in a private placement (the
"Placement"), if necessary. See Note 7. The Company has also reserved 339,300
shares of common stock for issuance upon exercise of options under its current
incentive stock option plan.
The consolidated financial statements include the accounts of the Company
and its subsidiaries: APL and Northern Arch Resources Ltd. ("NARL"), both
wholly-owned Canadian companies; Arch Production Company, wholly-owned;
Saginaw Pipeline Company, L.C. ("Saginaw") and Industrial Natural Gas, L.C.
("ING"), 95% membership interest; and Onyx Pipeline Company, L.C., Onyx
Gathering Company, L.C. and Onyx Gas Marketing Company, L.C. (all together,
"Onyx"), 50% membership interest. The Onyx interests were sold in July 1997.
See Note 3. All significant intercompany balances and transactions are
eliminated.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities, and
related revenues and expenses, and disclosure of gain and loss contingencies
at the date of the financial statements. Actual results could differ from
those estimates.
Supplemental Cash Flow Information:
Cash paid for interest was $2,811,000, $2,731,000 and $1,466,000 during
1997, 1996, and 1995, respectively. The Company issued stock as compensation
to a third party totaling $87,000, $67,000 and $60,000 during 1997, 1996 and
1995, respectively. The Company paid $241,000 in income taxes in 1997. During
1996 and 1995 the Company paid no income taxes.
Revenue Recognition:
The Company recognizes revenues as quantities of oil and gas are sold or
volumes of gas are transported, and utilizes the entitlement method of
accounting for gas imbalances. Under this method the oil and gas segment
recognizes revenue for its proportionate share of volumes sold. Any over-
produced amount is recorded as deferred revenue and any under-produced amount
is recorded as current revenue and revenue receivable. The Company had no
significant over or under-produced positions as of December 31, 1997 and 1996.
F-10
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The natural gas pipeline segment also utilizes the entitlement method,
recognizing a receivable or payable for over or under delivered volumes, as
applicable. As of December 31, 1997 and 1996, the Company had net imbalance
receivables of nil and $298,000, respectively.
Foreign Currency Translation:
The assets and liabilities of APL are translated into U.S. dollars at
current exchange rates, and revenues and expenses are translated at average
exchange rates for the year. Resulting translation adjustments are reflected
as a separate component of shareholders' equity.
The Canadian dollar is the functional currency of APL. Transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results
of operations as incurred.
Cash and Cash Equivalents:
Cash and cash equivalents consist of cash in banks and cash investments in
immediately available interest bearing accounts.
Property and Equipment:
The Company follows the successful efforts method of accounting for costs
incurred in oil and gas exploration and development operations, all of which
are conducted in the United States and Western Canada. Under this method, the
Company capitalizes all costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that discover proved
reserves, and to drill and equip development wells. Exploration costs,
including geological and geophysical costs, delay rentals and exploratory dry
holes, are charged to expense when incurred. The Company does not capitalize
internal costs such as salaries and related fringe benefits paid to employees
directly engaged in the acquisition, exploration and development of oil and
gas properties or any other directly identifiable general and administrative
costs associated with such activities.
Under the successful efforts method all costs capitalized are aggregated on
an area basis and depleted using the units-of-production method based upon
proved reserves as estimated by independent petroleum engineers.
Interest is capitalized in accordance with the guidelines established in
Statement of Financial Accounting Standards ("SFAS") No. 34, "Capitalization
of Interest Cost", during the periods of drilling (or preparation for
drilling) and completing of wells or construction of natural gas pipelines.
The Company has had no significant capitalized interest since 1994.
Costs of unproved properties that are individually significant are evaluated
at least annually for impairment of net book value. Costs of proved properties
that are abandoned or retired are charged against accumulated reserves for
depreciation, depletion and amortization for their respective area and a loss
is recognized to the extent of any excess.
Depreciation of property and equipment, other than oil and gas properties
but including natural gas pipelines, is determined on the straight-line method
using estimated useful lives, which vary from two to thirty years.
Maintenance and repairs are charged to expense; renewals and betterments are
capitalized. Upon sale or retirement of depreciable assets other than proved
oil and gas properties, the cost and related accumulated depreciation are
removed from the accounts, and the resulting gain or loss is included in
operations.
F-11
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Assets:
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which had no impact upon the Company's financial condition or results of
operations. As required, the Company periodically evaluates the realizability
of its long-lived assets based upon expectations of undiscounted cash flows
before interest. An impairment loss is recognized if the sum of the expected
undiscounted cash flows from the use of the asset is less than the book value
of the asset. Generally, the amount of impairment loss is measured as the
difference between the net book value and the estimated fair value of the
assets. There was no impairment provision required in 1997 or 1996.
KEYSTONE ELLENBURGER FIELD
A water lifting program was encouraged by the Railroad Commission of Texas
("RRC") in 1993 to enhance future recovery of oil and gas from the Keystone
Ellenburger Field ("Keystone") in Winkler County, Texas. The capitalized water
lifting program costs arose from the recovery, transportation and re-injection
of formation water in Keystone. The most significant costs are the following:
rental of submersible electric pumps used to produce the formation water,
electricity to power the submersible pumps and above-ground injection pumps,
water disposal facilities and pipelines. The wells in the water lifting
program, as well as the water disposal facilities used to collect and
transport the water, are used exclusively for the lifting and re-injection of
formation water and are specifically identified by the Company.
The RRC amended the field rules in May 1993, regarding formation water
production in Keystone. Subsequent to this ruling and until February 1995 the
Company produced approximately 18.9 million barrels of formation water, thus
earning and accumulating a bonus production allowable of approximately 9.5
million Mcf of natural gas. As a result, the Company incurred high water
lifting costs without realizing the related natural gas revenues during this
water lift period.
The Company ceased capitalizing water lifting program costs on January 31,
1995 concurrent with the issue of modified field rules and commenced
amortization of the deferred water production costs as the bonus production
allowable is produced. The Company's net capitalized water production costs
were $4.4 million and $4.6 million at December 31, 1997 and 1996,
respectively. These costs are included in proved oil and gas properties. The
Company amortized approximately $188,000 and $563,000 of the deferred water
production costs in 1997 and 1996, respectively.
Net Income Available Per Common Share:
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share" which prescribes standards for computing and presenting earnings per
share and supersedes APB Opinion No. 15, "Earnings per Share." In accordance
with SFAS No. 128, net income (loss) available per common share ("EPS") has
been calculated based on the weighted average shares outstanding during the
year and net income (loss) available per common share-assuming dilution, has
been calculated assuming the exercise or conversion of all dilutive securities
as of the beginning of the period, or as of the date of issuance, if later.
Net income (loss) available to common shareholders is net income (loss)
reduced by dividends on preferred stock.
As of December 31, 1997 and 1996, there were 119,000 and 88,000 dilutive
shares of stock options, respectively, which did not effect the EPS
computation. As of December 31, 1995, stock options were anti-dilutive. The
only other potentially dilutive securities the Company had outstanding as of
December 31, 1997, 1996 and 1995, were exchangeable convertible preferred
stock and convertible subordinated notes, which were convertible into
7,273,000 and 1,818,000 shares of common stock, respectively, in each of the
periods. These securities were antidilutive in each of the periods.
F-12
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes:
Deferred tax liabilities and assets are recognized for the anticipated
future tax effects of temporary differences between the financial statement
basis and the tax basis of the Company's assets and liabilities using the
current tax rates in effect at year-end. A valuation allowance for deferred
tax assets is recorded when it is more likely than not that the benefit from
the deferred tax asset will not be realized.
Stock Based Employee Compensation:
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", which establishes accounting
and reporting standards for various stock based compensation plans. SFAS No.
123 encourages the adoption of a fair value based method of accounting for
employee stock options, but permits continued application of the accounting
method prescribed by Accounting Principles Board Opinion No. 25 ("Opinion
25"), "Accounting for Stock Issued to Employees". The Company has elected to
continue to apply the provisions of Opinion 25. Under Opinion 25, if the
exercise price of the Company's stock options equals the market value of the
underlying stock on the date of grant, no compensation expense is recognized.
SFAS No. 123 requires disclosure of pro forma information regarding net income
and earnings per share as if the Company had accounted for its employee stock
options under the fair value method of the statement. See Note 12 .
Estimated Fair Value of Financial Instruments:
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
requires the disclosure of the estimated fair value of financial instruments.
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. Unless
otherwise noted, the estimated fair values of the Company's financial
instruments approximate their carrying value.
Exchangeable convertible preferred stock and convertible subordinated notes:
In determining the estimated fair value of the Preferred Stock and Notes, the
Company used market-based prices of similar securities recently traded. The
estimated fair value of the Preferred Stock was $19.0 million and $18.8
million at December 31, 1997 and 1996, respectively, as compared with the
carrying value of $20 million at December 31, 1997 and 1996, respectively. The
estimated fair value of the Notes was $4.8 million and $4.7 million at
December 31, 1997 and 1996, respectively, as compared to the carrying value of
$5 million at December 31, 1997 and 1996, respectively.
Reclassification:
Certain amounts in prior years have been reclassified to conform to
classifications adopted in 1997.
Concentration of Credit Risk:
The Company is exposed to credit risk with respect to receivables and
related party receivables from entities associated and involved with the oil
and gas industry. The Company performs ongoing credit evaluations and
generally does not require collateral. The Company's cash and cash equivalents
are maintained in major banks. As a result, the Company believes the credit
risk in such instruments is minimal.
Interim Financial Statements (unaudited)
In the opinion of the Company, the accompanying consolidated financial
statements as of and for the three month period ended March 31, 1998 and 1997,
which have not been audited by independent public accountants,
F-13
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contain all adjustments necessary to present fairly the Company's consolidated
financial position, the results of its operations and its cash flows for the
periods reported. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany balances and
transactions are eliminated. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
Certain prior amounts have been reclassified to conform to 1998 presentation.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and footnotes thereto
included herein. The results of operations for the three months ended March
31, 1998 and 1997 are not necessarily indicative of the results to be expected
for a full year.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income as defined by SFAS No. 130 is net
income plus direct adjustments to shareholders' equity. The cumulative
translation adjustment of APL, is the only such direct adjustment recorded by
the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
--------- --------
<S> <C> <C>
Comprehensive income:
Net income (loss).................................. $(803,000) $900,000
Cumulative translation adjustment, net of tax...... 48,000 (72,000)
--------- --------
Total comprehensive income (loss)................ $(755,000) $828,000
========= ========
</TABLE>
2. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 1997 31, 1996
----------- -----------
<S> <C> <C>
Oil and gas properties:
Unproved properties.................................. $ 3,398,000 $ 3,059,000
Proved properties.................................... 95,780,000 78,561,000
----------- -----------
99,178,000 81,620,000
Less accumulated depreciation and depletion of proved
properties.......................................... 24,067,000 17,821,000
----------- -----------
Net oil and gas properties......................... 75,111,000 63,799,000
Natural gas pipelines.................................. 5,657,000 12,361,000
Less accumulated depreciation........................ 603,000 1,202,000
----------- -----------
Net natural gas pipelines.......................... 5,054,000 11,159,000
Furniture, fixtures and other equipment................ 1,033,000 1,038,000
Less accumulated depreciation........................ 650,000 594,000
----------- -----------
Net furniture, fixtures and other equipment........ 383,000 444,000
----------- -----------
Net property and equipment......................... $80,548,000 $75,402,000
=========== ===========
</TABLE>
The Company sold its working and royalty interests in certain oil and gas
properties located in West Texas for net proceeds of $1,570,000 effective
April 30, 1996. The Company recognized a pre-tax gain of $1,037,000 on the
sale of the properties.
F-14
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SALE OF ONYX
The Company entered into an agreement on July 10, 1997, to sell its entire
50% membership interest in Onyx. The transaction was closed on July 31, 1997,
and was effective June 30, 1997. The proceeds consisted of a $6.3 million
sales price plus a $1.8 million repayment to the Company for advances formerly
made to Onyx for pipeline construction and other uses. The Company reduced its
domestic long-term debt by $7.8 million, concurrently, and recognized a pre-
tax book gain of approximately $5.0 million.
The following unaudited pro forma information has been prepared as if the
sale transaction had occurred on January 1, 1996 and that the proceeds from
the sale had been used to retire domestic long-term bank debt. Management
believes that the unaudited pro forma information presented is not necessarily
indicative of the financial results as they may be in the future or as they
might have been, had the Company been able to utilize proceeds from the sale
at the beginning of such period, to develop existing leases and to acquire
additional oil and gas properties. This information is presented for
comparative purposes only.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1996
------- -------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues................................................ $30,686 $28,689
Net income (loss) before dividends...................... (231) 2,963
Net income (loss) per share--basic...................... (.11) .08
</TABLE>
4. ACQUISITION OF TRAX PETROLEUMS LIMITED
The Company acquired Trax Petroleums Limited ("Trax"), a Canadian oil and
gas exploration and development company headquartered in Calgary, Alberta,
Canada effective January 31, 1996. The acquisition of 100% of the common stock
of Trax was made through NARL. The Trax headquarters remains in Calgary. The
aggregate acquisition purchase price was approximately $7,645,000 at January
31, 1996. As described in Note 1, Trax changed its name to Arch Petroleum Ltd.
("APL") effective March 31, 1997. The Company accounted for the acquisition of
APL as a purchase. No goodwill was recorded as the total purchase price was
allocated to the net assets of APL.
5. VOLUMETRIC PRODUCTION PAYMENT
The Company sold a volumetric production payment (the "VPP") to Enron
Reserve Acquisition Corp. ("Enron") for $24,300,000 on November 30, 1992. The
Company contracted to deliver to Enron the equivalent of approximately 17.9
Bcf of natural gas from Keystone beginning December 1, 1992. The Company is
responsible for all costs of production, development and marketing of these
dedicated gas volumes. The VPP gas reserves dedicated to Enron are excluded
from the Unaudited Supplemental Oil and Gas Disclosures, herein.
Certain rulings by the RRC in May 1993, which affected all the Keystone
operators, curtailed the production of natural gas from this field. These
production curtailments created delays in the Company's scheduled volume
deliveries to Enron. The VPP provides a mechanism to remedy both under and
over delivery of scheduled volumes. The under deliveries of production payment
volumes are converted into a volumetric obligation which is denominated in
dollars (the "Remedy Adjustment"), and which is calculated on a monthly basis
by multiplying the deficient volumes by the market price of the gas at the end
of that month. In addition, the VPP provides for interest at 10% per year on
the outstanding Remedy Adjustment. This Remedy Adjustment is satisfied by
proceeds received from the sale of dedicated hydrocarbons from Keystone in
excess of the future scheduled volume deliveries. The Company remitted
$312,000, $1,200,000 and $1,196,000 to Enron during 1997, 1996 and 1995,
respectively, in satisfaction of a portion of the Remedy Adjustment.
F-15
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1997, the RRC imposed further production limitations of natural gas
from Keystone. It became evident at that time that the Company would incur
significant future deficiencies and interest under the VPP. Accordingly, in
1997 the Company has reclassified amounts due under the Remedy Adjustment from
Deferred Revenue to Non-recourse Production Payment Obligation in the
accompanying financial statements. At December 31, 1997, the Company has
treated the past deficiencies as a repurchase of the volumetric production
payment and therefore approximately 6.0 Bcf associated with these deficiencies
have been restored to the Company's Unaudited Supplemental Oil and Gas
disclosures, herein and approximately $4.2 million net, has been capitalized
in oil and gas property costs. Repayment of the Remedy Adjustment is recourse
only to future production from Keystone.
The Company anticipates that the RRC will continue to impose production
limitations for Keystone in 1998 that will create additional deficiencies in
scheduled volume deliveries. The scheduled volumes deliverable during 1998
under the VPP at December 31, 1997 are approximately 1.9 Bcf. The Non-recourse
obligation recorded as a result of the Remedy Adjustment is approximately
$13.3 million at December 31, 1997.
The Company recognizes deferred revenue as deliveries of natural gas are
made under the VPP. The Company recognized deferred revenue of $2,050,000,
$2,309,000 and $3,457,000 during 1997, 1996 and 1995, respectively. Deferred
revenue was amortized at $1.20, $1.11 and $.83 during 1997, 1996 and 1995,
respectively. The amortization rate was reduced in years prior to 1997 to
provide for the additional volumes that would be delivered to Enron as
interest on the Remedy Adjustment. In 1997, interest expense of $1,049,000
relating to the Remedy Adjustment is reflected in the accompanying
consolidated financial statements.
6. LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Bank credit facilities................................. $30,000,000 $28,009,000
Term note.............................................. -- 2,500,000
Note payable--minority interest holder................. -- 744,000
Less current maturities............................ -- 1,119,000
----------- -----------
$30,000,000 $30,134,000
=========== ===========
</TABLE>
The bank credit facilities mature as follows: none in 1998, $30,000,000 in
1999 and none in 2000, 2001 and 2002, respectively.
The Company entered into two new bank credit facilities on February 20,
1996: the Third Restated Revolving Credit Loan Agreement among the Company and
Bank One, Texas, NA, the Agent bank, and other banks (the "Domestic Revolver")
and the Credit Agreement among APL and Bank of Montreal, the Canadian Agent
bank (the "Canadian Revolver"). The consolidated borrowing base was increased
to $37,000,000 from $35,000,000 by third amendment to both revolvers on August
1, 1997. The maturity date of both revolvers was extended from May 1, 1998 to
May 1, 1999 by fourth amendment on November 1, 1997. Each of the revolvers is
described briefly, as follows:
Domestic Revolver
The Domestic Revolver is a modification of the Company's former revolver
with Bank One, Texas, NA and its participant, the Bank of Scotland. The
principal changes to the former revolver were the inclusion of the Bank of
Montreal as an additional participant and the introduction of certain
language, terms and concepts such
F-16
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
that the Domestic Revolver and the Canadian Revolver will be accommodated in
pari passu sharing and general administration. This facility amends, restates
and supersedes in its entirety the former revolver.
The facility's commitment is $50,000,000 and the current domestic borrowing
base is $33,000,000. The borrowing base is designated the "U.S. Allocated
Borrowing Base" to distinguish it from the related "Canadian Allocated
Borrowing Base" contained and described in the Canadian Revolver below. As of
the first business day of each calendar quarter, so long as no event of
default has occurred and is continuing, the Company may allocate all or any
portion of its Consolidated Borrowing Base (the U.S., Domestic Revolver
borrowing base plus the APL properties, Canadian borrowing base, the "CBB") to
the Canadian facility provided that such amount shall not be less than the
outstanding balance of the Canadian Revolver at that time. The current
allocation of the CBB is $23,000,000 to the Domestic Revolver and $14,000,000
to the Canadian Revolver.
The Company may select an interest rate option with each borrowing advance
($500,000 minimum, in increments of $100,000) between a Floating Base Rate
("FBR") and an Interbank Offered Rate ("IOR"). The FBR is the rate of interest
announced from time to time by the Agent bank and usually will track the U.S.
national prime rate. The IOR is generally the London interbank market rate in
place two business days before the commencement of an interest period of a
Eurodollar advance. A Eurodollar advance is the principal amount under a note
with respect to which an IOR is selected. For purposes of the IOR, the
effective interest rate occurring on Eurodollar advance notes will be
increased relative to Borrowing Base Percentage ("BBP"), the aggregate of the
unpaid principal balance of the Domestic Revolver and the Canadian Revolver to
the CBB. The effective interest rate increase ranges from a low of 1.75% if
the BBP is less than 25% to a high of 2.50% if the BBP is more than 75%.
There is a commitment fee of one-half of one percent for the unused
borrowing base that accrues and is payable quarterly. The effective interest
rate was 8.09% in 1997. The security collateral requirements include
essentially all of the Company's oil and gas properties.
Canadian Revolver
The Canadian Revolver is similar to the Domestic Revolver in all significant
aspects. The loans under the Canadian Revolver are guaranteed by the Company
("the Guaranty") and are secured by, among other things, a first lien on 65%
of the issued and outstanding shares of NARL's common stock and a first lien
on the oil and gas properties of the Company which serve as security in the
Domestic Revolver. The Guaranty is intended to rank pari passu with the
Companys' obligations under the Domestic Revolver. The Canadian Revolver is
also guaranteed by NARL. The facility 's commitment is US $14,000,000 and the
current Canadian borrowing base is set at US $4,000,000.
The various interest rates used in the Canadian Revolver are based on the
LIBOR or Prime Rate and are adjusted for applicable margins based on the ratio
of aggregate outstanding balances relative to CBB (similar to the Domestic
Revolver) and range from a low of 0.75% if the CBB is less than 25% to a high
of 2.25% if the CBB is more than 75%.
The proceeds of each advance may be used to acquire additional borrowing
base properties, to drill and recomplete oil and gas wells and for general
corporate purposes. Repayments shall be made relative to the currency used in
each borrowing. The effective interest rate was 8.14% in 1997. There is a
commitment fee of one half of one percent for the unused borrowing base which
accrues and is payable on the first day of each quarter.
The APL borrowing base, which is currently US $4,000,000, is the loan value
determined by the Canadian Agent bank in its sole discretion based on its
calculations of value of borrowing base properties utilizing current and
customary procedures and standards for petroleum industry customers.
F-17
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Term Note
The Onyx Term Loan Agreement (the "Onyx Note"), which Onyx entered into with
the Bank of Scotland on March 30, 1994, as amended, is a separate facility and
provided Onyx with $5,000,000. The Onyx Note bears interest at national prime
rate plus one-half of one percent. Interest on the unpaid principal amount of
the note is payable quarterly. The unpaid principal totaled $2,501,000 at
December 31, 1996, and was payable in eighteen quarterly installments ending
on March 31, 1999. Current maturities of the Onyx Note totaled $1,111,000 at
December 31, 1996. The Onyx Note is collateralized by certain of Onyx's
pipelines, gathering facilities and related transportation contracts. In
addition, the Onyx Note was guaranteed by the Company. Onyx also had a note
payable of $785,000 including interest of $41,000 as of December 31, 1996,
payable to Sejita Natural Gas, L.C., a 50% interest holder in Onyx. This note
was subordinated to the Company's bank debt and was due on August 31, 1999.
The Company sold its interest in Onyx effective June 30, 1997. As a result
of the sale, the Company is no longer a party to the Onyx Note described above
and does not guarantee that facility as of July 31, 1997. All collateral
requirements and security instruments formerly associated with the Onyx Note
were released and clear as regards the Company as of July 31, 1997.
Both the Domestic and Canadian Revolvers contain normal and standard
covenants generally found in lending agreements. Among other things, these
covenants prohibit the declaration and payment of cash dividends on the
Company's common stock. In addition, the covenants stipulate the maintenance
of financial criteria including: a minimum level of net worth, a certain
current ratio, a certain debt to net worth ratio and a defined net income in
excess of scheduled interest and principal payments. The Company and APL are
currently in compliance with the covenants in the loan agreements. The Company
has no other unused lines of credit.
7. EXCHANGEABLE CONVERTIBLE PREFERRED STOCK AND CONVERTIBLE SUBORDINATED NOTES
On October 20, 1994, the Company sold the following securities to four
institutional investors (the "Investors") in the Placement: (a) 727,273 shares
of its 8% Exchangeable Convertible Preferred Stock (the "Preferred Stock"),
$0.01 par value, having an aggregate liquidation preference of $20,000,000,
(b) $500,000 aggregate principal amount of its 9.75% Series A Convertible
Subordinated Notes due 2004 (the "Series A Notes") and (c) $4,500,000
aggregate principal amount of its Adjustable Rate Series B Notes due 2004 (the
"Series B Notes" and, together with the Series A Notes, the "Notes"). The
Series B Notes currently bear interest at an annual rate of 9.75%. Gross
proceeds from the Placement were $20,000,000 for the Preferred Stock and
$5,000,000 for the Notes. The proceeds were used to pay down the Company's
bank debt. The Company incurred $916,000 of debt issuance costs related to the
Placement, which are being amortized over the period the Preferred Stock and
Notes are outstanding.
The Preferred Stock accrues annual dividends at the rate of $2.20 per share
and the dividends are cumulative. Dividends are payable April 20 and October
20 of each year and commenced April 20, 1995. The Company paid $1,600,000 in
dividends on the Preferred Stock in 1997, 1996 and 1995, respectively. If
dividends remain unpaid for more than one semiannual period, the holders of
the Preferred Stock have the right to elect two additional directors to the
Company's board of directors until such time that all cumulative dividends
have been paid. The Preferred Stock has a liquidation preference of $27.50 per
share and is exchangeable in whole at the option of the Company, for its
10.563% Series C Convertible Subordinated Notes due 2004 (the "Series C
Notes"). The Series C Notes possess attributes similar to the Series A Notes,
except for the higher rate of interest associated with the Series C Notes. The
Preferred Stock is exchangeable on April 20 and October 20 of each year.
F-18
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
After October 20, 1998, and upon the achievement of certain stated
objectives for the market price of its common stock, the Company earns the
right to require the conversion of all of the Preferred Stock and the Notes
into common stock of the Company. The market price objectives are as follows:
after August 20, 1998, the closing price of the Company's common stock on the
NASDAQ National Market System, or similarly recognized system, must list for a
period of sixty consecutive trading days at a price equal to or greater than
125% of a certain target price. The target price ranges from $2.837 at October
20, 1998 to $2.764 at October 20, 2003. Each share of Preferred Stock is
convertible, at any time at the option of the holder thereof, into shares of
common stock of the Company, par value $0.01 per share, at a price of $2.75
per share. Based on the number of shares (17,321,804) of the Company's common
stock outstanding at December 31, 1997, if all the Preferred Stock and Notes
were converted into common stock of the Company, 26,412,713 shares of common
stock would be outstanding. Upon such conversion the institutional investors,
being Travelers, Travelers Life, Connecticut General and CIGNA Mezzanine would
own 16.6%, 4.2%, 4.9% and 8.9% of the Company's common stock, respectively.
The Preferred Stock entitles each holder to one vote per share on an as
converted basis. The vote or consent of at least 66 2/3% (or at least a
majority in the event the Investors and their affiliates own less than 66 2/3%
of the Preferred Stock and Notes on an as converted basis) of the issued and
outstanding shares of Preferred Stock, voting as a separate class, is required
for the Company to (a) issue or authorize the issuance of any class or series
of equity securities senior to the Preferred Stock, (b) change the par value
of the Preferred Stock, (c) alter or change the powers, preferences or special
rights of the shares of Preferred Stock or any other provision of the
Company's Certificate of Incorporation so as to affect the shares of Preferred
Stock adversely, (d) merge, consolidate or amalgamate with other person or (e)
sell, lease, transfer or otherwise dispose of all or substantially all of the
assets of the Company.
Interest on the unpaid principal balance of the Notes is payable quarterly
and commenced January 20, 1995. The Company paid $488,000 in interest on the
Notes in 1997, 1996 and 1995, respectively. The Company has the option at any
time on or after October 20, 1998, to prepay the Notes in whole or in part,
together with accrued interest, plus the applicable prepayment premium
(expressed as a percentage of the principal amount to be prepaid). The
prepayment premium ranges from 3.150% at October 20, 1998 to 0.525% at October
20, 2003.
On or after October 20, 1998, the Preferred Stock is redeemable, in whole or
in part at any time at the option of the Company at redemption prices ranging
from $28.366 per share at October 20, 1998 to $27.644 per share at October 20,
2003. On October 20, 2004 all outstanding shares of the Preferred Stock are
mandatorily redeemable by the Company at a price of $27.50 plus accrued and
unpaid dividends.
F-19
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
Deferred taxes are provided for temporary differences between the financial
reporting basis and federal income tax basis of the Company's assets,
liabilities and other tax attributes. Deferred tax liabilities and assets are
comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Domestic:
Gross deferred tax liabilities:
Depreciation, depletion and intangible drilling
costs.............................................. $12,942,000 $9,628,000
Volumetric production payment....................... -- 547,000
----------- ----------
12,942,000 10,175,000
Gross deferred tax assets:
Net operating loss carryforwards.................... 3,452,000 4,884,000
Volumetric production payment....................... 1,712,000 --
Statutory depletion carryforwards................... 1,042,000 1,042,000
Alternative minimum tax credit carryforwards........ 778,000 698,000
Investment tax credit carryforwards................. 98,000 98,000
Other............................................... 90,000 3,000
----------- ----------
7,172,000 6,725,000
----------- ----------
Long term deferred tax liability...................... $ 5,770,000 $3,450,000
=========== ==========
Foreign:
Gross deferred tax assets:
Net operating loss carryforwards.................... $ 109,000 $ 24,000
Excess of net tax basis over book basis of property. 1,279,000 477,000
Excess of net tax basis over book basis of
liabilities........................................ 123,000 122,000
Other............................................... -- 82,000
----------- ----------
Long term deferred tax asset.......................... $ 1,511,000 $ 705,000
=========== ==========
</TABLE>
F-20
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Domestic..................................... $6,683,000 $5,260,000 $(250,000)
Foreign...................................... (2,179,000) (800,000) --
---------- ---------- ---------
$4,504,000 $4,460,000 $(250,000)
========== ========== =========
</TABLE>
The income tax provision consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Current:
U.S. Federal............................... $ 89,000 $ 107,000 $ --
Foreign.................................... -- -- --
---------- ---------- --------
89,000 107,000 --
Deferred:
U.S. Federal............................... 2,427,000 1,611,000 (86,000)
Foreign.................................... (840,000) (280,000) --
---------- ---------- --------
1,587,000 1,331,000 (86,000)
---------- ---------- --------
Income tax expense (benefit)................. $1,676,000 $1,438,000 $(86,000)
========== ========== ========
</TABLE>
The provision for income taxes differs from the amount determined by
applying the U.S. federal statutory rate to income before income taxes as a
result of the following differences:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Provision based on federal statutory rate.................. 35.0% 34.0% (34.0%)
Statutory depletion........................................ -- (3.1%) (21.2%)
Effects on foreign taxes................................... -- (0.2%) --
State tax and other........................................ 2.5% 1.6% 21.2%
---- ---- -----
37.5% 32.3% (34.0%)
==== ==== =====
</TABLE>
At December 31, 1997, the Company has gross domestic tax benefit
carryforwards of approximately $9,148,000, $3,656,000, $692,000 and $38,000
relating to net operating losses, statutory depletion, alternative minimum tax
credits and investment tax credits, respectively, and gross foreign tax
benefits of $245,000 relating to net operating losses which expire at various
dates beginning in 2000, except for statutory depletion which does not have an
expiration date.
As a result of the acquisition of Trax, the utilization of a portion of the
Company's deferred assets are subject to limitations imposed by various
Canadian tax authorities. However, based upon the Company's Canadian reserves
and its estimated future net income related thereto, it is management's belief
that it is more likely than not that its Canadian deferred tax assets will be
utilized.
F-21
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. TRANSACTIONS WITH RELATED PARTIES
The Board of Directors of the Company authorized notes receivable from key
employees and directors in 1991, 1992 and 1993, for purposes of exercising
stock options. The notes bear interest at the Domestic Revolver interest rate
and all of the notes are secured by stock certificates that were issued upon
exercise of the stock options by each employee. The notes mature May 13, 1999.
The balances due to the Company in this regard, including interest, were
$1,047,000 and $1,022,000 at December 31, 1997 and 1996, respectively. These
amounts are offset against equity on the Company's consolidated balance sheet.
There have not been any additional notes of this nature since 1993.
The Board of Directors of the Company also authorized one time cash advances
to certain officers in 1993 in exchange for notes receivable. These notes also
bear interest at the Domestic Revolver interest rate and are secured by stock
certificates of the Company owned by those individuals. The notes mature May
13, 1999. The notes, including interest, total $1,872,000 and $1,759,000 at
December 31, 1997 and 1996, respectively. The Company recognized interest
income on all its outstanding notes receivable from officers, directors and
key employees of $179,000, $174,000 and $188,000 during 1997, 1996 and 1995,
respectively.
Onyx had transactions in the ordinary course of business with Corpus Christi
Gas Marketing ("CCGM"). CCGM's president serves as one of Onyx's Managers. At
December 31, 1996, Onyx had a gas imbalance payable of $120,000 to CCGM.
The consolidated financial statements include certain amounts and balances
that arise from transactions with related parties:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 AT DECEMBER 31, 1996
------------------- ---------------------
ACCOUNTS ACCOUNTS ACCOUNTS ACCOUNTS
RECEIVABLE PAYABLE RECEIVABLE PAYABLE
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
TDC, net.............................. $2,135,000 $-- $1,551,000 $ --
CCGM.................................. -- -- 275,000 1,911,000
Cedar Energies, Inc................... -- -- -- 60,000
---------- --- ---------- ----------
$2,135,000 $-- $1,826,000 $1,971,000
========== === ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR YEAR ENDED FOR YEAR ENDED FOR YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ---------------------- ------------------
PURCHASES PURCHASES PURCHASES
FROM SALES TO FROM SALES TO FROM SALES TO
----------- ---------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
CCGM.................... $10,246,000 $1,518,000 $10,196,000 $1,120,000 $ 39,000 $265,000
Sejita Natural Gas...... -- -- -- -- 8,000 --
Libra Marketing......... -- -- -- -- 5,000 --
Cedar Energies, Inc..... 157,000 -- 266,000 -- 239,000 --
Puma Resources.......... -- -- -- -- -- 171,000
----------- ---------- ----------- ---------- -------- --------
$10,403,000 $1,518,000 $10,462,000 $1,120,000 $291,000 $436,000
=========== ========== =========== ========== ======== ========
</TABLE>
The Company rented an aircraft from TDC, on an as-needed basis, prior to
1997. Charges for this service were billed to the Company based on time used.
Rental charges amounted to $20,000 and $39,000 for the years ended December
31, 1996 and 1995, respectively. TDC is the operator of certain wells in North
Texas in which the Company owns interests. The increase in the receivable from
TDC in 1997 primarily relates to revenues earned for 1997 production from
those wells. TDC paid the Company those revenues subsequent to December 31,
1997. Commencing January 1, 1997, the net unpaid balance due to the Company by
TDC accrues interest at the Company's Domestic Revolver interest rate. Under
agreement with TDC, the Company has the
F-22
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
right of offset with TDC. Accordingly, the 1997 and 1996 TDC balances are
shown net in the financial statements.
10. MAJOR CUSTOMERS
The following major customers represent 10% or more of total operating
revenues by industry segment for the years ended December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
OIL AND GAS 1997 1996 1995
- ----------- ---- ---- ----
<S> <C> <C> <C>
Genesis Crude Oil, LP............................................ 29% 32% 13%
Enron Gas Marketing.............................................. 12% 23% 31%
Richardson Products Company...................................... 21% * *
Chevron USA Inc.................................................. * 12% 31%
</TABLE>
The Company's principal products are oil and natural gas. The principal
market for such products is primarily the Southwestern United States and
Western Canada wherein the Company's oil and gas properties are physically
located. The methods of distribution of such products are by the sale of such
products at the wellhead to appropriate gathering companies operating in the
geographic area of production.
<TABLE>
<CAPTION>
NATURAL GAS PIPELINES 1997 1996 1995
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Central Power and Light.......................................... 50% 61% 58%
</TABLE>
In its natural gas marketing and transmission activities, the Company buys
and resells natural gas, receiving a gross margin or spread equal to the
difference between the purchase price and the resale price of such natural
gas. In addition, the Company receives a fee for transmission of natural gas
over pipeline systems owned by the Company.
* -- Less than 10% in period.
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS:
The Company leases office space, an airplane, office equipment and vehicles
under various lease agreements with primary lease terms ranging from three to
five years. Rental expense on these leases was $365,000, $249,000 and $202,000
in the years ended December 31, 1997, 1996 and 1995, respectively. Aggregate
future minimum rental payments required pursuant to noncancellable leases are
as follow: 1998--$377,000, 1999--$313,000, 2000--$211,000, 2001--$131,000 and
2002--$3,000.
CONTINGENCIES:
The Company has entered into employment agreements with certain key
employees in 1996 and 1997. Among other events, in the event that following a
change of control employment is terminated for those key employees for reasons
specified in the agreements, the employees would receive a lump sum payment at
the time of termination as specified in the agreement. There is a calculated
ceiling in the agreement. As of February 28, 1998, the maximum payout
attributable to these employment agreements is approximately $1,600,000.
From time to time the Company is involved in litigation arising in the
normal course of business. In the opinion of management, the Company's
ultimate liability, if any, from lawsuits currently pending would not
materially affect the Company's financial condition or operations.
F-23
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK OPTIONS
The Company's 1993 Stock Option plan ("the 93 Plan"), is an incentive stock
option plan under which 1,660,000 shares are reserved for issuance to
employees in the ten year period commencing June 1, 1993. The exercise price
will be set by the 93 Plan Committee in its best judgment but shall not be
less than 100% of the fair market value per share at grant date. The majority
of currently outstanding options vest over a three year period (33%, 66%,
100%). At December 31, 1997, 1,310,700 shares were available for grant.
Unaudited pro forma information regarding net income and earnings per share
is required by SFAS No. 123, if material, and has been determined as if the
Company had accounted for its employee stock options under the fair value
method of that statement. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997 and 1995,
respectively: no dividend yield, expected volatility of 48% and 37%, risk free
interest rate of 6% and 7% and expected lives of four and five years. There
were no option grants during 1996.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Applying the
effect of the pro forma expense did not materially affect the Company's 1997,
1996 and 1995 reported net income (loss) and income (loss) per common share.
Stock option transactions, in the period from January 1, 1995 to December
31, 1997 are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 319,300 $1.84 361,700 $1.84 292,700 $1.81
Granted................. 75,000 2.89 -- 75,000 1.94
Exercised............... (20,000) 2.00 (400) 1.81 --
Forfeited............... (35,000) 1.97 (42,000) 1.81 (6,000) 1.81
------- ----- ------- ----- ------- -----
Outstanding at end of
year................... 339,300 $2.05 319,300 $1.84 361,700 $1.84
======= ===== ======= ===== ======= =====
Exercisable at end of
year................... 242,600 $1.87 259,300 $1.82 230,300 $1.82
Weighted average fair
value of options
granted during the
year................... $ 1.32 -- $ 0.85
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
WTD. AVG.
CONTRACTUAL WTD. AVG. WTD. AVG.
RANGE OF LIFE IN EXERCISE EXERCISE
GRANT DATE EXPIRATION DATE PRICES OUTSTANDING YEARS PRICE EXERCISABLE PRICE
---------- ------------------ ----------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
July 7, 1993............ May 31, 2003 $1.81 214,300 5.41 214,300
May 20, 1995............ May 20, 2000 1.81 50,000 2.39 20,000
March 1, 1997........... March 1, 2002 2.56 30,000 4.16 --
April 8, 1997........... April 8, 2002 2.69 10,000 4.25 --
May 26, 1997............ May 26, 2002 2.91 10,000 4.40 --
July 9, 1997............ July 9, 2000 3.22 10,000 2.50 3,300
September 15, 1997...... September 15, 2000 3.44 15,000 2.71 5,000
------- ---- -------
$1.81-$3.44 339,300 4.59 $2.05 242,600 $1.87
======= ==== ===== ======= =====
</TABLE>
F-24
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. GEOGRAPHIC AND INDUSTRY SEGMENT INFORMATION
The Company operates in two industry segments: oil and gas exploration,
development and production and natural gas marketing, transportation and
distribution. In addition, the Company has oil and gas operations in the
United States and Western Canada. Operating profit by segment is defined as
revenues less operating expenses. Income and expense items excluded from
operating profit include: interest income, other income, interest expense,
minority interest and income taxes. Identifiable assets are those assets used
exclusively in the operations of each business segment. Operating results for
the oil and gas segment of the Company are significantly affected by the
Company's ability to acquire reserves in the future through the development of
existing properties and also its ability to select and acquire suitable
prospects for exploratory drilling or development. The buying, selling and
transporting of natural gas by the Company's pipeline segment is a highly
competitive business. The Company markets natural gas to customers who can
purchase natural gas from various suppliers. Marketing of both oil and natural
gas is affected in part by domestic production levels, imports, the proximity
of pipelines to producing properties and the regulation by states of allowable
rates of production. Cash flow from operations for all segments may be
affected to a significant degree by fluctuations in prices that are brought on
by factors beyond the Company's control. All of these variable factors are
dependent on economic and political forces that cannot be accurately predicted
in advance.
Financial information by geographic and industry segment for the years ended
December 31, 1997, 1996 and 1995 follows. Prior to 1996, the Company operated
only in the United States.
<TABLE>
<CAPTION>
NATURAL
OIL AND GAS
GAS PIPELINES TOTAL
------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
1997
Identifiable assets................................. $86,721 $ 6,450 $ 93,171
Revenues (1)........................................ 23,750 56,438 80,188
Exploration costs and expenses...................... 1,134 -- 1,134
Depletion, depreciation and amortization............ 6,782 329 7,111
Operating income.................................... 2,063 6,255 8,318
Capital expenditures................................ 14,108 443 14,551
1996
Identifiable assets................................. $75,785 $25,254 $101,039
Revenues (1)........................................ 24,914 74,309 99,223
Exploration costs and expenses...................... 593 -- 593
Depletion, depreciation and amortization............ 6,460 444 6,904
Operating income.................................... 5,758 1,475 7,233
Capital expenditures................................ 8,421 913 9,334
1995
Identifiable assets................................. $61,547 $18,125 $ 79,672
Revenues............................................ 16,599 49,249 65,848
Exploration costs and expenses...................... 898 -- 898
Depletion, depreciation and amortization............ 4,973 416 5,389
Operating income.................................... 648 670 1,318
Capital expenditures................................ 6,164 264 6,428
</TABLE>
F-25
<PAGE>
ARCH PETROLEUM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
1997
Identifiable assets.................................. $79,343 $13,828 $ 93,171
Revenues (1)......................................... 77,521 2,667 80,188
Exploration costs and expenses....................... 401 733 1,134
Depletion, depreciation and amortization............. 5,627 1,484 7,111
Operating income (loss).............................. 9,737 (1,419) 8,318
Capital expenditures................................. 11,471 3,080 14,551
1996
Identifiable assets.................................. $89,672 $11,367 $101,039
Revenues (1)......................................... 96,785 2,438 99,223
Exploration costs and expenses....................... 200 393 593
Depreciation and amortization........................ 5,763 1,141 6,904
Operating income (loss).............................. 7,447 (214) 7,233
Capital expenditures................................. 6,991 2,343 9,334
</TABLE>
- --------
(1) Includes gain on sale of natural gas pipeline of $5,046,000 in 1997 and
gain on sale of domestic oil and gas properties of $1,037,000 in 1996.
15. UNAUDITED QUARTERLY FINANCIAL DATA
A summary of consolidated financial data for 1997 and 1996 follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Operating revenues (1) (3).................. $33,142 $27,307 $12,634 $ 7,779
Exploration costs and expenses.............. 75 127 649 283
Gross profit (3)............................ 3,975 2,644 6,554 1,508
Net income (loss)........................... 900 55 2,919 (1,046)
Net income (loss) per share (1)--basic...... $ 0.03 $ (0.02) $ 0.15 $ (0.08)
Net income per share (1)--diluted........... N/A N/A $ 0.12 N/A
Year Ended December 31, 1996
Operating revenues (1)...................... $19,765 $23,416 $23,071 $33,674
Exploration costs and expenses.............. 51 127 312 103
Gross profit................................ 2,523 3,924 2,864 3,728
Net income.................................. 488 938 595 1,001
Net income per share (2)--basic............. $ 0.01 $ 0.03 $ 0.01 $ 0.04
Net income per share (2)--diluted........... N/A N/A N/A N/A
</TABLE>
Gross profit represents income before income taxes excluding general and
administrative expense, interest expense, foreign currency transaction loss and
minority interest in income of consolidated subsidiaries.
- --------
(1) Includes gain on sale of natural gas pipeline of $5,046,000 in 1997 and
gain on sale of domestic oil and gas properties of $1,037,000 in 1996.
(2) After dividends on preferred stock.
(3) Includes $224,000, $233,000, $273,000 and none which has been reclassified
as additional gas sales in accordance with the accounting for the Remedy
Adjustment discussed in Note 5.
F-26
<PAGE>
ARCH PETROLEUM INC.
UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES
ESTIMATES OF RESERVES AND FUTURE PRODUCTION PERFORMANCE
ARE SUBJECTIVE AND MAY CHANGE MATERIALLY AS ACTUAL
PRODUCTION INFORMATION BECOMES AVAILABLE
The following table sets forth the proved oil and gas reserves of the Company
for the years ended December 31, 1997, 1996 and 1995, and the changes therein.
All of the Company's oil and gas activities are located within the United
States and Western Canada. None of the Company's reserves are subject to long-
term supply agreements with a governmental agency.
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Natural Gas (Mcf)
Net proved reserves, December 31, 1994....... 61,546,200 -- 61,546,200
Extensions and discoveries................. 4,138,000 -- 4,138,000
Production................................. (4,291,900) -- (4,291,900)
Revision of previous estimates............. (106,000) -- (106,000)
---------- --------- ----------
Net proved reserves, December 31, 1995....... 61,286,300 -- 61,286,300
Purchases of minerals in place............. -- 1,015,200 1,015,200
Sales of minerals in place................. (1,191,500) -- (1,191,500)
Extensions and discoveries................. 1,776,000 273,000 2,049,000
Production................................. (3,845,200) (152,200) (3,997,400)
Revisions of previous estimates............ 1,095,300 -- 1,095,300
---------- --------- ----------
Net proved reserves, December 31, 1996....... 59,120,900 1,136,000 60,256,900
Extensions and discoveries................. 3,889,000 5,246,000 9,135,000
Production................................. (3,362,600) (181,200) (3,543,800)
Revisions of previous estimates (1)........ 8,783,400 374,200 9,157,600
---------- --------- ----------
Net proved reserves, December 31, 1997....... 68,430,700 6,575,000 75,005,700
========== ========= ==========
Oil (Bbl)
Net proved reserves, December 31, 1994....... 3,586,400 -- 3,586,400
Extensions and discoveries................. 1,126,000 -- 1,126,000
Production................................. (382,100) -- (382,100)
Revision of previous estimates............. (300,100) -- (300,100)
---------- --------- ----------
Net proved reserves, December 31, 1995....... 4,030,200 -- 4,030,200
Purchases of minerals in place............. -- 682,500 682,500
Sales of minerals in place................. (37,700) -- (37,700)
Extensions and discoveries................. 395,000 294,700 689,700
Production................................. (459,300) (120,300) (579,600)
Revision of previous estimates............. (67,200) -- (67,200)
---------- --------- ----------
Net proved reserves, December 31, 1996....... 3,861,000 856,900 4,717,900
Extensions and discoveries................. 793,500 82,500 876,000
Production................................. (528,400) (128,600) (657,000)
Revision of previous estimates............. 934,400 2,100 936,500
---------- --------- ----------
Net proved reserves, December 31, 1997....... 5,060,500 812,900 5,873,400
========== ========= ==========
</TABLE>
- --------
(1) Includes approximately 6.0 Bcf associated with deficiencies related to the
Remedy Adjustment discussed in Note 5.
F-27
<PAGE>
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Proved developed reserves:
Natural gas (Mcf)
December 31, 1995............................ 55,628,500 -- 55,628,500
December 31, 1996............................ 54,981,200 504,000 55,485,200
December 31, 1997............................ 65,324,800 6,489,000 71,813,800
Oil (Bbl)
December 31, 1995............................ 2,993,600 -- 2,993,600
December 31, 1996............................ 3,128,400 809,900 3,938,300
December 31, 1997............................ 4,475,600 693,800 5,169,400
</TABLE>
The Company's proved reserves exclude 1.9 Bcf, 8.7 Bcf and 11.9 Bcf of gas
reserves at December 31, 1997, 1996 and 1995, respectively, which were sold
under the VPP in December 1992 for $1.30 per Mcf. The Company is required to
deliver these gas production volumes through July 1998 and thereafter under
the terms of the VPP agreement. The revenue associated with these reserves,
which is deferred, is recognized as production is delivered.
COSTS INCURRED IN OIL AND GAS ACTIVITIES
Costs incurred in oil and gas property acquisition, exploration and
development activities are set forth below:
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
1995
Acquisition of properties:
Proved...................................... $ 274,000 $ -- $ 274,000
Unproved.................................... 108,000 -- 108,000
Exploration................................... 898,000 -- 898,000
Development................................... 4,937,000 -- 4,937,000
1996
Acquisition of properties:
Proved...................................... $ 442,000 $6,667,000 $7,109,000
Unproved.................................... -- 2,185,000 2,185,000
Exploration................................... 125,000 1,590,000 1,715,000
Development................................... 5,514,000 400,000 5,914,000
1997
Acquisition of properties:
Proved...................................... $ 78,000 $ 220,000 $ 298,000
Unproved.................................... 17,000 322,000 339,000
Exploration................................... 623,000 733,000 1,356,000
Development................................... 10,323,000 1,792,000 12,115,000
</TABLE>
F-28
<PAGE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
1995
Future cash inflows...................... $182,785,400 $ -- $182,785,400
Future production and development costs.. 66,311,500 -- 66,311,500
Future income tax expenses............... 22,434,000 -- 22,434,000
------------ ----------- ------------
Future net cash flows undiscounted....... 94,039,900 -- 94,039,900
10% annual discount for estimated timing
future net cash flows................... 42,127,800 -- 42,127,800
------------ ----------- ------------
Standardized measure of discounted future
net cash flows.......................... $ 51,912,100 $ -- $ 51,912,100
============ =========== ============
1996
Future cash inflows...................... $309,315,400 $29,589,400 $338,904,800
Future production and development costs.. 118,878,800 12,846,900 131,725,700
Future income tax expenses............... 50,507,300 3,898,600 54,405,900
------------ ----------- ------------
Future net cash flows undiscounted....... 139,929,300 12,843,900 152,773,200
10% annual discount for estimated timing
of cash flows........................... 65,201,200 3,758,500 68,959,700
------------ ----------- ------------
Standardized measure of discounted future
net cash flows.......................... $ 74,728,100 $ 9,085,400 $ 83,813,500
============ =========== ============
1997
Future cash inflows...................... $239,670,400 $21,085,100 $260,755,500
Future production and development costs.. 117,082,300 8,470,600 125,552,900
Future income tax expenses............... 27,908,300 1,527,300 29,435,600
------------ ----------- ------------
Future net cash flows undiscounted....... 94,679,800 11,087,200 105,767,000
10% annual discount for estimated timing
of cash flows........................... 40,516,200 3,684,700 44,200,900
------------ ----------- ------------
Standardized measure of discounted future
net cash flows.......................... $ 54,163,600 $ 7,402,500 $ 61,566,100
============ =========== ============
</TABLE>
Future net cash flows were computed using year-end prices and costs. For the
reserve reports as of December 31, 1997, 1996 and 1995, respectively, the
average domestic prices were $16.89, $24.97 and $18.82 for oil and $2.25,
$3.60 and $1.76 for gas. For the reserve reports as of December 31, 1997, and
1996, respectively, the average foreign prices were $16.31 and $25.41 for oil
and $1.12 and $1.84 for gas. Oil and gas prices at December 31, 1996 were
higher than those realized on average by the Company over the past five years.
Also, prices at the end of the first quarter of 1998 are below those at the
end of 1997. Changes in prices could have a material effect on reserve
estimates and related future net cash flow amounts.
The standardized measure of discounted future net cash flows at December 31,
1997, 1996 and 1995, as presented in the table above, excludes future net cash
flows associated with the VPP as described in Note 5. The discounted future
net cash flows related to the VPP approximates $436,400, $2,960,600 and
$11,672,700 which amounts are net of discounted future production costs of
$1,856,000, $3,831,000, and $1,912,700 at December 31, 1997, 1996 and 1995,
respectively.
F-29
<PAGE>
The Company operates in an industry that is subject to volatile prices for
its products. The standardized measure of discounted future net cash flows may
be affected to a significant degree by fluctuations in prices that are brought
on by factors beyond the Company's control. The following are the principal
sources of change in the standardized measure of discounted future net cash
flows:
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
December 31, 1994........................ $48,520,400 $ -- $48,520,400
Net changes in prices and costs,
exclusive of properties purchased and
sold.................................. 2,736,100 -- 2,736,100
Net change in income taxes............. 174,100 -- 174,100
Sales of oil and gas produced, net of
production costs...................... (6,001,800) -- (6,001,800)
Revisions of previous quantity
estimates............................. (1,464,900) -- (1,464,900)
Extensions and discoveries, less
related costs......................... 9,241,100 -- 9,241,100
Changes in estimated future development
costs................................. (5,899,500) -- (5,899,500)
Development costs incurred previously
estimated............................. 740,700 -- 740,700
Accretion of discount.................. 4,852,000 -- 4,852,000
Timing and other....................... (986,100) -- (986,100)
----------- ---------- -----------
December 31, 1995........................ 51,912,100 -- 51,912,100
Purchases of minerals in place......... 2,176,600 9,473,800 11,650,400
Sales of minerals in place............. (595,800) -- (595,800)
Net changes in prices and costs,
exclusive of properties purchased and
sold.................................. 46,473,300 -- 46,473,300
Net change in income taxes............. (14,589,000) (2,757,700) (17,346,700)
Sales of oil and gas produced, net of
production costs...................... (11,479,600) (1,420,500) (12,900,100)
Revisions of previous quantity
estimates............................. 961,900 -- 961,900
Extensions and discoveries, less
related costs......................... 5,719,000 3,789,800 9,508,800
Changes in estimated future operating
costs................................. (13,709,200) -- (13,709,200)
Changes in estimated future development
costs................................. (232,400) -- (232,400)
Development costs incurred previously
estimated............................. 3,742,000 -- 3,742,000
Accretion of discount.................. 5,191,200 -- 5,191,200
Timing and other....................... (842,000) -- (842,000)
----------- ---------- -----------
December 31, 1996........................ 74,728,100 9,085,400 83,813,500
Net changes in prices and costs,
exclusive of properties purchased and
sold.................................. (48,688,400) (4,479,500) (53,167,900)
Net change in income taxes............. 20,847,300 1,612,500 22,459,800
Sales of oil and gas produced, net of
production costs...................... (11,695,700) (1,612,000) (13,307,700)
Revisions of previous quantity
estimates............................. 9,593,100 420,600 10,013,700
Extensions and discoveries, less
related costs......................... 12,535,200 2,788,800 15,324,000
Changes in estimated future development
costs................................. (2,085,400) (293,300) (2,378,700)
Development costs incurred previously
estimated............................. 3,389,100 572,400 3,961,500
Accretion of discount.................. 7,472,800 908,500 8,381,300
Timing and other....................... (11,932,500) (1,600,900) (13,533,400)
----------- ---------- -----------
December 31, 1997........................ $54,163,600 $7,402,500 $61,566,100
=========== ========== ===========
</TABLE>
F-30
<PAGE>
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
1995
Revenues................ $16,599,000 $ -- $16,599,000
Production costs........ (7,176,000) -- (7,176,000)
Exploration expenses.... (898,000) -- (898,000)
Depletion, depreciation
and amortization....... (4,973,000) -- (4,973,000)
----------- ---------- -----------
3,552,000 -- 3,552,000
Income tax expense...... (1,208,000) -- (1,208,000)
----------- ---------- -----------
Results of operations... $ 2,344,000 $ -- $ 2,344,000
=========== ========== ===========
1996
Revenues................ $21,439,000 $2,438,000 $23,877,000
Production costs........ (7,591,000) (490,000) (8,081,000)
Exploration expenses.... (200,000) (393,000) (593,000)
Depletion, depreciation
and amortization....... (5,321,000) (1,139,000) (6,460,000)
----------- ---------- -----------
8,327,000 416,000 8,743,000
Income tax (expense)
benefit................ (2,681,000) 280,000 (2,401,000)
----------- ---------- -----------
Results of operations... $ 5,646,000 $ 696,000 $ 6,342,000
=========== ========== ===========
1997
Revenues................ $21,083,000 $2,667,000 $23,750,000
Production costs........ (7,912,000) (850,000) (8,762,000)
Exploration expenses.... (401,000) (733,000) (1,134,000)
Depletion, depreciation
and amortization....... (5,298,000) (1,484,000) (6,782,000)
----------- ---------- -----------
7,472,000 (400,000) 7,072,000
Income tax (expense)
benefit................ (2,516,000) 840,000 (1,676,000)
----------- ---------- -----------
Results of operations... $ 4,956,000 $ 440,000 $ 5,396,000
=========== ========== ===========
</TABLE>
F-31
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
POGO PRODUCING COMPANY
ALPHAC, INC.
AND
ARCH PETROLEUM INC.
DATED AS OF MAY 28, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
1.1 The Merger; Effective Time of the Merger......................... 2
1.2 Closing.......................................................... 2
1.3 Effects of the Merger............................................ 2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK AND CERTAIN INDEBTEDNESS OF THE
CONSTITUENT CORPORATIONS;EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock.......................................... 2
2.2 Exchange of Certificates......................................... 3
2.3 Effect on Certain Indebtedness................................... 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Arch............................ 6
3.2 Representations and Warranties of Pogo and Sub.................... 21
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS OF ARCH
4.1 Conduct of Business by Arch Pending the Merger.................... 26
4.2 No Solicitation................................................... 28
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of S-4 and the Proxy Statement....................... 29
5.2 Access to Information............................................ 30
5.3 Arch Stockholders Meeting........................................ 30
5.4 Filings; Other Action............................................ 30
5.5 Agreements of Others............................................. 31
5.6 Authorization for Shares and Stock Exchange Listing.............. 31
5.7 Employee Matters................................................. 31
5.8 Stock Options.................................................... 32
5.9 Arch Bank Credit Facilities...................................... 33
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<PAGE>
5.10 Modification of Indebtedness and Equity......................... 33
5.11 Agreement to Defend............................................. 33
5.12 Public Announcements............................................ 33
5.13 Other Actions................................................... 33
5.14 Advice of Changes; SEC Filings.................................. 34
5.15 Reorganization.................................................. 34
5.16 Accounting Matters.............................................. 34
5.17 Indemnification................................................. 34
5.18 Announcement of Combined Operations............................. 35
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger....... 35
6.2 Conditions of Obligations of Pogo and Sub........................ 36
6.3 Conditions of Obligations of Arch................................ 37
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination...................................................... 38
7.2 Effect of Termination............................................ 40
7.3 Amendment........................................................ 40
7.4 Extension; Waiver................................................ 40
ARTICLE VIII
GENERAL PROVISIONS
8.1 Payment of Expenses.............................................. 41
8.2 Survival of Certain Representations, Warranties and Agreements... 41
8.3 Notices.......................................................... 41
8.4 Interpretation................................................... 42
8.5 Counterparts..................................................... 42
8.6 Entire Agreement; No Third Party Beneficiaries................... 42
8.7 Governing Law.................................................... 42
8.8 No Remedy in Certain Circumstances............................... 43
8.9 Assignment....................................................... 43
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<PAGE>
GLOSSARY OF DEFINED TERMS
Acquisition Proposal.................................... 4.2(e)
Affiliates.............................................. 5.5
Affiliate Notes......................................... 2.3(b)
Agreement............................................... Preamble
APL..................................................... 3.1(f)
Arch.................................................... Preamble
Arch Common Stock....................................... 2.1
Arch Employee Benefit Plans............................. 3.1(l)(iii)
Arch ERISA Affiliate.................................... 3.1(l)(i)
Arch Intangible Property................................ 3.1(n)
Arch Litigation......................................... 3.1(j)
Arch Order.............................................. 3.1(j)
Arch Pension Plans...................................... 3.1(l)(i)
Arch Permits............................................ 3.1(i)
Arch Preferred Stock.................................... 3.1(b)
Arch Representatives.................................... 4.2(a)
Arch SEC Documents...................................... 3.1(d)
Arch Stock Option....................................... 5.8(a)
Arch Stock Plan......................................... 3.1(b)
Average Closing Price................................... 2.2(e)
Bank Credit Facilities.................................. 5.9
CIGNA................................................... Recitals
CERCLA.................................................. 3.1(o)(A)
Certificate of Merger................................... 1.1
Certificates............................................ 2.2(b)
Closing................................................. 1.1
Closing Date............................................ 1.2
Code.................................................... Recitals
Common Exchange Ratio................................... 2.1(c)
Confidentiality Agreement............................... 5.2
Constituent Corporations................................ 1.3(a)
Convertible Preferred Stock............................. Recitals
DGCL.................................................... 1.1
Effective Time.......................................... 1.1
Environmental Law....................................... 3.1(o)(A)
ERISA................................................... 3.1(l)(i)
Evaluation Data......................................... 3.1(p)
Executives.............................................. 5.7
Exchange Act............................................ 3.1(c)(iii)
Exchange Agent.......................................... 2.2(a)
Exchange Fund........................................... 2.2(a)
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<PAGE>
GAAP.................................................... 3.1(d)
Governmental Entity..................................... 3.1(c)(iii)
Hazardous Materials..................................... 3.1(o)(B)
HSR Act................................................. 3.1(c)(iii)
Indemnified Liabilities................................. 5.17
Indemnified Parties..................................... 5.17
Injunction.............................................. 6.1(e)
IRS..................................................... 3.1(k)(iii)
Leases.................................................. 3.1(v)
Material Adverse Change................................. 3.1(a)
Material Adverse Effect................................. 3.1(a)
Merger.................................................. Recitals
Mezzanine............................................... Recitals
Notes................................................... Recitals
NYSE.................................................... 2.2(e)
Oil & Gas Knowledge..................................... 3.1(v)
Oil and Gas Properties.................................. 3.1(v)
OSHA.................................................... 3.1(m)(ii)
PBGC.................................................... 3.1(l)(ii)
Pogo.................................................... Preamble
Pogo Common Stock....................................... 2.1(c)
Pogo Litigation......................................... 3.2(n)
Pogo Order.............................................. 3.2(n)
Pogo Preferred Stock.................................... 3.2(b)
Pogo SEC Documents...................................... 3.2(d)
Pogo Permits............................................ 3.2(m)
Preferred Exchange Ratio................................ 2.1(d)
Pricing Period.......................................... 2.1(a)
Proxy Statement......................................... 3.1(c)(iii)
Release................................................. 3.1(o)(C)
Remedial Action......................................... 3.1(o)(D)
Returns................................................. 3.1(k)(i)
S-4..................................................... 3.1(e)
SEC..................................................... 3.2(a)
Securities Act.......................................... 3.1(d)
Securities Purchase Agreement........................... 2.3(a)
Series A Notes.......................................... Recitals
Series B Notes.......................................... Recitals
Significant Subsidiary.................................. 3.2(a)
Stockholder Agreement................................... Recitals
Stockholders Meeting.................................... 5.3
Surviving Corporation................................... 1.3(a)
Sub..................................................... Preamble
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Subsidiary.............................................. 3.1(a)
Taxes................................................... 3.1(k)
TDC..................................................... Recitals
TIC..................................................... Recitals
TRAL.................................................... Recitals
Voting Debt............................................. 3.1(b)
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<PAGE>
SCHEDULES TO THE AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
Schedule No. Description
- ------------ -----------
<S> <C>
2.3(b) Affiliate Notes
3.1(a) Significant Subsidiaries; Jurisdiction of Incorporation
3.1(b) Capital Structure
3.1(c) Authority; No Violations; Consents and Approvals
3.1(d) SEC Documents
3.1(f) Absence of Certain Changes or Events
3.1(g) No Undisclosed Material Liabilities
3.1(h) No Default
3.1(i) Compliance with Applicable Laws
3.1(j) Litigation
3.1(k)( i), (ii), (iii), (vi) Taxes
3.1(l)(ii), (v) Pension and Benefit Plans; ERISA
3.1(m)(i), (ii) Labor Matters
3.1(n) Intangible Property
3.1(o) Environmental Matters
3.1(p) Proprietary Information
3.1(v) Oil and Gas
3.1(w) Title to Property
3.1(y) Leases and Wells
3.1(z) Marketing
3.2(b) Capital Structure
3.2(f) Absence of Certain Changes or Events
3.2(k) No Undisclosed Material Liabilities
3.2(l) No Default
3.2(m) Compliance With Applicable Laws
3.2(n) Litigation
5.7 Employee Matters
6.3(c)(i) Representation Certificate of Pogo and Sub
6.3(c)(ii) Representation Certificate of Arch
Exhibit A Form of Affiliate Note
Exhibit B Form of Rule 145 Letter
Exhibit C Form of Affiliate Agreement
Exhibit D Form of Resignation and Release
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 28, 1998 (this "Agreement"),
among Pogo Producing Company, a Delaware corporation ("Pogo"), Alphac, Inc., a
Delaware corporation and a direct wholly owned subsidiary of Pogo ("Sub"), and
Arch Petroleum Inc., a Delaware corporation ("Arch").
WHEREAS, the Boards of Directors of Pogo, Sub and Arch each have determined
that it is in the best interests of their respective stockholders for Sub to
merge with and into Arch (the "Merger") upon the terms and subject to the
conditions of this Agreement;
WHEREAS, concurrently with the execution and delivery hereof, (a)
Threshold Development Company, a Delaware corporation ("TDC"), the owner of
approximately 13.9% of the outstanding Arch Common Stock (as hereinafter
defined), (b) The Travelers Indemnity Company ("TIC"), the beneficial owner of
436,364 shares of Arch's 8% Exchangeable Convertible Preferred Stock (the
"Convertible Preferred Stock"), (c) The Travelers Life and Annuity Company
("TRAL"), the beneficial owner of $300,000 of Arch's 9.75% Series A Convertible
Subordinated Notes due 2004 (the "Series A Notes") and $2,700,000 of Arch's
Adjustable Rate Series B Subordinated Notes (the "Series B Notes" and,
collectively with the Series A Notes, the "Notes"), which Notes are collectively
convertible into 1,090,909 shares of Arch Common Stock, which is all of the Arch
Common Stock that would be beneficially owned by TRAL, (d) Connecticut General
Life Insurance Company ("CIGNA"), the beneficial owner of 39,829.5 shares of
Convertible Preferred Stock and $27,373 of Series A Notes, $246,361 of Series B
Notes, which Notes are collectively convertible into 99,540 shares of Arch
Common Stock, which is all of the Arch Common Stock that would be beneficially
owned by CIGNA, (e) CIGNA Mezzanine Partners III, L.P. ("Mezzanine"), the
beneficial owner of 187,454.5 shares of Convertible Preferred Stock, $128,900 of
Series A Notes and $1,160,100 of Series B Notes, which Notes are convertible
into 468,727 shares of Arch Common Stock, which is all of the Arch Common Stock
that would be beneficially owned by Mezzanine, and (f) The Lincoln National Life
Insurance Company ("Lincoln"), the beneficial owner of 63,625 shares of
Convertible Preferred Stock, $43,727 of Series A Notes and $393,539 of Series B
Notes, which Notes are convertible into 159,005 shares of Arch Common Stock ,
which is all of the Arch Common Stock that would be beneficially owned by
Lincoln, are each entering into a Stockholder Agreement (individually, a
"Stockholder Agreement" and collectively, the "Stockholder Agreements") with
Pogo providing for, among other things, the voting of the shares of Convertible
Preferred Stock and Arch Common Stock, as applicable, owned by it;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests; and
WHEREAS, Pogo, Sub and Arch desire to make certain representations,
warranties, covenants
<PAGE>
and agreements in connection with the Merger and also to prescribe various
conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties agree as
follows:
ARTICLE I
THE MERGER
1.1 The Merger; Effective Time of the Merger. Upon the terms and subject
to the conditions of this Agreement and in accordance with the Delaware General
Corporation Law (the "DGCL"), Sub shall be merged with and into Arch at the
Effective Time (as hereinafter defined). The Merger shall become effective
immediately when a certificate of merger (the "Certificate of Merger"), prepared
and executed in accordance with the relevant provisions of the DGCL, is filed
with the Secretary of State of the State of Delaware (the "Effective Time").
The filing of the Certificate of Merger shall be made as soon as practicable on
or after the closing of the Merger (the "Closing").
1.2 Closing. The Closing shall take place at 10:00 a.m. on a date to be
specified by the parties, which shall be no later than the second business day
after satisfaction (or waiver in accordance with this Agreement) of the latest
to occur of the conditions set forth in Article VI (the "Closing Date"), at the
offices of Baker & Botts, L.L.P., One Shell Plaza, 910 Louisiana, Houston, Texas
77002, unless another date or place is agreed to in writing by the parties.
1.3 Effects of the Merger. (a) At the Effective Time: (i) Sub shall be
merged with and into Arch, the separate existence of Sub shall cease and Arch
shall continue as the surviving corporation (Sub and Arch are sometimes referred
to herein as the "Constituent Corporations" and Arch is sometimes referred to
herein as the "Surviving Corporation"); (ii) the Certificate of Incorporation of
Sub shall be the Certificate of Incorporation of the Surviving Corporation;
(iii) the Bylaws of Sub as in effect immediately prior to the Effective Time
shall be the Bylaws of the Surviving Corporation; and (iv) the Surviving
Corporation shall succeed to and assume all of the rights and obligations of Sub
in accordance with the DGCL.
(b) The directors and officers of Sub at the Effective Time shall, from and
after the Effective Time, be the initial directors and officers of the Surviving
Corporation, and such directors and officers shall serve until their successors
have been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's
Certificate of Incorporation and Bylaws.
2
<PAGE>
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK AND CERTAIN INDEBTEDNESS OF THE
CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of common
stock, par value $0.01 per share, of Arch ("Arch Common Stock"), Convertible
Preferred Stock or capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of the
common stock of Sub shall be converted into and become 10 fully paid and
nonassessable shares of common stock, par value $0.01 per share, of the
Surviving Corporation.
(b) Cancellation of Treasury Stock. Each share of Arch Common Stock
and all other shares of capital stock of Arch that are owned by Arch as
treasury stock of Arch shall be canceled and retired and shall cease to
exist and no Pogo Common Stock (as hereinafter defined) or other
consideration shall be delivered or deliverable in exchange therefor.
(c) Exchange Ratio for Arch Common Stock. Each share of Arch Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be canceled in accordance with Section 2.1(b)) shall be
converted into 0.09615 of a duly authorized, validly issued, fully paid and
nonassessable share of common stock, par value $1.00 per share, of Pogo,
together with any associated right to acquire shares of Pogo Series A
Junior Convertible Preferred Stock (collectively, the "Pogo Common Stock"),
such 0.09615 of a share of Pogo Common Stock for each share of Arch Common
Stock being referred to herein as the "Common Exchange Ratio". All such
shares of Arch Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a certificate representing any such shares
shall cease to have any rights with respect thereto, except the right to
receive the shares of Pogo Common Stock and cash in lieu of fractional
shares of Pogo Common Stock as contemplated by Section 2.2(e), to be issued
or paid in consideration therefor upon the surrender of such certificate in
accordance with Section 2.2, without interest.
(d) Exchange Ratio for Convertible Preferred Stock. Each share of
Convertible Preferred Stock issued and outstanding immediately prior to the
Effective Time shall be converted into 0.9615 of a duly authorized, validly
issued, fully paid and non-assessable share of Pogo Common Stock, such
0.9615 of a share of Pogo Common Stock for each share of Arch Convertible
Preferred Stock being referred to herein as the "Preferred Exchange Ratio".
All such shares of Convertible Preferred Stock, when so converted, shall no
longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and each holder of a certificate representing any
such shares shall cease to have any rights with respect thereto, except the
right to receive the shares of Pogo Common Stock and cash in lieu of
fractional shares of Pogo Common Stock as contemplated by Section 2.2(e),
to be issued or paid in
3
<PAGE>
consideration therefor upon the surrender of such certificate in accordance
with Section 2.2, without interest. Accrued but unpaid dividends on each
share of Convertible Preferred Stock through the Effective Time, whether or
not declared, shall be paid in cash at the Effective Time.
(e) Treatment of Stock Options. Each outstanding Arch Stock Option
(as defined in Section 5.8) shall be treated as provided in Section 5.8.
2.2 Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Pogo shall deposit, or cause
to be deposited, with Pogo's transfer agent for Pogo Common Stock or such other
bank or trust company designated by Pogo and reasonably acceptable to Arch (the
"Exchange Agent"), for the benefit of the holders of shares of Arch Common Stock
and Convertible Preferred Stock, for exchange in accordance with this Article
II, through the Exchange Agent, certificates representing the shares of Pogo
Common Stock (such shares of Pogo Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.1 in exchange for outstanding
shares of Arch Common Stock and Convertible Preferred Stock, together with cash
in lieu of fractional shares as provided herein. The Exchange Agent shall,
pursuant to irrevocable instructions, deliver the Pogo Common Stock contemplated
to be issued pursuant to Section 2.1 out of the Exchange Fund. The Exchange Fund
shall not be used for any other purpose.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which, immediately prior to the Effective Time,
represented outstanding shares of Arch Common Stock or Convertible Preferred
Stock, as the case may be (the "Certificates"), which holder's shares of Arch
Common Stock and Convertible Preferred Stock were converted into the right to
receive shares of Pogo Common Stock pursuant to Section 2.1: (i) a letter of
transmittal (which shall specify that delivery shall be effected and risk of
loss and title to the Certificates shall pass only upon delivery of the
Certificates to the Exchange Agent, and shall be in such form and have such
other provisions as Pogo may reasonably specify); and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for certificates
representing shares of Pogo Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Pogo, together with such letter of transmittal, duly executed, and
any other required documents, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing that number of whole
shares of Pogo Common Stock which such holder has the right to receive pursuant
to the provisions of this Article II and cash in lieu of fractional shares of
Pogo Common Stock as contemplated by Section 2.2(e), and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Arch Common Stock or Convertible Preferred Stock which is not
registered in the transfer records of Arch, a certificate representing the
appropriate number of shares of Pogo Common Stock may be issued to a transferee
if the Certificate representing such Arch Common Stock or Convertible Preferred
Stock is presented to the Exchange Agent accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 2.2, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the certificate
representing shares of Pogo Common Stock and cash in lieu of any fractional
4
<PAGE>
shares of Pogo Common Stock as contemplated by this Section 2.2. The Exchange
Agent shall not be entitled to vote or exercise any rights of ownership with
respect to the Pogo Common Stock held by it from time to time hereunder, except
that it shall receive and hold all dividends or other distributions paid or
distributed with respect thereto for the account of persons entitled thereto.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Pogo Common Stock declared or made after the
Effective Time with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the right to receive
shares of Pogo Common Stock represented thereby and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 2.2(e)
until the holder of such Certificate shall surrender such Certificate. Subject
to the effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the holder thereof, without interest: (i) at the time of
such surrender, the amount of any cash payable in lieu of a fractional share of
Pogo Common Stock to which such holder is entitled pursuant to Section 2.2(e)
and the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Pogo Common
Stock; and (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Pogo Common Stock.
(d) No Further Ownership Rights in Arch Common Stock or Convertible
Preferred Stock. All shares of Pogo Common Stock issued upon the surrender for
exchange of shares of Arch Common Stock and Convertible Preferred Stock in
accordance with the terms hereof (including any cash paid pursuant to Section
2.2(c) or 2.2(e)) shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of Arch Common Stock and Convertible
Preferred Stock, as applicable, and after the Effective Time there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Arch Common Stock or Convertible Preferred Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article II.
(e) No Fractional Shares. Prior to determining if any fractional shares of
Pogo Common Stock are due to a holder of either Arch Common Stock or Convertible
Preferred Stock, the number of shares of Pogo Common Stock to be received by
such holder on account of all shares of both Arch Common Stock and Convertible
Preferred Stock held by such holder shall be aggregated. In the event that any
such holder is still due a fractional share of Pogo Common Stock, no
certificates or scrip representing such fractional share of Pogo Common Stock
shall be issued upon the surrender for exchange of Certificates pursuant to this
Article II, and, except as provided in this Section 2.2(e), no dividend or other
distribution, stock split or interest shall relate to any such fractional
security, and such fractional interest shall not entitle the owner thereof to
vote or to any rights of a security holder of Pogo. In lieu of any fractional
security, each holder of shares of Arch Common Stock and Convertible Preferred
Stock who would otherwise have been entitled to a fraction of a share of Pogo
Common Stock upon surrender of Certificates for exchange pursuant to this
Article II will be paid an amount in cash (without interest) equal to the
Average Closing Price multiplied by the fractional interest the holder would
otherwise be entitled to receive. "Average Closing Price" shall mean the average
of the
5
<PAGE>
per share closing prices of Pogo Common Stock as reported on the consolidated
transaction reporting system for securities traded on the New York Stock
Exchange, Inc. ("NYSE") for the twenty consecutive trading days ending
immediately prior to the second trading day prior to the Closing Date (the
"Pricing Period"), appropriately adjusted for any stock splits, reverse stock
splits, stock dividends, recapitalizations or similar transactions.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund and any
cash in lieu of fractional shares of Pogo Common Stock made available to the
Exchange Agent that remain undistributed to the former stockholders of Arch for
one year after the Effective Time shall be delivered to Pogo, upon demand, and
any stockholders of Arch who have not theretofore complied with this Article II
shall thereafter look only to Pogo for payment of their claim for Pogo Common
Stock, any cash in lieu of fractional shares of Pogo Common Stock and any
dividends or distributions with respect to Pogo Common Stock.
(g) No Liability. Neither Pogo nor Arch shall be liable to any holder of
shares of Arch Common Stock, Convertible Preferred Stock or Pogo Common Stock,
as the case may be, for such shares (or dividends or distributions with respect
thereto) or cash in lieu of fractional shares of Pogo Common Stock delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
2.3 Effect on Certain Indebtedness.
(a) Conversion of the Notes. At the Effective Time, TRAL, CIGNA, Lincoln
and Mezzanine, being all of the holders of the Notes, shall each convert the
Notes owned by it into such number of shares of Pogo Common Stock as is equal to
(i) the unpaid principal amount of such Notes divided by (ii) $2.75 per share of
Arch Common Stock, multiplied by (iii) the Common Exchange Ratio. The
conversion price for the Notes will also be subject, if applicable, to
adjustment as described in Section 11.3 of the Securities Purchase Agreement,
dated as of October 15, 1994, by and between the holder of such Note and Arch
(the "Securities Purchase Agreement") as a result of any events that occur
because of actions taken by Arch or Pogo from and after the date of this
Agreement. Accrued unpaid interest on each Note through the Effective Time,
shall be paid in cash at the Effective Time. In addition, cash shall be payable
to TRAL, CIGNA, Lincoln and Mezzanine in lieu of any fractional interests that
such parties would otherwise be entitled pursuant to the foregoing conversion,
calculated in a manner similar to that set forth in Section 2.2(e) hereof.
(b) Affiliate Notes. At the Effective Time, all of the notes receivable
from, and loans to, officers of Arch set forth on Schedule 2.3(b) (the
"Affiliate Notes") shall be, at the officer's choice, (i) repaid in full
(including principal and accrued interest through the Closing Date) or (ii)
amended and restated in substantially the form of the note and security
agreement set forth as Exhibit A hereto.
6
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Arch. Arch represents and warrants
to Pogo and Sub on its own behalf and on behalf of each of its Subsidiaries as
follows:
(a) Organization, Standing and Power. Each of Arch and its Subsidiaries
(as hereinafter defined) is a corporation or limited liability company duly
organized, validly existing and in good standing under the laws of its state or
jurisdiction of incorporation or organization, has all requisite power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted, and is duly qualified and in good standing to do
business in each jurisdiction in which the business it is conducting, or the
operation, ownership or leasing of its properties, makes such qualification
necessary, other than in such jurisdictions where the failure so to qualify
would not have a Material Adverse Effect (as defined below) on Arch. Arch has
heretofore delivered to Pogo complete and correct copies of its Certificate of
Incorporation, as amended and corrected and Bylaws. All Subsidiaries of Arch
and their respective jurisdictions of incorporation or organization are
identified on Schedule 3.1(a). As used in this Agreement a "Material Adverse
Effect" or "Material Adverse Change" shall mean, in respect of Arch, Pogo, or
any named Subsidiary of either party, as the case may be, any effect or change
that is or, as far as can be reasonably determined, is reasonably likely to be,
materially adverse to the business, operations, assets, condition (financial or
otherwise) or results of operation of such party and its Subsidiaries taken as a
whole. As used in this Agreement, "Subsidiary" means, with respect to any
party, any corporation or other organization, whether incorporated or
unincorporated, of which: (i) such party or any other Subsidiary of such party
is a general partner (excluding partnerships, the general partnership interests
of which are held by such party or any Subsidiary of such party that do not have
a majority of the voting interest in such partnership); or (ii) at least a
majority of the securities or other interests having by their terms ordinary
voting power to elect a majority of the Board of Directors or others performing
similar functions with respect to such corporation or other organization is,
directly or indirectly, owned or controlled by such party or by any one or more
of its Subsidiaries, or by such party and any one or more of its Subsidiaries.
(b) Capital Structure. As of the date hereof, the authorized capital stock
of Arch consists of 50,000,000 shares of Arch Common Stock and 1,000,000 shares
of preferred stock, par value $0.01 per share ("Arch Preferred Stock"). At the
close of business on March 31, 1998: (i) 17,321,804 shares of Arch Common Stock
and 727,273 shares of Arch Preferred Stock (all of which were Convertible
Preferred Stock) were issued and outstanding, (ii) 339,300 shares of Arch Common
Stock were reserved for issuance pursuant to outstanding options under Arch's
Stock Option Plan (the "Arch Stock Plan"), (iii) 7,272,727 shares of Arch Common
Stock were reserved for issuance upon conversion of the Convertible Preferred
Stock pursuant to the Securities Purchase Agreement, (iv) 100,000 shares of Arch
Common Stock were held by Arch in its treasury; and (v), except for 1,818,181
shares of Arch Common Stock reserved for issuance upon conversion of the Notes
pursuant to the Securities Purchase Agreement, no other bonds, debentures, notes
or other indebtedness having the right to vote (or convertible into securities
having the right to vote) on any matters on which stockholders may vote
(collectively, including the Notes, "Voting Debt") were issued or outstanding
with respect to Arch. Except as set forth on Schedule 3.1(b), all outstanding
shares of Arch Common Stock are validly issued, fully paid and nonassessable and
were not issued in violation of any preemptive rights. Except as set forth on
Schedule 3.1(b), all outstanding shares of capital stock of the Subsidiaries of
Arch are owned by Arch, or a direct or indirect wholly owned Subsidiary of Arch,
free and clear of all liens, charges, encumbrances, claims and options of any
nature. Except as set forth in this Section 3.1(b) or on
7
<PAGE>
Schedule 3.1(b) and except for changes since March 31, 1998 resulting from the
exercise of employee stock options granted pursuant to the Arch Stock Plan,
there are outstanding or reserved for issuance: (i) no shares of capital stock,
Voting Debt or other voting securities of Arch; (ii) no securities of Arch or
any Subsidiary of Arch convertible into or exchangeable for shares of capital
stock, Voting Debt or other voting securities of Arch or any Subsidiary of Arch;
and (iii) no options, warrants, calls, rights (including preemptive rights),
commitments or agreements to which Arch or any Subsidiary of Arch is a party or
by which it is bound in any case obligating Arch or any Subsidiary of Arch to
issue, deliver, sell, purchase, redeem or acquire, or cause to be issued,
delivered, sold, purchased, redeemed or acquired, additional shares of capital
stock or any Voting Debt or other voting securities of Arch or of any Subsidiary
of Arch, or obligating Arch or any Subsidiary of Arch to grant, extend or enter
into any such option, warrant, call, right, commitment or agreement. Except for
the Stockholder Agreements or as set forth on Schedule 3.1(b), there are not as
of the date hereof and there will not be at the Effective Time any stockholder
agreements, voting trusts or other agreements or understandings to which Arch is
a party or of which Arch is aware relating to the voting of any shares of the
capital stock of Arch that will limit in any way the solicitation of proxies by
or on behalf of Arch from, or the casting of votes by, the stockholders of Arch
with respect to the Merger. Except as set forth on Schedule 3.1(b), there are no
restrictions on Arch to vote the stock of any of its Subsidiaries.
(c) Authority; No Violations; Consents and Approvals.
(i) The Board of Directors of Arch has unanimously approved (subject
to approval by the stockholders of Arch in accordance with the DGCL) the Merger
and this Agreement and declared the Merger and this Agreement to be in the best
interests of the stockholders of Arch. Arch has all requisite corporate power
and authority to enter into this Agreement and, subject, with respect to
consummation of the Merger, to approval of this Agreement and the Merger by the
stockholders of Arch in accordance with the DGCL, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Arch, subject, with respect to
consummation of the Merger, to approval of this Agreement and the Merger by the
stockholders of Arch in accordance with the DGCL. This Agreement has been duly
executed and delivered by Arch and, subject, with respect to consummation of the
Merger, to approval of this Agreement and the Merger by the stockholders of Arch
in accordance with the DGCL, and assuming this Agreement constitutes the valid
and binding obligation of Pogo and Sub, constitutes a valid and binding
obligation of Arch enforceable in accordance with its terms, subject, as to
enforceability, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
principles of equity.
(ii) Except as set forth on Schedule 3.1(c), the execution and
delivery of this Agreement does not, and the consummation of the transactions
contemplated hereby and compliance with the provisions hereof will not, conflict
with, or result in any violation of, or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to the loss of a material benefit under, or
give rise to a right of purchase under, result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
Arch or any of its Subsidiaries under, or otherwise result in a detriment to
Arch or any of its Subsidiaries under, any provision of (A) the Certificate of
Incorporation, as amended
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and corrected, or Bylaws of Arch or any provision of the comparable charter or
organizational documents of any of its Subsidiaries, (B) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement (including,
without limitation, any pre-emptive rights or rights of first refusal with
respect to oil and gas interests), instrument, permit, concession, franchise or
license applicable to Arch or any of its Subsidiaries, (C) any joint operating
agreement or joint venture or other ownership arrangement or (D) assuming the
consents, approvals, authorizations or permits and filings or notifications
referred to in Section 3.1(c)(iii) are duly and timely obtained or made and the
approval of the Merger and this Agreement by the stockholders of Arch has been
obtained, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Arch or any of its Subsidiaries or any of their
respective properties or assets, other than, in the case of clause (B), (C) or
(D), any such conflicts, violations, defaults, rights, liens, security
interests, charges, encumbrances or detriments that, individually or in the
aggregate, would not have a Material Adverse Effect on Arch or materially impair
the ability of Arch to perform its obligations hereunder or prevent the
consummation of any of the transactions contemplated hereby. Notwithstanding the
foregoing, no representation or warranty is made with respect to Evaluation Data
(as hereinafter defined), which is covered exclusively by Section 3.1(p).
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, or permit from any court,
governmental, regulatory or administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign (a "Governmental
Entity"), is required by or with respect to Arch or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by Arch or the
consummation by Arch of the transactions contemplated hereby, as to which the
failure to obtain or make would have a Material Adverse Effect on Arch, except
for: (A) the filing of a premerger notification report by Arch under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and
the expiration or termination of the applicable waiting period with respect
thereto; (B) the appropriate filings or notifications as may be required by
Canadian laws; (C) the filing with the SEC (as defined hereafter) of (x) a proxy
statement in preliminary and definitive form (including any amendment or
supplements thereto) on Form S-4 of the Securities Act (as hereinafter defined)
relating to the meeting of Arch's stockholders to be held in connection with the
Merger (the "Proxy Statement") and any other filings as may be required under
the Securities Act and (y) such reports under Section 13(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and such other compliance
with the Exchange Act and the rules and regulations thereunder, as may be
required in connection with this Agreement and the transactions contemplated
hereby; (D) the filing of the Certificate of Merger with the Secretary of State
of the State of Delaware; (E) such filings and approvals as may be required by
any applicable state securities, "blue sky" or takeover laws, or environmental
laws; and (F) such filings and approvals as may be required by any foreign
premerger notification, securities, corporate or other law, rule or regulation.
(d) SEC Documents. Arch has made available to Pogo a true and complete
copy of each report, schedule, registration statement and definitive proxy
statement filed by Arch with the SEC since December 31, 1997 and prior to the
date of this Agreement (the "Arch SEC Documents") which are all the documents
(other than preliminary materials) that Arch was required to file with the SEC
during such period. Except as disclosed on Schedule 3.1(d), as of their
respective dates, the Arch SEC Documents complied in all material respects with
the requirements of the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act, as the case may be, and the rules and regulations
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of the SEC thereunder applicable to such Arch SEC Documents, and none of the
Arch SEC Documents contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of Arch included in the Arch SEC
Documents complied as to form in all material respects with the published rules
and regulations of the SEC with respect thereto, were prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by Rule 10-01
of Regulation S-X of the SEC) and fairly present in accordance with applicable
requirements of GAAP (subject, in the case of the unaudited statements, to
normal year-end adjustments, any other adjustments described therein, and the
fact that certain information and notes have been condensed or omitted in
accordance with the Exchange Act and the rules and regulations promulgated
thereunder) the consolidated financial position of Arch and its consolidated
Subsidiaries as of their respective dates and the consolidated results of
operations and the consolidated cash flows of Arch and its consolidated
Subsidiaries for the periods presented therein. For purposes of this Section
3.1(d), any amendment to any information contained in any Arch SEC document duly
filed with the SEC prior to the date of this Agreement shall be deemed to have
been filed on the date that the original Arch SEC Document being amended was
filed. Except as disclosed in the Arch SEC Documents or in Schedule 3.1(d),
there are no agreements, arrangements or understandings between Arch and any
party who is at the date of this Agreement or was at any time prior to the date
hereof but after December 31, 1997 an Affiliate of Arch that are required to be
disclosed in the Arch SEC Documents.
(e) Information Supplied. None of the information supplied or to be
supplied by Arch for inclusion or incorporation by reference in the Registration
Statement on Form S-4 to be filed with the SEC by Pogo in connection with the
issuance of shares of Pogo Common Stock in the Merger (the "S-4") will, at the
time the S-4 becomes effective under the Securities Act or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and none of the information supplied or to be supplied
by Arch and included or incorporated by reference in the Proxy Statement will,
at the date mailed to stockholders of Arch or at the time of the meeting of such
stockholders to be held in connection with the Merger or at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time any event with respect
to Arch or any of its Subsidiaries, or with respect to other information
supplied by Arch for inclusion in the Proxy Statement or the S-4, shall occur
which is required to be described in an amendment of, or a supplement to, the
Proxy Statement or the S-4, such event shall be so described, and such amendment
or supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of Arch.
(f) Absence of Certain Changes or Events. Except as disclosed in, or
reflected in the financial statements included in, the Arch SEC Documents or on
Schedule 3.1(f), or except as contemplated by this Agreement, since December 31,
1997, there has not been: (i) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to any of Arch's capital stock; (ii) any amendment of any material term of any
outstanding equity security of Arch or any Subsidiary; (iii) any repurchase,
redemption or other acquisition by Arch
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or any Subsidiary of any outstanding shares of capital stock or other equity
securities of, or other ownership interests in, Arch or any Subsidiary, except
as contemplated by Arch Employee Benefit Plans; (iv) any material change in any
method of accounting or accounting practice or any tax method, practice or
election by Arch or any Subsidiary; (v) options granted under the Arch Stock
Plan or any other agreement; or (vi) any other transaction, commitment, dispute
or other event or condition (financial or otherwise) of any character (whether
or not in the ordinary course of business) that has had a Material Adverse
Effect on either Arch or Arch Petroleum Ltd., a Canadian corporation ("APL").
(g) No Undisclosed Material Liabilities. Except as disclosed or reflected
in the Arch SEC Documents or on Schedule 3.1(g), as of the date hereof, neither
Arch nor any of its Subsidiaries has incurred any liabilities of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, that would have a Material Adverse Effect on either Arch or APL,
other than liabilities under this Agreement.
(h) No Default. Neither Arch nor any of its Subsidiaries is in default or
violation (and no event has occurred which, with notice or the lapse of time or
both, would constitute a default or violation) of any term, condition or
provision of (i) their respective charter, organizational documents and by-laws,
(ii) except as disclosed in Schedule 3.1(h), any note, bond, mortgage,
indenture, license, agreement or other instrument or obligation to which Arch or
any of its Subsidiaries is now a party or by which Arch or any of its
Subsidiaries or any of their respective properties or assets may be bound or
(iii) any order, writ, injunction, decree, statute, rule or regulation
applicable to Arch or any of its Subsidiaries, except in the case of (ii) and
(iii) for defaults or violations which in the aggregate would not have a
Material Adverse Effect on either Arch or APL.
(i) Compliance with Applicable Laws. Arch and its Subsidiaries hold all
permits, licenses, variances, exemptions, orders, franchises and approvals of
all Governmental Entities necessary for the lawful conduct of their respective
businesses (the "Arch Permits"), except where the failure so to hold would not
have a Material Adverse Effect on either Arch or APL. Arch and its Subsidiaries
are in compliance with the terms of the Arch Permits, except where the failure
so to comply would not have a Material Adverse Effect on either Arch or APL.
Except as disclosed in the Arch SEC Documents or as set forth on the disclosure
schedules hereto, the businesses of Arch and its Subsidiaries are not being
conducted in violation of any law, ordinance or regulation of any Governmental
Entity, except for possible violations which would not have a Material Adverse
Effect on either Arch or APL. Except as set forth on Schedule 3.1(i), as of the
date of this Agreement, no investigation or review by any Governmental Entity
with respect to Arch or any of its Subsidiaries is pending or, to the knowledge
of Arch as of the date hereof, threatened, other than those the outcome of which
would not have a Material Adverse Effect on either Arch or APL. Schedule 3.1(i)
sets forth each such failure to hold or comply with the terms of Arch Permits,
each such violation of law, ordinance or regulation of any Governmental Entity
and each such pending or threatened investigation or review by any Governmental
Entity existing on the date hereof that involves amounts in excess of $100,000,
notwithstanding the fact that such failure to hold or comply or such violation
of law, ordinance or regulation may not constitute a Material Adverse Effect on
either Arch or APL.
(j) Litigation. Except as disclosed in the Arch SEC Documents or on
Schedule 3.1(j) hereto, there is no suit, action or proceeding pending, or, to
the best knowledge of Arch, threatened against or
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affecting Arch or any Subsidiary of Arch ("Arch Litigation"), and Arch and its
Subsidiaries have no knowledge of any facts that are likely to give rise to any
Arch Litigation, that (in any case) would have a Material Adverse Effect on
Arch, nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against Arch or any Subsidiary of
Arch ("Arch Order") that would have a Material Adverse Effect on Arch or
materially impair the ability of Arch to consummate the transactions
contemplated by this Agreement. Notwithstanding the fact that the uninsured
exposure or losses under all claims and judgments pending may not constitute a
Material Adverse Effect on Arch, the aggregate reasonable estimate of uninsured
exposures or losses under all claims and judgments pending, or to the knowledge
of Arch as of the date hereof, threatened, pursuant to all Arch Litigation and
Arch Orders, existing on the date hereof, excluding individual, unrelated claims
or judgments of less than $10,000 each, does not exceed $100,000.
(k) Taxes.
(i) Except as set forth on Schedule 3.1(k)(i), each of Arch, each of
its Subsidiaries and any affiliated, consolidated, combined, unitary or similar
group of which any such corporation or limited liability company is or was a
member has (A) duly filed on a timely basis (taking into account any extensions)
all federal and all material state, local, foreign and other returns,
declarations, reports, estimates, information returns and statements ("Returns")
required to be filed or sent by or with respect to it in respect of any Taxes
(as hereinafter defined), (B) duly paid or deposited on a timely basis all Taxes
that are due and payable (except to the extent not material in the aggregate or
to the extent that liability therefor is reserved for in Arch's most recent
audited financial statements) for which Arch or any of its Subsidiaries may be
liable, (C) established reserves that are adequate for the payment of all Taxes
not yet due and payable with respect to the results of operations of Arch and
its Subsidiaries through the date hereof, and (D) complied in all material
respects with all applicable laws, rules and regulations relating to the
reporting, payment and withholding of Taxes and has in all material respects
timely withheld from employee wages and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over.
(ii) Schedule 3.1(k)(ii) sets forth (A) the last taxable period
through which the federal income Tax Returns of Arch and any of its Subsidiaries
have been examined by the Internal Revenue Service ("IRS") or, in the case of
APL, Revenue Canada, or otherwise closed and (B) any affiliated, consolidated,
combined, unitary or similar group or Return in which Arch or any of its
Subsidiaries is or has been a member or is or has joined in the filing. Except
to the extent being contested in good faith, all material deficiencies asserted
as a result of such examinations and any examination by any applicable taxing
authority have been paid, fully settled or adequately provided for in Arch's
most recent audited financial statements. Except as adequately provided for in
the Arch SEC Documents, no material audits or other administrative proceedings
or court proceedings are presently pending with regard to any Taxes for which
Arch or any of its Subsidiaries would be liable, and no material deficiency for
any Taxes has been proposed in writing or assessed pursuant to such examination
against Arch or any of its Subsidiaries by any authority with respect to any
period other than as set forth in Schedule 3.1(k)(ii).
(iii) Except as disclosed on Schedule 3.1(k)(iii), neither Arch nor
any of its Subsidiaries has executed or entered into (or prior to the close of
business on the Closing Date will
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execute or enter into) with the IRS or any taxing authority (i) any agreement or
other document extending or having the effect of extending the period for
assessments or collection of any income or franchise Taxes for which Arch or any
of its Subsidiaries would be liable or (ii) a closing agreement pursuant to
Section 7121 of the Code, or any predecessor provision thereof or any similar
provision of state, local, foreign or other income tax law that relates to the
assets or operations of Arch or any of its Subsidiaries.
(iv) Neither Arch nor any of its Subsidiaries has made an election
under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code
apply to any disposition of a subsection (f) asset (as such term is defined in
Section 341(f)(4) of the Code) owned by Arch or any of its Subsidiaries.
(v) Except as set forth in Arch SEC Documents or as disclosed on
Schedule 3.1(k)(vi), neither Arch nor any of its Subsidiaries is a party to, is
bound by or has any obligation under any tax sharing or allocation agreement or
similar agreement or arrangement.
For purposes of this Agreement, "Taxes" shall mean all federal, state,
county, local, foreign or other taxes, charges, fees, levies, imposts, duties,
licenses or other assessments, together with any interest, penalties, additions
to tax or additional amounts imposed by any taxing authority.
(l) Pension and Benefit Plans; ERISA.
(i) All "employee pension plans," as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
maintained by Arch or any of its Subsidiaries or any trade or business (whether
or not incorporated) which is under common control, or which is treated as a
single employer, with Arch under Section 414(b), (c), (m) or (o) of the Code
("Arch ERISA Affiliate") or to which Arch or any of its Subsidiaries or any Arch
ERISA Affiliate contributed or is obligated to contribute thereunder (the "Arch
Pension Plans") intended to qualify under Section 401 of the Code so qualify and
the trusts maintained pursuant thereto are exempt from federal income taxation
under Section 501 of the Code, and, to the knowledge of Arch as of the date
hereof, nothing has occurred with respect to the operation of the Arch Pension
Plans that could reasonably be expected to cause the loss of such qualification
or exemption or the imposition of any liability, penalty, or tax under ERISA or
the Code that would have a Material Adverse Effect on Arch.
(ii) As to the Arch Pension Plans and as to the "employee pension
benefit plans" maintained or contributed to by Arch, its Subsidiaries or by any
Arch ERISA Affiliate within six years prior to the Effective Time subject to
Title IV of ERISA, there has been no event or condition which presents a
material risk of termination, no notice of intent to terminate has been given
under Section 4041 of ERISA and no proceeding has been instituted under Section
4042 of ERISA to terminate, such that would result in a material liability to
Arch, its Subsidiaries, or Arch ERISA Affiliates; no material liability to the
Pension Benefit Guaranty Corporation ("PBGC") has been incurred; no material
accumulated funding deficiency, whether or not waived, within the meaning of
Section 302 of ERISA or Section 412 of the Code has been incurred; and the
assets of each Arch Pension Plan equal or exceed the actuarial present value of
the benefit liabilities, within the meaning of Section 4041 of ERISA, under such
Arch Pension Plan, based upon reasonable actuarial assumptions and the asset
valuation principles established by the PBGC.
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(iii) There is no violation of ERISA with respect to the filing of
applicable reports, documents, and notices regarding all the "employee benefit
plans," as defined in Section 3(3) of the ERISA and all other material employee
compensation and benefit arrangements or payroll practices, including, without
limitation, severance pay, sick leave, vacation pay, salary continuation for
disability, consulting or other compensation agreements, retirement, deferred
compensation, bonus, long-term incentive, stock option, stock purchase,
hospitalization, medical insurance, life insurance and scholarship programs
maintained by Arch or any of its Subsidiaries or to which Arch or any of its
Subsidiaries contributed or is obligated to contribute thereunder (all such
plans, other than the Arch Pension Plans, being hereinafter referred to as the
"Arch Employee Benefit Plans"), or Arch Pension Plans with the Secretary of
Labor and the Secretary of the Treasury or the furnishing of such documents to
the participants or beneficiaries of the Arch Employee Benefit Plans or Arch
Pension Plans, which violation would have a Material Adverse Effect on Arch.
(iv) Except as disclosed on Schedule 3.1(l)(iv), the Arch Employee
Benefit Plans and Arch Pension Plans have been maintained, in all material
respects, in accordance with their terms and with all provisions of ERISA
(including rules and regulations thereunder) and other applicable Federal and
state law, all contributions to the Arch Employee Benefit Plans and Arch Pension
Plans have been timely made pursuant to their terms, there is no material
liability for breaches of fiduciary duty in connection with the Arch Employee
Benefit Plans and Arch Pension Plans, there have been no material defaults,
violations, actions, suits or claims pending (except ordinary claims for
benefits), or, to the knowledge of Arch, threatened respecting the Arch Employee
Benefit Plans and Arch Pension Plans, and neither Arch nor any of its
Subsidiaries has engaged in a material "prohibited transaction" within the
meaning of Section 4975 of the Code or Section 406 of ERISA with respect to the
Arch Employee Benefit Plans and Arch Pension Plans.
(v) Except as disclosed or referenced on Schedule 3.1(l)(v), neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment becoming due to
any employee or group of employees of Arch or any of its Subsidiaries; (ii)
increase any benefits otherwise payable under any Arch Employee Benefit Plan or
Arch Pension Plan or the profit sharing plan of Arch or (iii) result in the
acceleration of the time of payment or vesting of any such benefits. Except as
disclosed or referenced on Schedule 3.1(l)(v) or in the Arch SEC Documents,
there are no severance agreements or employment agreements between Arch or any
of its Subsidiaries and any employee of Arch or such Subsidiary.
True and correct copies of all such severance agreements and employment
agreements have been provided to Pogo. Except as set forth or otherwise
referenced on Schedule 3.1(l)(v), neither Arch nor any of its Subsidiaries has
any consulting agreement or arrangement with any person involving compensation
in excess of $10,000, except as are terminable upon one month's notice or less.
(vi) No stock or other security issued by Arch or any of its
Subsidiaries forms or has formed a material part of the assets of any funded
Arch Employee Benefit Plan or Arch Pension Plan other than the Arch Stock Plan.
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(vii) Neither Arch nor any of its Subsidiaries nor any Arch ERISA
Affiliate contributes to, or has an obligation to contribute to, and has not
within six years prior to the Effective Time contributed to, or had an
obligation to contribute to, a multi-employer plan within the meaning of Section
3(37) of ERISA.
(viii) Set forth on schedule 2.3(b) is a complete list of all
Affiliate Notes, setting forth the amounts owed by such officer.
(m) Labor Matters.
(i) Except as set forth in Schedule 3.1(m)(i) hereto, as of the
date of this Agreement, (1) no employees of Arch or any of its Subsidiaries are
represented by any labor organization; (2) no labor organization or group of
employees of Arch or any of its Subsidiaries has made a pending demand for
recognition or certification, and there are no representation or certification
proceedings or petitions seeking a representation proceeding presently pending
or threatened in writing to be brought or filed with the National Labor
Relations Board or any other labor relations tribunal or authority; and (3) to
the knowledge of Arch, there are no organizing activities involving Arch or any
of its Subsidiaries pending with any labor organization or group of employees of
Arch or any of its Subsidiaries.
(ii) Except as set forth on Schedule 3.1(m)(ii) hereto, Arch and
each of its Subsidiaries is in compliance with all laws and orders relating to
the employment of labor, including all such laws and orders relating to wages,
hours, collective bargaining, discrimination, civil rights, safety and health
(including the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.
("OSHA")), workers' compensation and the collection and payment of withholding
and/or Social Security Taxes and similar Taxes, except where the failure to
comply would not have a Material Adverse Effect on Arch.
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(n) Intangible Property. Arch and its Subsidiaries possess or have
adequate rights to use all material trademarks, trade names, patents, service
marks, brand marks, brand names, computer programs, databases, industrial
designs and copyrights necessary for the operation of the businesses of each of
Arch and its Subsidiaries (collectively, the "Arch Intangible Property"), except
where the failure to possess or have adequate rights to use such properties
would not have a Material Adverse Effect on Arch. Except as set forth on
Schedule 3.1(n), all of the Arch Intangible Property is owned by Arch or its
Subsidiaries free and clear of any and all liens, claims or encumbrances, except
those that would not have a Material Adverse Effect on Arch, and neither Arch
nor any such Subsidiary has forfeited or otherwise relinquished any Arch
Intangible Property which forfeiture would result in a Material Adverse Effect.
To the knowledge of Arch, the use of the Arch Intangible Property by Arch or its
Subsidiaries does not, in any material respect, conflict with, infringe upon,
violate or interfere with or constitute an appropriation of any right, title,
interest or goodwill, including, without limitation, any intellectual property
right, trademark, trade name, patent, service mark, brand mark, brand name,
computer program, database, industrial design, copyright or any pending
application therefor of any other person and there have been no claims made.
Neither Arch nor any of its Subsidiaries has received any written notice of any
claim or otherwise knows that any of the Arch Intangible Property is invalid or
conflicts with the asserted rights of any other person or has not been used or
enforced or has been failed to be used or enforced in a manner that would result
in the abandonment, cancellation or unenforceability of any of the Arch
Intangible Property, except for any such conflict, infringement, violation,
interference, claim, invalidity, abandonment, cancellation or unenforceability
that would not have a Material Adverse Effect on Arch.
(o) Environmental Matters.
For purposes of this Agreement:
(A) "Environmental Law" means any applicable law, rule or regulation
(including, without limitation, any applicable U.S. federal, state or local
and any applicable foreign national, provincial or local law, rule or
regulation) regulating or prohibiting Releases into any part of the
environment, or pertaining to the protection of natural resources and the
environment, including the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") (42 U.S.C. Section 9601 et
seq.), the Hazardous Materials Transportation Act (49 U.S.C. Section 1801
et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section
6901 et seq.), the Clean Water Act (33 U.S.C. Section 1251 et seq.), the
Clean Air Act (33 U.S.C. Section 7401 et seq.), the Toxic Substances
Control Act (15 U.S.C. Section 7401 et seq.), and the Federal Insecticide,
Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et seq.), and the
regulations promulgated pursuant thereto, and any such applicable state or
local statutes, and the regulations promulgated pursuant thereto, as such
laws have been and may be amended or supplemented through the Closing Date.
(B) "Hazardous Material" means any substance, material or waste which
is regulated pursuant to any Environmental Law by any public or
governmental authority in the jurisdictions in which the applicable party
or its Subsidiaries conducts business, or the United States or Canada,
including, without limitation, any material or substance which is defined
as a "hazardous waste," "hazardous material," "hazardous substance,"
"extremely hazardous
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waste" or "restricted hazardous waste," "contaminant," "toxic waste" or
"toxic substance" under any provision of Environmental Law;
(C) "Release" means any release, spill, effluent, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the environment; and
(D) "Remedial Action" means all actions, including, without
limitation, any capital expenditures, required by a Governmental Entity or
required under any Environmental Law, to (I) clean up, remove, treat, or in
any other way ameliorate or address any Hazardous Materials or other
substance in the environment; (II) prevent the Release or threat of
Release, or minimize the further Release of any Hazardous Material so it
does not endanger or threaten to endanger the public health or welfare of
the indoor or outdoor environment; (III) perform pre-remedial studies and
investigations or post-remedial monitoring and care pertaining or relating
to a Release; or (IV) bring the applicable party into compliance with any
Environmental Law.
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(i) Except as disclosed on Schedule 3.1(o), the operations of Arch
and its Subsidiaries have been and, as of the Closing Date, will be, in
compliance with all Environmental Laws, except where the failure to so comply
would not have a Material Adverse Effect on Arch or APL;
(ii) Except as disclosed on Schedule 3.1(o), Arch and its
Subsidiaries have obtained and will, as of the Closing Date, maintain all
permits required under applicable Environmental Laws for the continued
operations of their respective businesses, except such permits the lack of which
would have a Material Adverse Effect on Arch or APL;
(iii) Except as disclosed on Schedule 3.1(o), as of the date hereof
Arch and its Subsidiaries are not subject to any outstanding written orders or
material contracts with any Governmental Entity or other person respecting (A)
Environmental Laws, (B) Remedial Action or (C) any Release or threatened Release
of a Hazardous Material except for such orders or contracts that would not have
a Material Adverse Effect on Arch or APL;
(iv) Except as disclosed on Schedule 3.1(o), Arch and its
Subsidiaries have not received any written communication in the last two years
alleging, with respect to any such party, the violation of or liability under
any Environmental Law, which violation or liability would reasonably be expected
to have a Material Adverse Effect on Arch or APL;
(v) Except as disclosed on Schedule 3.1(o), to the knowledge of
Arch or APL, neither Arch nor any of its Subsidiaries has any contingent
liability in connection with the Release of any Hazardous Material into the
environment (whether on-site or off-site) that would have a Material Adverse
Effect on Arch;
(vi) Except as disclosed on Schedule 3.1(o), the operations of Arch
or its Subsidiaries involving the generation, transportation, treatment, storage
or disposal of hazardous waste, as defined and regulated under 40 C.F.R. Parts
260-270 (in effect as of the date of this Agreement) or any foreign or state
equivalent, are in compliance with applicable Environmental Laws, except where
the failure to so comply would not reasonably be expected to have a Material
Adverse Effect on Arch; and
(vii) Except as disclosed on Schedule 3.1(o), to the knowledge of
Arch as of the date hereof, there is not now on or in any property of Arch or
its Subsidiaries any of the following: (A) any underground storage tanks or
surface impoundments, (B) any friable asbestos-containing materials, or (C) any
polychlorinated biphenyls, any of which ((A), (B), or (C) preceding) would have
a Material Adverse Effect on Arch.
(p) Maps, Geological, Geophysical Libraries and other Proprietary
Information. Except as set forth on Schedule 3.1(p), to Arch's knowledge, (i)
either Arch or its Subsidiaries own, or have a right to use without any
limitations or restrictions adversely affecting the use of the same in the
ordinary conduct of their business, subject to all applicable license
agreements, laws, rules and regulations, including without limitation,
directives, orders or similar actions of the province of Alberta's Energy
Resources Conservation Board, all technology, know-how, processes, maps, seismic
records, well logs, core samples, interpretations and programs, and all seismic,
geological, engineering and
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geophysical information and libraries and other proprietary information now used
in the conduct of their business (collectively, "Evaluation Data"), and (ii) the
consummation of the transactions contemplated by this Agreement will not alter
or impair any such rights or breach any agreements with third party vendors or
require payments of additional sums thereto. Except as set forth on Schedule
3.1(p), no claims have been asserted by any person challenging Arch's or its
Subsidiaries' right to use or obtain access to any such Evaluation Data and no
person has overtly challenged or questioned the right of Arch or any of its
Subsidiaries to copy, modify, use or distribute the same within the terms
governing Arch's or its Subsidiaries' use of such Evaluation Date, nor to Arch's
knowledge, is there any reasonable basis for any such claim, challenge or
question. Except as set forth on Schedule 3.1(p), the manner in which Arch or
its Subsidiaries have actually used or copied such Evaluation Data does not
infringe on the rights of any persons.
(q) Vote Required. The affirmative vote of the holders of (i) a majority
of the outstanding shares of Arch Common Stock, and (ii) two-thirds of the
shares of the outstanding Convertible Preferred Stock are the only votes of the
holders of any class or series of Arch capital stock necessary to approve this
Agreement and the transactions contemplated hereby.
(r) Beneficial Ownership of Pogo Common Stock. As of the date hereof,
assuming the accuracy of the representation set forth in Section 3.2(b), neither
Arch nor its Subsidiaries "beneficially owns" (as defined in Rule 13d-3 under
the Exchange Act) any Pogo Common Stock.
(s) Insurance. Arch has delivered to Pogo an insurance schedule of Arch's
and each of its Subsidiaries' directors' and officers' liability insurance,
primary and excess casualty insurance policies, providing coverage for bodily
injury and property damage to third parties, including products liability and
completed operations coverage, and worker's compensation, in effect as of the
date hereof. Arch maintains insurance coverage reasonably adequate for the
operation of the business of Arch and each of its Subsidiaries (taking into
account the cost and availability of such insurance), and the transactions
contemplated hereby will not materially adversely affect such coverage.
(t) Brokers. No broker, investment banker, or other person is entitled to
any broker's, finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Arch.
(u) Accounting Matters. Arch has previously (i) requested its outside
accountants to disclose to Pogo any actions taken by Arch or any of its
affiliates, and (ii) accurately answered all written questions posed by Pogo,
that in either such case are relevant to the determination of the treatment of
the business combination to be effected by the Merger as a pooling of interests
for accounting purposes.
(v) Title to Oil and Gas Properties; Performance of Obligations; no
Defaults or Violations; Material Oil and Gas Contracts. For purposes of this
Agreement, the term "Oil and Gas Properties" shall mean all of the royalty
interests, oil and gas leases or oil, gas and mineral leases owned by Arch and
its Subsidiaries and described or referred to in Schedule 3.1(v), the leasehold
estates created thereby and any other real property interest described in
Schedule 3.1(v), together with all the property and rights incident and
appurtenant thereto, including without limitation the undivided interests of
either
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Arch or APL (as specified on Schedule 3.1(v)) in and to such leases and the
lands covered thereby and the wells or units located thereon or applicable
thereto, all as set forth in Schedule 3.1(v). Neither Arch nor APL warrant title
to the Oil and Gas Properties, but Arch does represent and warrant that (i) they
have done no act or thing whereby any of the Oil and Gas Properties may be
canceled or terminated and, to Arch's and APL's knowledge on the basis of (A)
its actual knowledge, (B) with respect to properties which Arch, APL or TDC
operate, what a prudent joint operator should have known, and (C) with respect
to properties that are not operated by Arch, APL or TDC, what a prudent person
in the conduct of his business should have known ((A), (B) and (C) are
hereinafter referred to "Oil & Gas Knowledge") no other party has done any such
thing; (ii) except as disclosed on Schedule 3.1(v), and except as may be
provided in any oil and gas contract entered into in the ordinary course,
neither Arch nor APL have created any lien or encumbrance upon or against any of
the Oil and Gas Properties; (iii) except as disclosed on Schedule 3.1(v), none
of the Oil and Gas Properties are subject to reduction or conversion (A) by
reference to payout of any well or (B) otherwise pursuant to a right created by,
through or under either Arch or APL; (iv) to the Oil & Gas Knowledge of Arch, or
APL, as applicable, may enter into and upon, and hold and enjoy the lands
included in or comprising the Oil and Gas Properties for the respective terms of
the oil and gas leases or oil, gas and mineral leases including in or comprising
the Oil and Gas Properties (collectively, the "Leases") and all renewals or
extensions thereof without any interruption of or by the vendors to either Arch
or APL or any other person claiming by, through or under such vendors; (v) all
rentals, royalties and all ad valorem, income, property, production, severance
and similar taxes and assessments on or measured by the ownership of the Oil and
Gas Properties or the production of petroleum substances from the Oil and Gas
Properties or the receipt of proceeds therefrom payable prior to the Closing
Date have been duly and properly paid; provided that with respect to Oil and Gas
Properties not operated by either Arch or APL, Arch or APL, as applicable, makes
the representation set out in this clause (v) only on the basis of Arch's and
APL's respective Oil & Gas Knowledge; (vi) to Arch's and APL's Oil & Gas
Knowledge, each have complied with, performed, observed and satisfied all
material terms, conditions, obligations, and liabilities which have heretofore
arisen and were the obligations of either Arch or APL under any of the
provisions of any contract or agreement (including any Lease) affecting any Oil
and Gas Property or any statute, rule, regulation, permit, order, writ,
injunction, or decree of any governmental agency or court relating to any Oil
and Gas Property, and, to Arch's and APL's Oil & Gas Knowledge, where the
performance, observance, or satisfaction of any such material term, condition,
obligation or liability is or was the responsibility of another party, such
other party has so performed, observed and satisfied the same; (vii) neither
Arch nor APL is in material default, nor does either Arch or APL have any
knowledge of, nor has Arch or APL been informed of, any material default or
received notice of any material default by any other party, under any contract
relating to an Oil and Gas Property or agreement (including any Lease), or
otherwise relating to any Oil and Gas Property; provided that with respect to
any such contract or agreement relating to any Oil and Gas Property not operated
by either Arch or APL, Arch or APL, as applicable, makes the representation set
out in this clause (vii) only to Arch's and APL's Oil & Gas Knowledge; (viii)
neither Arch nor APL has received, nor to the knowledge of Arch and APL has any
other party received, any notice of the occurrence of a material violation, nor
is Arch or APL aware that any material violation is occurring or has occurred,
in respect of operations relating to the Oil and Gas Properties; provided that
in respect of operations relating to Oil and Gas Properties not operated by
either Arch or APL, Arch makes the representations set out in this clause (viii)
only to Arch's and APL's Oil & Gas Knowledge; and (ix) Schedule 3.1(v) lists all
joint ventures, partnerships, or contracts for the sale or processing of gas
pursuant to which either Arch or APL has
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mandatory capital expenditure obligations in excess of $250,000 annually; and
(x) Schedule 3.1(v) lists all executory contracts pursuant to which either Arch
or APL have agreed to purchase, sell or exchange Oil and Gas Properties for
consideration or having a value in excess of $50,000.
(w) Title to Other Properties. Arch or its Subsidiaries, as applicable,
have defensible title to, or a valid right to use and enjoy, all of their
properties and assets, real and personal, tangible and intangible (other than
the Oil and Gas Properties, which are the subject of Section 3.1(v) above) used
in connection with the operation of the Oil and Gas Properties and the marketing
of production therefrom; provided that with respect to such properties and
assets which are used in the operation of Oil and Gas Properties not operated by
either Arch or APL, Arch makes the foregoing representation only as to Arch's
and APL's Oil & Gas Knowledge. Except as set forth on Schedule 3.1(w), all of
such properties are free of any mortgage, pledge, lien, charge, encumbrance or
other adverse claim, created or arising, through or under Arch or such
Subsidiary and to Arch's and APL's Oil & Gas Knowledge, all of such properties
are free of any other mortgage, pledge, lien, charge, encumbrance or recorded
adverse claim howsoever created or arising.
(x) Personalty, Equipment and Fixtures Equipment. All wells, platforms,
fixtures, facilities, pipelines, gas plants, vehicles, personal property and
equipment owned or leased by Arch or its Subsidiaries and used in its operations
or attributed value on Arch's consolidated balance sheet are (i) in good
working order, ordinary wear and tear excepted, and Arch or its Subsidiary has
maintained the same in accordance with sound industry or oil field practices,
and to Arch's knowledge, either Arch's or its Subsidiaries' predecessors-in-
interest have so maintained the same, (ii) adequate, together with all related
assets, to comply with the volume and pipeline or shipper quality requirements
of all applicable contracts, including gas sales, processing and transportation
contracts and (iii) meet and comply with all applicable laws, rules and
regulations of any Governmental Entity, excluding all Environmental Laws which
is the subject of Section 3.1(o); provided that with respect to property and
equipment which are used in the operation of Oil and Gas Properties not operated
by either Arch or APL, Arch makes the foregoing representations only on the
basis of Arch's and APL's Oil & Gas Knowledge.
(y) Wells; Leases; Operations Generally. Except as disclosed on Schedule
3.1(y), since the date that either Arch or APL have acquired each of the Oil and
Gas Properties, the production of oil and gas therefrom has not been materially
in excess of the allowable production allocated to each well thereon, and to
either Arch or APL's knowledge, Arch's or APL's predecessors-in-interest, as
applicable, have not produced any such well in excess of the allowable
production allocated thereto; provided that with respect to wells not operated
by either Arch or APL or their predecessors-in-interest, Arch makes the
foregoing representation only as to Arch's and APL's Oil & Gas Knowledge.
Except as disclosed on Schedule 3.1(y), (i) there are no provisions applicable
to any of the Leases or other contracts to which either Arch or APL is a party
that increase the royalty share of the lessor thereunder; (ii) following
production sufficient to hold the Leases without payment of delay rentals, none
of the Leases are fixed-term Leases; and (iii) to Arch's or APL's executive
officer's actual knowledge the terms of the Leases are in accordance with
generally accepted standards in the jurisdiction in which the lands covered
thereby are located.
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(z) Marketing; Take or Pay Payments. Except as disclosed on Schedule
3.1(z), no amounts of hydrocarbons produced from any Oil and Gas Property are
subject to a sales or transportation (excluding gathering systems) contract
(except for contracts terminable without penalty by either Arch or APL on not
more than 30 days notice), and except as may be contained in any contract or
other instrument described on Schedule 3.1(z), no person has any call upon,
option to purchase or similar rights under any agreement with respect to the Oil
and Gas Properties or to the production therefrom. Neither Arch nor APL has in
any respect collected, nor will either Arch or APL in any respect collect, any
proceeds from the sale of hydrocarbons produced from the Oil and Gas Properties
that are subject to refund, except as disclosed on Schedule 3.1(z). Proceeds
from the sale of oil, condensate and gas from the Oil and Gas Properties are
being received in all respects by either Arch or APL in a timely manner and are
not being held in suspense for any reason, except as disclosed on Schedule
3.1(z). Neither Arch nor APL has been nor will either Arch or APL be obligated
by virtue of any prepayment made under any production sales contract or any
other contract containing a "Take or Pay" clause, or under any gas balancing,
deferred production or similar arrangement to deliver oil, gas or other minerals
produced from or allocated to any of the Oil and Gas Properties at some future
time without receiving full payment therefor at the time of delivery, except as
disclosed on Schedule 3.1(z). Except as disclosed on Schedule 3.1(z), there are
no material gas imbalances as between either Arch or APL and any third party
with respect to operations relating to the Oil and Gas Properties. Except as
disclosed on Schedule 3.1(z), to the Oil & Gas Knowledge of Arch and APL, they
have each followed customary practices in the oil and gas industry and have
filed, or caused to be filed, with the appropriate provincial and federal
agencies all necessary rate and collection filings and all necessary
applications for well determinations under applicable law, and the rules and
regulations of any applicable Governmental Entity thereunder and each such
application has been approved by or is pending before the appropriate state,
provincial or federal agency. Except as disclosed on Schedule 3.1(z), no gas
sold by Arch or APL from the Oil and Gas Properties is price-restricted under
any law, rule or regulation.
3.2 Representations and Warranties of Pogo and Sub. Pogo and Sub jointly
and severally represent and warrant to Arch as follows:
(a) Organization, Standing and Power. Each of Pogo, Sub and Pogo's
Significant Subsidiaries is a corporation, limited liability company or
partnership duly organized, validly existing and in good standing under the laws
of its state or jurisdiction of incorporation or organization, has all requisite
power and authority to own, lease and operate its properties and to carry on its
business as now being conducted, and is duly qualified and in good standing to
do business in each jurisdiction in which the business it is conducting, or the
operation, ownership or leasing of its properties, makes such qualification
necessary, other than in such jurisdictions where the failure so to qualify
would not have a Material Adverse Effect on Pogo. Pogo and Sub have heretofore
delivered to Arch complete and correct copies of their respective Certificates
of Incorporation and Bylaws. As used in this Agreement a "Significant
Subsidiary" means any Subsidiary of Pogo that would constitute a Significant
Subsidiary of such party within the meaning of Rule 1-02 of Regulation S-X of
the Securities and Exchange Commission (the "SEC").
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(b) Capital Structure. As of the date hereof, the authorized capital stock
of Pogo consists of 100,000,000 shares of Pogo Common Stock and 1,000,000 shares
of preferred stock, par value $1.00 per share, of Pogo (the "Pogo Preferred
Stock"). At the close of business on March 31, 1998 (i) 37,559,370 shares of
Pogo Common Stock were issued and outstanding; (ii) 15,575 shares of Pogo Common
Stock were held by Pogo, which are treated for purposes of clause (i) and
financial reporting purposes as having been effectively retired; (iii) no shares
of Pogo Preferred Stock are issued and outstanding; and (iv) $115,000,000 of
Voting Debt was issued or outstanding with respect to Pogo. All outstanding
shares of Pogo capital stock are, and the shares of Pogo Common Stock when
issued in accordance with this Agreement, and upon exercise of the Arch Stock
Options (as defined in Section 5.8) to be assumed pursuant to the Merger, will
be, validly issued, fully paid and non-assessable and were not issued in
violation of any preemptive rights. Except as set forth on Schedule 3.2(b), all
outstanding shares of capital stock of the Significant Subsidiaries of Pogo are
owned by Pogo, a direct or indirect wholly owned Subsidiary of Pogo, or by
officers of Pogo as required by local law, free and clear of all liens, charges,
encumbrances, claims and options of any nature. Except as set forth in this
Section 3.2(b) or on Schedule 3.2(b) or as described in the Pogo SEC Documents
and except for changes since March 31, 1998 resulting from the exercise of
employee stock options granted pursuant to, or from issuances under plans
described in the Pogo SEC Documents (as defined herein) (collectively, the "Pogo
Equity Plans"), or as contemplated by this Agreement, there are outstanding: (i)
no shares of capital stock, Voting Debt or other voting securities of Pogo; (ii)
no securities of Pogo or any Subsidiary of Pogo convertible into or exchangeable
for shares of capital stock, Voting Debt or other voting securities of Pogo or
any Subsidiary of Pogo; and (iii) no options, warrants, calls, rights (including
preemptive rights), commitments or agreements to which Pogo or any Subsidiary of
Pogo is a party or by which it is bound in any case obligating Pogo or any
Significant Subsidiary of Pogo to issue, deliver, sell, purchase, redeem or
acquire, or cause to be issued, delivered, sold, purchased, redeemed or
acquired, additional shares of capital stock or any Voting Debt or other voting
securities of Pogo or of any Significant Subsidiary of Pogo or obligating Pogo
or any Significant Subsidiary of Pogo to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement. There are not as of the
date hereof and there will not be at the Effective Time any stockholder
agreements, voting trusts or other agreements or understandings to which Pogo is
a party or by which it is bound relating to the voting of any shares of the
capital stock of Pogo. As of the date hereof, the authorized capital stock of
Sub consists of 1,000 shares of common stock, par value $0.01 per share, 1,000
shares of which are validly issued, fully paid and non-assessable and are owned
by Pogo.
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(c) Authority; No Violations, Consents and Approvals.
(i) Each of Pogo and Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including but not limited
to the issuance of the Pogo Common Stock pursuant to the Merger, have been duly
authorized by all necessary corporate action on the part of Pogo and Sub. This
Agreement has been duly executed and delivered by Pogo and Sub and, assuming
this Agreement constitutes the valid and binding obligation of Arch, constitutes
a valid and binding obligation of each of Pogo and Sub enforceable in accordance
with its terms, subject, as to enforceability, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditors' rights and to general principles of equity.
(ii) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or give rise to a right of purchase under,
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of Pogo or any of its Subsidiaries under,
or otherwise result in a detriment to Pogo or any of its Subsidiaries under, any
provision of (A) the Certificate of Incorporation or Bylaws of Pogo or any
provision of the comparable charter or organizational documents of any of its
Subsidiaries, (B) any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement (including, without limitation, any pre-emptive rights
or rights of first refusal with respect to oil and gas interests), instrument,
permit, concession, franchise or license applicable to Pogo or any of its
Subsidiaries, (C) any joint operating agreement or joint venture or other
ownership arrangement or (D) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in Section 3.2(c)(iii) are duly
and timely obtained or made, any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Pogo or any of its Subsidiaries or
any of their respective properties or assets, other than, in the case of clause
(B), (C) or (D), any such conflicts, violations, defaults, rights, liens,
security interests, charges, encumbrances or detriments that, individually or in
the aggregate, would not have a Material Adverse Effect on Pogo, materially
impair the ability of Pogo to perform its obligations hereunder or thereunder or
prevent the consummation of any of the transactions contemplated hereby or
thereby.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, or permit from any Governmental Entity
is required by or with respect to Pogo or any of its Subsidiaries in connection
with the execution and delivery of this Agreement by Pogo and Sub or the
consummation by Pogo and Sub of the transactions contemplated hereby, as to
which the failure to obtain or make would have a Material Adverse Effect on
Pogo, except for: (A) the filing of a pre-merger notification report by Pogo
under the HSR Act and the expiration or termination of the applicable waiting
period with respect thereto; (B) the filing with the SEC of the Proxy Statement,
the S-4, such reports under Section 13(a) of the Exchange Act and such other
compliance with the Securities Act and the Exchange Act and the rules and
regulations thereunder as may be required in connection with this Agreement and
the transactions contemplated hereby, and the obtaining from the SEC of such
orders
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as may be so required; (C) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware; (D) filings with, and approval of,
the NYSE; (E) such filings and approvals as may be required by any applicable
state securities, "blue sky" or takeover laws or environmental laws; and (F)
such filings and approvals as may be required by any foreign pre-merger
notification, securities, corporate or other law, rule or regulation.
(d) SEC Documents. Pogo has made available to Arch a true and complete
copy of each report, schedule, registration statement and definitive proxy
statement filed by Pogo with the SEC since December 31, 1997 and prior to the
date of this Agreement (the "Pogo SEC Documents"), which are all the documents
(other than preliminary material) that Pogo was required to file with the SEC
during such period. As of their respective dates, the Pogo SEC Documents
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Pogo SEC Documents, and none of the Pogo SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of Pogo included in the Pogo SEC
Documents complied as to form in all material respects with the published rules
and regulations of the SEC with respect thereto, were prepared in accordance
with GAAP applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly
present in accordance with applicable requirements of GAAP (subject, in the case
of the unaudited statements, to normal year-end adjustments, any other
adjustments described therein, and the fact that certain information and notes
have been condensed or omitted in accordance with the Exchange Act and the rules
and regulations promulgated thereunder) the consolidated financial position of
Pogo and its consolidated Subsidiaries as of their respective dates and the
consolidated results of operations and the consolidated cash flows of Pogo and
its consolidated Subsidiaries for the periods presented therein.
(e) Information Supplied. None of the information supplied or to be
supplied by Pogo or Sub for inclusion or incorporation by reference in the S-4
will, at the time the S-4 becomes effective under the Securities Act or at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and none of the information supplied or to be
supplied by Pogo or Pogo Sub and included or incorporated by reference in the
Proxy Statement will, at the date mailed to stockholders of Arch or at the time
of the meeting of such stockholders to be held in connection with the Merger or
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading.
(f) Absence of Certain Changes or Events. Except as disclosed in, or
reflected in the financial statements included in, the Pogo SEC Documents or on
Schedule 3.2(f), or except as contemplated by this Agreement, since December 31,
1997, there has not been: (i) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to any of Pogo's capital stock, except for regular quarterly cash dividends not
in excess of $.03 per share on Pogo Common Stock (or a pro rata amount for any
dividend less than a full quarter)
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with usual record and payment dates for such dividends; (ii) any amendment of
any material term of any outstanding equity security of Pogo or any Significant
Subsidiary; (iii) any repurchase, redemption or other acquisition by Pogo or any
Subsidiary of any outstanding shares of capital stock or other equity securities
of, or other ownership interests in, Pogo or any Subsidiary, except as
contemplated by any Pogo benefit plans; (iv) any material change in any method
of accounting or accounting practice or any tax method, practice or election by
Pogo or any Subsidiary; (v) options to purchase Pogo Common Stock granted under
any stock option plan or other agreement at a price less than the fair market
value of the Pogo Common Stock on the date of grant; or (vi) any other
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of business)
that has had a Material Adverse Effect on Pogo.
(g) No Vote Required. No vote of the holders of any class or series of
Pogo capital stock or Voting Debt of Pogo is necessary to approve the issuance
of Pogo Common Stock pursuant to this Agreement and the transactions
contemplated hereby.
(h) Beneficial Ownership of Arch Common Stock. As of the date hereof,
assuming the accuracy of the representation set forth in Section 3.1(b), neither
Pogo nor its Subsidiaries "beneficially owns" (as defined in Rule 13d-3 under
the Exchange Act) any of the outstanding Arch Common Stock.
(i) Brokers. No broker, investment banker or other person is entitled to
any broker's, finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Pogo.
(j) Interim Operations of Sub. Sub was formed by Pogo solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business or activities, has incurred no other obligations or liabilities,
has no other assets and has conducted its operations only as contemplated
hereby. All of the outstanding capital stock of Sub is owned directly by Pogo.
(k) No Undisclosed Material Liabilities. Except as disclosed in the Pogo
SEC Documents or on Schedule 3.2(k), as of the date hereof, neither Pogo nor any
of its Significant Subsidiaries has incurred any liability of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, that would have a Material Adverse Effect on Pogo other than
liabilities under this Agreement.
(l) No Default. Neither Pogo nor any of its Significant Subsidiaries is in
default or violation (and no event has occurred which, with notice or the lapse
of time or both, would constitute a default or violation) of any term, condition
or provision of (i) their respective charter, organizational documents and by-
laws, (ii) except as disclosed in Schedule 3.2(l), any note, bond, mortgage,
indenture, license, agreement or other instrument or obligation to which Pogo or
any of its Significant Subsidiaries is now a party or by which Pogo or any of
its Significant Subsidiaries or any of their respective properties or assets may
be bound or (iii) any order, writ, injunction, decree, statute, rule or
regulation applicable to Pogo or any of its Significant Subsidiaries, except in
the case of (ii) and (iii) for defaults or violations which in the aggregate
would not have a Material Adverse Effect on Pogo.
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(m) Compliance with Applicable Laws. Pogo holds all permits, licenses,
variances, exemptions, orders, franchises and approvals of all Governmental
Entities necessary for the lawful conduct of their respective businesses (the
"Pogo Permits"), except where the failure so to hold would not have a Material
Adverse Effect on Pogo. Pogo is in compliance with the terms of the Pogo
Permits, except where the failure so to comply would not have a Material Adverse
Effect on Pogo. Except as disclosed in the Pogo SEC Documents or as set forth
on the disclosure schedules hereto, the businesses of Pogo and its Significant
Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity, except for possible violations which
would not have a Material Adverse Effect on Pogo. Except as set forth on
Schedule 3.2(m), as of the date of this Agreement, no investigation or review by
any Governmental Entity with respect to Pogo or any of its Significant
Subsidiaries is pending or, to the knowledge of Pogo as of the date hereof,
threatened, other than those the outcome of which would not have a Material
Adverse Effect on Pogo.
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(n) Litigation. Except as disclosed in the Pogo SEC Documents or on
Schedule 3.2(n) hereto, there is no suit, action or proceeding pending, or, to
the knowledge of Pogo, threatened against or affecting Pogo or its Significant
Subsidiaries ("Pogo Litigation"), and Pogo has no knowledge of any facts that
are likely to give rise to any Pogo Litigation, that (in any case) would have a
Material Adverse Effect on Pogo, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity or arbitrator outstanding against Pogo
or its Significant Subsidiaries ("Pogo Order") that would have a Material
Adverse Effect on Pogo or materially impair the ability of Pogo to consummate
the transactions contemplated by this Agreement.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS OF ARCH
4.1 Conduct of Business by Arch Pending the Merger. During the period
from the date of this Agreement and continuing until the Effective Time, Arch
agrees as to itself and its Subsidiaries that (except as expressly contemplated
or permitted by this Agreement, or to the extent that Pogo shall otherwise
consent in writing):
(a) Ordinary Course. Each of Arch and its Subsidiaries shall carry on
its businesses in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted and shall use all reasonable
efforts to preserve intact its present business organizations, keep
available the services of its current officers and employees, and endeavor
to preserve its relationships with customers, suppliers and others having
business dealings with it.
(b) Dividends; Changes in Stock. Arch shall not and it shall not
permit any of its Subsidiaries to: (i) declare or pay any dividends on or
make other distributions in respect of any of its capital stock or
partnership interests, except for the declaration and payment of dividends
from a Subsidiary of Arch to Arch or another Subsidiary of Arch and except
for cash dividends paid to holders of the Convertible Preferred Stock or
distributions paid in the ordinary course of business and consistent with
past practices, on or with respect to the membership interests of Saginaw
Pipeline Company, L.C. and Industrial Natural Gas, L.C.; (ii) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of Arch capital stock other than as contemplated
by this Agreement; or (iii) repurchase, redeem or otherwise acquire, or
permit any of its Subsidiaries to purchase, redeem or otherwise acquire,
any shares of its capital stock.
(c) Issuance of Securities. Arch shall not and it shall not permit
any of its Subsidiaries to, issue, deliver or sell, or authorize or propose
to issue, deliver or sell, any shares of its capital stock of any class,
any Voting Debt or any securities convertible into, or any rights, warrants
or options to acquire, any such shares, Voting Debt or convertible
securities, other than: (i) the issuance of Arch Common Stock upon the
exercise of stock options granted under the Arch Stock Plan that are
outstanding on the date hereof, or in
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satisfaction of stock grants or stock based awards made prior to the date
hereof pursuant to the Arch Stock Plan; and (ii) issuances by a wholly
owned Subsidiary of its capital stock to its parent.
(d) Governing Documents. Except as contemplated hereby or in
connection herewith, Arch shall not amend or propose to amend its
Certificate of Incorporation or Bylaws.
(e) No Acquisitions. Arch shall not and it shall not permit any of
its Subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization
or division thereof.
(f) No Dispositions. Other than dispositions in the ordinary course
of business consistent with past practice that are not material,
individually or in the aggregate, to Arch and its Subsidiaries taken as a
whole and product sales in the ordinary course of business consistent with
past practice, Arch shall not and it shall not permit any of its
Subsidiaries to sell, lease, encumber or otherwise dispose of, or agree to
sell, lease (whether such lease is an operating or capital lease), encumber
or otherwise dispose of, any of its assets.
(g) No Dissolution, Etc. Except as otherwise permitted or
contemplated by this Agreement, Arch shall not authorize, recommend,
propose or announce an intention to adopt a plan of complete or partial
liquidation or dissolution of Arch or any of its Subsidiaries.
(h) Certain Employee Matters. Arch shall not and it shall not permit
any of its Subsidiaries to: (i) grant any increases in the compensation of
any of its directors, officers or employees, except increases to employees
who are not officers or directors in the ordinary course of business and in
accordance with past practice; (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required or contemplated
by any of the existing Arch Employee Benefit Plans or Arch Pension Plans as
in effect on the date hereof to any director, officer or employee, whether
past or present; (iii) enter into any new, or amend any existing,
employment or severance or termination agreement with any director, officer
or key employee; (iv) become obligated under any new Arch Employee Benefit
Plan or Arch Pension Plan, which was not in existence prior to the date
hereof, or amend any such plan or arrangement in existence on the date
hereof if such amendment would have the effect of materially enhancing any
benefits thereunder; or (v) terminate the employment of any executive or
employee of Arch without cause.
(i) Indebtedness; Leases; Capital Expenditures. Arch shall not, nor
shall Arch permit any of its Subsidiaries to, (i) incur any indebtedness
for borrowed money (except for working capital under Arch's existing credit
facilities, and refinancings of existing debt that permit prepayment of
such debt without penalty (other than LIBOR breakage costs)) or guarantee
any such indebtedness or issue or sell any debt securities or warrants or
rights to acquire any debt securities of such party or any of its
Subsidiaries or guarantee any debt securities of others, (ii) except in the
ordinary course of business, enter into any lease (whether such lease is an
operating or capital lease) or create any mortgages, liens, security
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interests or other encumbrances on the property of Arch or any of its
Subsidiaries in connection with any indebtedness thereof, or (iii) commit
to aggregate capital expenditures in excess of $500,000 outside the capital
budget dated as of May 1, 1998, as amended and approved by Arch prior to
the date hereof and disclosed to Pogo.
4.2 No Solicitation.
(a) From and after the date hereof, Arch will not, and will not
authorize or permit any of its officers, directors, employees, agents or other
representatives or those of any of its Subsidiaries (collectively, "Arch
Representatives") to, directly or indirectly, solicit or knowingly encourage
(including by way of providing information) any prospective acquiror or the
invitation or submission of any inquiries, proposals or offers or any other
efforts or attempts that constitute, or may reasonably be expected to lead to,
an Acquisition Proposal (as defined herein) from any person or engage in any
discussions or negotiations with respect thereto or otherwise cooperate with or
assist or participate in or facilitate any such proposal; provided, however,
that, notwithstanding any other provision of this Agreement, (i) Arch's Board of
Directors may take and disclose to Arch's stockholders a position contemplated
by Rule 14e-2(a) promulgated under the Exchange Act or make any other disclosure
to Arch's stockholders if failure to so disclose would be inconsistent with the
fiduciary duties of the Board of Directors of Arch to its stockholders under
applicable law and (ii) following receipt from a third party (without any
solicitation, initiation, encouragement, discussion or negotiation, directly or
indirectly, by or with Arch or any Arch Representatives) of a bona fide
Acquisition Proposal that is financially superior to the Merger and reasonably
capable of being financed (as determined in each case in good faith by Arch's
Board of Directors after consultation with Arch's financial advisors), (x) Arch
may engage in discussions or negotiations with such third party and may furnish
such third party information concerning Arch, and its business, properties and
assets if such third party executes a confidentiality agreement in reasonably
customary form and (y) the Board of Directors of Arch may withdraw, modify or
not make its recommendation referred to in Section 5.3 or terminate this
Agreement in accordance with Section 7.1(f), but in each case referred to in the
foregoing clauses (i) and (ii) only to the extent that the Board of Directors of
Arch shall conclude in good faith after consultation with Arch's outside counsel
that such action is necessary in order for the Board of Directors of Arch to act
in a manner that is consistent with its fiduciary obligations under applicable
law notwithstanding any concessions that may be offered by Pogo.
(b) Arch shall immediately cease and cause to be terminated any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by Arch or any Arch
Representatives with respect to any Acquisition Proposal existing on the date
hereof.
(c) Prior to taking any action referred to in Section 4.2(a), if Arch
intends to participate in any such discussions or negotiations or provide any
such information to any such third party, Arch shall give notice to Pogo of such
action. Arch will promptly notify Pogo of any such requests for such
information or the receipt of any Acquisition Proposal, including the identity
of the person or group engaging in such discussions or negotiations, requesting
such information or making such Acquisition Proposal, and the material terms and
conditions of any Acquisition Proposal.
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(d) Nothing in this Section 4.2 shall permit Arch to enter into any
agreement with respect to an Acquisition Proposal during the term of this
Agreement (it being agreed that during the term of this Agreement, Arch shall
not enter into any agreement with any person that provides for, or in any way
facilitates, an Acquisition Proposal other than a confidentiality agreement in
the form referred to above).
(e) As used in this Agreement, "Acquisition Proposal" shall mean any
proposal or offer, other than a proposal or offer by Pogo or any of its
affiliates, for, or that could be reasonably expected to lead to, a tender or
exchange offer, a merger, consolidation or other business combination involving
Arch or any Significant Subsidiary of Arch or any proposal to acquire in any
manner a substantial equity interest in, or any substantial portion of the
assets of, Arch or any of its Subsidiaries.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of S-4 and the Proxy Statement. Pogo and Arch shall
promptly prepare and file with the SEC the Proxy Statement and Pogo shall
prepare and file with the SEC the S-4, in which the Proxy Statement will be
included as a prospectus. Each of Pogo and Arch shall use all reasonable
efforts to have the S-4 declared effective under the Securities Act as promptly
as practicable after such filing. Each of Arch and Pogo shall use all
reasonable efforts to cause the Proxy Statement to be mailed to stockholders of
Arch at the earliest practicable date. Pogo shall use all reasonable efforts to
obtain all necessary state securities laws or "blue sky" permits, approvals and
registrations in connection with the issuance of Pogo Common Stock in the Merger
and upon the exercise of Arch Stock Options (as defined in Section 5.8), and
Arch shall furnish all information concerning Arch and the holders of Arch
Common Stock and Convertible Preferred Stock as may be reasonably requested in
connection with obtaining such permits, approvals and registrations. If at any
time prior to the Effective Time any event with respect to Arch or any of its
Subsidiaries, or with respect to other information supplied by Arch for
inclusion in the Proxy Statement or the S-4, shall occur which is required to be
described in an amendment of, or a supplement to, the Proxy Statement or the S-
4, such event shall be so described, and such amendment or supplement shall be
promptly filed with the SEC and, as required by law, disseminated to the
stockholders of Arch. The Proxy Statement and the S-4, insofar as it relates to
Arch or its Subsidiaries or other information supplied by Arch for inclusion
therein, will comply as to form in all material respects with the provisions of
the Exchange Act and the rules and regulations thereunder. If at any time prior
to the Effective Time any event with respect to Pogo or any of its Subsidiaries,
or with respect to other information supplied by Pogo or Sub for inclusion in
the S-4, shall occur which is required to be described in an amendment of, or a
supplement to, the S-4, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC. The S-4, insofar as it relates
to Pogo, Sub or other Subsidiaries of Pogo or other information supplied by Pogo
or Sub for inclusion therein, will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder.
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5.2 Access to Information. Upon reasonable notice, Arch shall (and shall
cause each of its Subsidiaries to) afford to the officers, employees,
accountants, counsel and other representatives of Pogo, access, during normal
business hours during the period prior to the Effective Time, to all of its and
its Subsidiaries' properties, books, contracts, commitments and records
(including reasonable environmental testing). Upon reasonable notice, Pogo
shall (and shall cause each of its Subsidiaries to) afford to the officers and
employees of Arch, access, during normal business hours during the period prior
to the Effective Time, to all of its and its Subsidiaries' properties, books,
contracts, commitments and records. During such period, each of Arch and Pogo
shall (and shall cause each of their respective Subsidiaries to) furnish
promptly to the other a copy of each report, schedule, registration statement
and other document filed or received by it during such period pursuant to SEC
requirements. Each of Arch and Pogo agrees that it will not, and will cause its
respective representatives not to, use any information obtained pursuant to this
Section 5.2 or otherwise pursuant to this Agreement for any purpose unrelated to
the consummation of the transactions contemplated by this Agreement. The Mutual
Confidentiality Agreement dated as of April 2, 1998, between Pogo and Arch (the
"Confidentiality Agreement") shall apply with respect to information furnished
thereunder or hereunder and any other activities contemplated thereby. In the
event that either Arch or Pogo, in the course of reviewing the other party's
properties, books, contract, commitments or records, gains actual knowledge of
any information that would cause a representation or warranty in this Agreement
to be inaccurate or untrue in any material respect, such party shall promptly
advise the other party of such information.
5.3 Arch Stockholders Meeting. Subject to the fiduciary duties of the
directors under applicable law, Arch shall call a meeting of its stockholders to
be held as promptly as practicable after the date hereof for the purpose of
voting upon this Agreement and the Merger (the "Stockholders Meeting"). Subject
only to the proviso of Section 4.2(a), Arch will, through its Board of
Directors, recommend to its stockholders approval of such matters and not
rescind such recommendation and shall use its best efforts to obtain approval
and adoption of this Agreement and the Merger by its stockholders. Arch shall
use all reasonable efforts to hold such meeting as soon as practicable after the
date upon which the S-4 becomes effective.
5.4 Filings; Other Action. Subject to the terms and conditions herein
provided, Pogo and Arch shall: (a) promptly make their respective filings and
thereafter make any other required submissions under the HSR Act with respect to
the Merger; (b) use all reasonable efforts to cooperate with one another in (i)
determining which filings are required to be made prior to the Effective Time
with, and which consents, approvals, permits or authorizations are required to
be obtained prior to the Effective Time from, governmental or regulatory
authorities of the United States, the several states and foreign jurisdictions
in connection with the execution and delivery of this Agreement and the
consummation of the Merger and the transactions contemplated hereby and (ii)
timely making all such filings and timely seeking all such consents, approvals,
permits or authorizations; (c) furnish the other with copies of all
correspondence, filings and communications (and memoranda setting forth the
substance thereof) between them and their affiliates and their respective
representatives, on the one hand, and any governmental or regulatory authority
or members or their respective staffs, on the other hand, with respect to this
Agreement and the transactions contemplated hereby; (d) furnish the other with
such necessary information and reasonable assistance as such other parties and
their respective affiliates may reasonably request in connection with their
preparation of necessary filings,
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registrations or submissions of information to any governmental or regulatory
authorities, including without limitation any filings necessary under the
provisions of the HSR Act; and (e) use their commercially reasonable efforts to
take, or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make effective
the Merger and the transactions contemplated by this Agreement including,
without limitation, the resolution of objections, if any, as may be asserted by
any governmental authority with respect to the Merger and the transactions
contemplated hereby under any antitrust or trade or regulatory laws or
regulations of any governmental authority; provided that Pogo and Arch shall not
be required to take any action that could have any adverse effect on the
business, operations, prospects, assets, condition (financial or otherwise) or
results of operations of Pogo or Arch (including any Subsidiaries thereof).
5.5 Agreements of Others. Prior to the Effective Time, Arch shall cause
to be prepared and delivered to Pogo a list identifying all persons who, at the
time of the Stockholders Meeting, may be deemed to be "affiliates" of Arch as
that term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act
(the "Affiliates"). Arch shall use all reasonable efforts to cause each person
who is identified as an Affiliate in such list to deliver to Pogo, at or prior
to the Effective Time, a written agreement, in substantially the form attached
as Exhibit B hereto, that such Affiliate will not sell, pledge, transfer or
otherwise dispose of any shares of Pogo Common Stock issued to such Affiliate
pursuant to the Merger, except pursuant to an effective registration statement
or in compliance with Rule 145 or an exemption from the registration
requirements of the Securities Act. Arch shall use its best efforts to cause
each person who is identified as an Affiliate in such list to sign prior to the
thirtieth day prior to the Effective Time, a written agreement, in substantially
the form attached as Exhibit C hereto, that such party will not sell or in any
other way reduce such party's risk relative to any shares of Arch Common Stock,
Arch Preferred Stock, Pogo Common Stock or securities convertible into Pogo
Common Stock controlled, owned or held by such Affiliate prior to the Merger, or
Pogo Common Stock received in the Merger (within the meaning of Section 201.01
of the SEC's Financial Reporting Release No. 1), or any securities convertible
into Pogo Common Stock, until such time as financial results (including combined
sales and net income) covering at least 30 days of post-merger operations have
been published, except as permitted by Staff Accounting Bulletin No. 76 (or any
successor thereto) issued by the SEC.
5.6 Authorization for Shares and Stock Exchange Listing. Prior to the
Effective Time, Pogo shall have taken all action necessary to permit it to issue
the number of shares of Pogo Common Stock required to be issued pursuant to
Section 2.1. Pogo shall use all reasonable efforts to cause the shares of Pogo
Common Stock to be issued in the Merger and the shares of Pogo Common Stock to
be reserved for issuance upon exercise of Arch Stock Options and issuances under
the Arch Stock Plan to be approved for listing on the NYSE, subject to official
notice of issuance, prior to the Closing Date.
5.7 Employee Matters. All persons, other than the executive officers
listed on Schedule 5.7 (the "Executives"), who are employed by Arch or its
Subsidiaries immediately prior to the Effective Time, shall be employed by the
Surviving Corporation immediately after the Effective Time, it being understood
that Pogo and the Surviving Corporation shall not have any obligations to
continue employing such employees for any length of time thereafter. Prior to
the Effective Time, Arch agrees to make no representations or promises, oral or
written, to employees of Arch concerning either (a) employment or (b)
compensation, in each case, in respect to such employment after the Effective
Time
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without the prior consent of Pogo. Pogo and Arch further agree that any person
(other than the Executives) who is employed by Arch or any of its Subsidiaries
immediately prior to the Effective Time shall be entitled to participate, from
and after the Effective Time, in all pension and benefit plans that are
available to similarly situated salaried Pogo employees, generally, who reside
in the United States. All persons (other than the Executives) who are employed
by Arch or any of its Subsidiaries immediately prior to the Effective Time
shall, from and after the Effective Time, be considered employees of Pogo, or a
subsidiary of Pogo, as applicable, for purposes of participation and vesting
under any existing or future Pogo salaried employee benefit or pension plan.
Service by such employee with Arch and its Subsidiaries prior to the Effective
Time shall not (i) constitute service for any purposes under any of the Pogo
salaried employee benefit plans or (ii) constitute service for participation and
vesting purposes under any Pogo pension plans. Persons (other than Executives)
who are employed by Arch or any of its Subsidiaries prior to the Effective Time
who remain with Arch until the Effective Time and are terminated at the
Effective Time or within six (6) months following the Effective Time (other than
for cause) shall receive a one time severance payment equal to three (3) weeks
salary for each year of continuous service with Arch or any of its Subsidiaries.
For purposes of calculating the one-time severance payment, an employee's salary
shall be the higher of such employee's salary at either (x) the Effective Time
or (y) such employee's termination; and the severance payment for any partial
year of such continuous service shall be prorated.
5.8 Stock Options. (a) At the Effective Time, each outstanding option to
purchase Arch Common Stock that has been granted pursuant to the Arch Stock Plan
("Arch Stock Option") shall be treated as set forth in this Section 5.8;
provided however, that from and after the date hereof, Arch shall not (i) grant
additional Arch Stock Options, (ii) grant any stock appreciation rights or
limited stock appreciation rights, (iii) take any action or permit the committee
charged with management of the Arch Stock Plan to take any action under the Arch
Stock Plan other than the issuance of Arch Common Stock to employees other than
Affiliates in the ordinary course and consistent with past practices, or to
alter or amend or terminate the Arch Stock Plan or in connection with any Arch
Stock Option granted pursuant thereto including, without limitation, any action
permitting cash payments to holders of Arch Stock Options in lieu of the
treatment otherwise provided in this Section 5.8.
(b) Each Arch Stock Option shall, as of the Effective Time, be assumed by
Pogo in accordance with the terms hereof. As so assumed, such option shall be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such Arch Stock Option, a number of shares of Pogo Common
Stock equal to the number of shares of Arch Common Stock purchasable pursuant to
such exercisable portion of such Arch Stock Option multiplied by the Common
Exchange Ratio, at a price per share equal to the per-share exercise price for
the shares of Arch Common Stock purchasable pursuant to such Arch Stock Option
divided by the Common Exchange Ratio; provided, however, that the number of
shares of Pogo Common Stock that may be purchased upon exercise of such Arch
Stock Option shall not include any fractional share and, upon exercise of such
Arch Stock Option, a cash payment shall be made for any fractional share based
upon the arithmetic average of the high and low trading prices ("regular way")
of a share of Pogo Common Stock on the NYSE on the date of exercise; and
provided further, that in the case of any option to which Section 421 of the
Code applies by reason of its qualification under any of sections 422-424 of the
Code, the option price, the number of shares purchasable pursuant to such option
and the terms and conditions of exercise of such option shall be determined in
order to comply with Section 424(a) of the
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Code. After the Effective Time, except as provided above in this Section 5.8(b),
each assumed option shall fully vest and be immediately exercisable, but shall
otherwise be subject to the same terms and conditions as were applicable to the
related Arch Stock Option immediately prior to the Effective Time.
(c) Pogo shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of Pogo Common Stock for delivery upon exercise of
the Arch Stock Options assumed in accordance with this Section 5.8. As soon as
practicable after the Effective Time, Pogo shall file with the SEC a
registration statement on Form S-8 (or any successor form) or another
appropriate form with respect to the shares of Pogo Common Stock subject to the
Arch Stock Options and shall use all reasonable efforts to maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as Arch Stock Options remain outstanding.
5.9 Arch Bank Credit Facilities. At or prior to the Closing, Pogo shall
refinance (or arrange for the continuation of) or repay all of Arch's debt under
its bank credit facilities with Bank One Texas, N.A. and Bank of Montreal and
the other lenders thereunder (the "Bank Credit Facilities").
5.10 Modification of Indebtedness and Equity. Except as otherwise
expressly permitted by this Agreement or unless permitted by Pogo in writing,
neither Arch nor any Subsidiary shall take any action to amend, modify,
terminate, forgive, cancel, retire, purchase or pay early or on terms other than
as expressly permitted by any instrument governing such indebtedness, any
indebtedness of, or to, the Company including, without limitation, the
Affiliated Notes, the Notes, the Convertible Preferred Stock, the Bank Credit
Facilities, the production payment with Enron Reserve Acquisition Corp., and all
other payables and receivables of Arch and its Subsidiaries, other than payments
made or received in the ordinary course of business that are consistent with
past practices and the express written terms of any agreement governing such
indebtedness; provided however, that neither Arch nor any Subsidiary shall make
any payment on any indebtedness that would require a material prepayment penalty
without the written permission of Pogo in each instance.
5.11 Agreement to Defend. In the event any claim, action, suit,
investigation or other proceeding by any Governmental Entity or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages in
connection therewith, the parties hereto agree to cooperate and use their
reasonable efforts to defend against and respond thereto.
5.12 Public Announcements. Pogo and Sub on the one hand, and Arch, on the
other hand, will consult with each other before issuing any press release or
otherwise making any public statements with respect to the transactions
contemplated by this Agreement, and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable law or by obligations pursuant to any listing agreement
with any national securities exchange or transaction reporting system.
5.13 Other Actions. Except as contemplated by this Agreement, neither Pogo
nor Arch shall, nor shall they permit any of their Subsidiaries to, take or
agree or commit to take any action that is reasonably likely to result in any of
its respective representations or warranties hereunder being
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untrue in any material respect or in any of the conditions to the Merger set
forth in Article VI not being satisfied.
5.14 Advice of Changes; SEC Filings. Pogo and Arch shall confer on a
regular basis with each other, report on operational matters and promptly advise
each other orally and in writing of any change or event having, or which,
insofar as can reasonably be foreseen, could have, a Material Adverse Effect on
Pogo or Arch, as the case may be. Arch and Pogo shall promptly provide each
other (or their respective counsel) copies of all filings made by such party
with the SEC or any other state or federal Governmental Entity in connection
with this Agreement and the transactions contemplated hereby.
5.15 Reorganization. It is the intention of Pogo and Arch that the Merger
will qualify as a reorganization described in Section 368(a) of the Code (and
any comparable provisions of applicable state law). Neither Pogo nor Arch (nor
any of their respective Subsidiaries) will take or omit to take any action
(whether before, on or after the Closing Date) that would cause the Merger not
to be so treated. The parties will characterize the Merger as such a
reorganization for purposes of all Returns and other filings.
5.16 Accounting Matters. During the period from the date of this Agreement
through the Effective Time, unless the parties shall otherwise agree in writing,
neither Arch nor any Subsidiary of Arch shall knowingly take or fail to take any
reasonable action requested by Pogo which action or failure to act would
jeopardize the treatment of Sub's combination with Arch as a pooling of
interests for accounting purposes.
5.17 Indemnification. (a) Arch shall, and from and after the Effective
Time, Pogo and the Surviving Corporation shall, indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, an officer or director of
Arch or any of its Subsidiaries (the "Indemnified Parties") against all losses,
claims, damages, costs, expenses (including attorneys' fees), liabilities or
judgments or amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not be unreasonably withheld) of or in
connection with any threatened or actual claim, action, suit, proceeding or
investigation based in whole or in part on or arising in whole or in part out of
the fact that such person is or was a director, officer, or employee of Arch or
any Arch Subsidiary whether pertaining to any matter existing or occurring at or
prior to the Effective Time and whether asserted or claimed prior to, or at or
after, the Effective Time ("Indemnified Liabilities"), including all Indemnified
Liabilities based in whole or in part on, or arising in whole or in part out of,
or pertaining to this Agreement or the transactions contemplated hereby, in each
case to the full extent permitted under applicable Delaware law (and Pogo and
the Surviving Corporation, as the case may be, will pay expenses in advance of
the final disposition of any such action or proceeding to each Indemnified Party
to the full extent permitted by law). Without limiting the foregoing, in the
event any such claim, action, suit, proceeding or investigation is brought
against any Indemnified Parties (whether arising before or after the Effective
Time), (i) the Indemnified Parties may retain counsel reasonably satisfactory to
Pogo and Arch (or them and Pogo and the Surviving Corporation after the
Effective Time) and Arch (or after the Effective
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Time, Pogo and the Surviving Corporation) shall pay all fees and expenses of
such counsel for the Indemnified Parties promptly as statements therefor are
received; and (ii) Arch (or after the Effective Time, Pogo and the Surviving
Corporation) will use all reasonable efforts to assist in the vigorous defense
of any such matter, provided that neither Arch, Pogo nor the Surviving
Corporation shall be liable for any settlement effected without its written
consent, which consent, however, shall not be unreasonably withheld. Any
Indemnified Party wishing to claim indemnification under this Section 5.17, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify Arch (or after the Effective Time, Pogo and the Surviving Corporation),
but the failure so to notify shall not relieve a party from any liability that
it may have under this Section 5.17, except to the extent such failure
materially prejudices such party. The Indemnified Parties as a group may retain
only one law firm to represent them with respect to each such matter unless
there is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties.
Arch, Pogo and Sub agree that all rights to indemnification, including
provisions relating to advances of expenses incurred in defense of any action or
suit, existing in favor of the Indemnified Parties (including in the Certificate
of Incorporation or Bylaws of Arch or in the indemnification agreements
previously provided to Pogo) with respect to matters occurring through the
Effective Time, shall survive the Merger and shall continue in full force and
effect for a period of six years from the Effective Time; provided, however,
that all rights to indemnification in respect of any Indemnified Liabilities
asserted or made within such period shall continue until the disposition of such
Indemnified Liabilities. In the event Pogo or the Surviving Corporation or any
of their respective successors or assigns (x) consolidates with or merges with
or into any other person and shall not be the surviving corporation in such
consolidation or merger and (y) transfers all or substantially all of its assets
and properties to any person, then, in each such case, proper provision shall be
made so that the successors and assigns of Pogo or the Surviving Corporation, as
the case may be, honor the indemnification obligations set forth in this Section
5.17.
5.18 Announcement of Combined Operations. Pogo shall use all reasonable
efforts to publish, by public filing or announcement, the results of the first
full calendar month of combined operations of Pogo and Arch after the Effective
Time as soon as is commercially practicable after the end of such calendar
month, but in no event more than sixty (60) days after the end of such full
calendar month.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
(a) Arch Stockholder Approval. This Agreement and the Merger shall
have been approved and adopted by the affirmative vote of the holders of
(i) a majority of the outstanding shares of Arch Common Stock entitled to
vote thereon and (ii) two-thirds of the Convertible Preferred Stock
outstanding.
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(b) NYSE Listing. The shares of Pogo Common Stock issuable to Arch
stockholders pursuant to this Agreement and such other shares of Pogo
Common Stock required to be reserved for issuance in connection with the
Merger shall have been authorized for listing on the NYSE upon official
notice of issuance.
(c) Other Approvals. The waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated and all filings required to be made prior to the Effective Time
with, and all consents, approvals, permits and authorizations required to
be obtained prior to the Effective Time from any Governmental Entity in
connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by Arch, Pogo and Sub
shall have been made or obtained (as the case may be), except where the
failure to obtain such consents, approvals, permits, and authorizations
would not be reasonably likely to result in a Material Adverse Effect on
Pogo or Arch (assuming the Merger has taken place) or to materially
adversely affect the consummation of the Merger, and no such consent,
approval, permit or authorization shall impose terms or conditions that
would have, or would be reasonably likely to have, a Material Adverse
Effect on Pogo or Arch (assuming the Merger has taken place). Unless
otherwise agreed to by Pogo, no such consent, approval, permit or
authorization shall then be subject to appeal.
(d) S-4. The S-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceedings seeking a
stop order.
(e) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect.
6.2 Conditions of Obligations of Pogo and Sub. The obligations of Pogo
and Sub to effect the Merger are subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by Pogo and
Sub:
(a) Representations and Warranties. Each of the representations and
warranties of Arch set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as
of the Closing Date as though made on and as of the Closing Date, except
where the failure to be so true and correct would not have a Material
Adverse Effect on Arch, except for general economic changes or changes that
may affect the oil and gas industry generally.
(b) Performance of Obligations of Arch. Arch shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date.
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(c) Letters from Arch Affiliates. Pogo shall have received from each
Affiliate an executed copy of agreement or agreements contemplated by
Section 5.5.
(d) Absence of Certain Action. No Injunction shall be in effect as a
result of or related to the Merger (i) imposing any limitation upon the
ability of Pogo or any of its Subsidiaries effectively to control the
business or operations of Pogo, Arch or any of their respective
Subsidiaries or (ii) prohibiting or imposing any limitation upon Pogo's or
Arch's or any of their Subsidiaries' ownership or operation of all or any
portion of the business or assets or properties of Pogo or Arch or any of
their respective Subsidiaries or compelling Pogo or Arch or any of their
respective Subsidiaries to divest or hold separate all or any portion of
the business or assets or properties of Pogo or Arch or any of their
respective Subsidiaries, or imposing any other limitation upon any of them
in the conduct of their businesses, and no suit or proceeding by a
governmental authority seeking such an Injunction or an Injunction
preventing or making illegal the consummation of any of the Mergers shall
be pending.
(e) Conversion of the Notes. At or prior to the Closing, holders of
the Notes shall have converted the outstanding principal amount of, and
accrued interest on, their Notes into Pogo Common Stock as contemplated in
Section 2.3(a).
(f) Affiliate Notes. All holders of the Affiliate Notes shall have
made the election provided in Section 2.3(b) with respect to all of their
Affiliate Notes. Notification of such election shall have been made, in
writing, to Sub.
(g) Pooling. Pogo shall either (i) have received written notification
from the SEC that the Merger will qualify as a "pooling" for financial
accounting purposes or (ii) the written opinion from Arthur Andersen LLP
dated May 22, 1998, shall not have been modified or rescinded, nor shall
there be any material changes in the facts or assumptions which are the
basis thereof, which would cause the Merger to fail to qualify as a
"pooling" for financial accounting purposes except to the extent that any
such failure to so qualify is attributable to actions taken, or failed to
be taken, by Pogo after the date hereof.
(h) Resignation and Release. Pogo shall have received from each of
the officers named on Schedule 5.7, a Resignation and Release in
substantially the form attached hereto as Exhibit D.
6.3 Conditions of Obligations of Arch. The obligation of Arch to effect
the Merger is subject to the satisfaction of the following conditions, any or
all of which may be waived in whole or in part by Arch:
(a) Representations and Warranties. Each of the representations and
warranties of Pogo and Sub set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and
(except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the
Closing Date, except where the failure to be so true and correct would not
have a Material Adverse Effect on Pogo, except for general economic changes
or changes that may affect the oil and gas industry generally.
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(b) Performance of Obligations of Pogo and Sub. Pogo and Sub shall
have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date.
(c) Tax Opinion. Arch shall have received an opinion of Arthur
Andersen LLP, reasonably satisfactory to Arch (a copy of which shall have
been delivered to Pogo), dated on or about the date that is two days prior
to the date the Proxy Statement is first mailed to stockholders of Arch
(and which opinion shall not have been withdrawn or modified in any
material respect on or before the Closing Date) to the effect that, if the
Merger is consummated in accordance with the terms of this Agreement, for
federal income tax purposes, (i) the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code, (ii) Pogo,
Sub and Arch will each be a party to the reorganization within the meaning
of Section 368(b) of the Code, (iii) no gain or loss will be recoqnized by
Arch, Pogo or Sub (other than possibly cancellation of indebtedness income
to Arch upon the exchange of the Notes for Pogo Common Stock and (iv) no
gain or loss will be recognized by the stockholders of Arch upon the
exchange of their shares solely for shares of Pogo Common Stock pursuant to
the Merger (except with respect to any cash received in lieu of fractional
shares). The party rendering such opinion may receive and rely upon
representations contained in certificates of Pogo, Sub and Arch,
substantially in the form of Schedules 6.3(c)(i) and 6.3(c)(ii).
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of Arch:
(a) by mutual written consent of Arch and Pogo, or by mutual action of
their respective Boards of Directors;
(b) by either Arch or Pogo if (i) the Merger shall not have been
consummated by September 30, 1998 (provided that the right to terminate
this Agreement under this clause (i) shall not be available to any party
whose failure to fulfill any covenant or agreement under this Agreement has
been the cause of or resulted in the failure of the Merger to occur on or
before such date); (ii) any court of competent jurisdiction, or some other
governmental body or regulatory authority shall have issued an order,
decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and non-appealable; or (iii)
any required approval of the Arch stockholders shall not have been obtained
by reason of the failure to obtain the required vote upon a vote held at a
duly held meeting of stockholders or at any adjournment thereof;
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(c) by Pogo if (i) for any reason Arch fails to call and hold a
stockholders meeting for the purpose of voting upon this Agreement and the
Merger by September 1, 1998 (provided that the right to terminate this
Agreement under this Section 7.1(c) shall not be available to Pogo if Arch
would be entitled to terminate this Agreement under Section 7.1(d) or if
the S-4 did not become effective at least 30 days prior to such date); (ii)
Arch shall have failed to comply in any material respect with any of the
covenants or agreements contained in this Agreement to be complied with or
performed by Arch at or prior to such date of termination (provided such
breach has not been cured within 15 days following receipt by Arch of
notice of such breach and is existing at the time of termination of this
Agreement); (iii) any representation or warranty of Arch contained in this
Agreement shall not be true in all material respects when made (provided
such breach has not been cured within 15 days following receipt by Arch of
notice of such breach and is existing at the time of termination of this
Agreement) or on and as of the time of such termination as if made on and
as of such time (except to the extent it relates to a particular date),
except where the failure to be so true and correct would not have a
Material Adverse Effect on Arch, except for general economic changes or
changes that may affect the oil and gas industry generally; or (iv) after
the date hereof there has been any Material Adverse Change with respect to
Arch, except for general economic changes or changes that may affect the
oil and gas industry generally or for changes in the business and
operations of Arch proximately caused by its entering into this Agreement
or performing its obligations hereunder;
(d) by Arch if (i) Pogo or Sub shall have failed to comply in any
material respect with any of the covenants or agreements contained in this
Agreement to be complied with or performed by it at or prior to such date
of termination (provided such breach has not been cured within 15 days
following receipt by Pogo of notice of such breach and is existing at the
time of termination of this Agreement); (ii) any representation or warranty
of Pogo or Sub contained in this Agreement shall not be true in all
material respects when made (provided such breach has not been cured within
15 days following receipt by Pogo of notice of such breach and is existing
at the time of termination of this Agreement) or on and as of the time of
such termination as if made on and as of such time (except to the extent it
relates to a particular date), except where the failure to be so true and
correct would not have a Material Adverse Effect on Pogo, except for
general economic changes or changes that may affect the oil and gas
industry generally; or (iii) after the date hereof there has been any
Material Adverse Change with respect to Pogo, except for general economic
changes or changes that may affect the oil and gas industry generally;
(e) by Pogo if (i) the Board of Directors of Arch shall have withdrawn
or modified, in any manner which is adverse to Pogo, its recommendation or
approval of the Merger or this Agreement and the transactions contemplated
hereby or shall have resolved to do so, or (ii) the Board of Directors of
Arch shall have presented to or recommended to the stockholders of Arch any
Acquisition Proposal or any transaction described in the definition of
Acquisition Proposal, or shall have resolved to do so;
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(f) by Arch if Arch shall exercise the right specified in clause (ii)
of Section 4.2(a); provided that Arch may not effect such termination
pursuant to this Section 7.1(f) unless and until (i) Pogo receives at least
three business days' prior written notice from Arch of its intention to
effect such termination pursuant to this Section 7.1(f); (ii) during such
period, Arch shall, and shall cause its respective financial and legal
advisors to, consider any adjustment in the terms and conditions of this
Agreement that Pogo may propose; and (iii) Arch pays the amounts required
by Section 7.2 concurrently with such termination; or
(g) by Pogo if any Governmental Entity shall have issued any
Injunction or taken any other action permanently imposing, prohibiting or
compelling any of the limitations, prohibitions or compulsions set forth in
Section 6.2(d) and such Injunction or other action shall have become final
and non-appealable.
7.2 Effect of Termination.
(a) In the event of termination of this Agreement by any party hereto as
provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of any party hereto except (i)
with respect to this Section 7.2, the third and fourth sentences of Section 5.2,
Section 5.17, and Section 8.1 and (ii) to the extent that such termination
results from the willful breach (except as provided in Section 8.8) by a party
hereto of any of its representations or warranties or of any of its covenants or
agreements contained in this Agreement.
(b) If Pogo or Arch terminates this Agreement pursuant to Section 7.1(e)
or 7.1(f), Arch shall, on the day of such termination, pay Pogo a fee of
$3,000,000 in cash by wire transfer of immediately available funds to an account
designated by Pogo.
(c) In the event Pogo receives any fee pursuant to Section 7.2(b), Pogo
shall not assert or pursue in any manner, directly or indirectly, any claim or
cause of action against Arch or any of its affiliates, stockholders, officers or
directors based in whole or in part upon a breach of this Agreement by them or
their receipt, consideration, negotiation, recommendation, or approval of an
Acquisition Proposal or the exercise by Arch of its right of termination under
Section 7.1(f).
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the stockholders of Arch, but, after any such approval, no amendment shall be
made which by law requires further approval by such stockholders without such
further approval. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed: (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto; and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or
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waiver shall be valid only if set forth in a written instrument signed on behalf
of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Payment of Expenses. Each party hereto shall pay its own expenses
incident to preparing for entering into and carrying out this Agreement and the
consummation of the transactions contemplated hereby, whether or not the Merger
shall be consummated, except that the filing fees with respect to the S-4 and
the printing and mailing costs of the Proxy Statement shall be paid by Pogo.
8.2 Survival of Certain Representations, Warranties and Agreements. None
of the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective Time
and any liability for breach or violation thereof shall terminate absolutely and
be of no further force and effect at and as of the Effective Time, except for
the agreements contained in Sections 2.1, 2.2, 5.7 through 5.9 and Article VIII,
the agreements delivered pursuant to Sections 5.5, 5.17 and 5.18 and the
representations, covenants and agreements contained in Section 5.15 and referred
to in Section 6.3(c). The Confidentiality Agreement shall survive the execution
and delivery of this Agreement, and the provisions of the Confidentiality
Agreement shall apply to all information and material delivered hereunder.
8.3 Notices. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally or telecopied or sent by
certified or registered mail, postage prepaid, and shall be deemed to be given,
dated and received when so delivered personally, or the next business day if
telecopied and a successful answerback message is received, or, if mailed, five
business days after the date of mailing to the following address or telecopy
number, or to such other address or addresses as such person may subsequently
designate by notice given hereunder:
(a) if to Pogo or Sub, to:
Pogo Producing Company
5 Greenway Plaza, Suite 2700
Houston, Texas 77046
Attention: Gerald A. Morton
Facsimile: 713-297-4999
with a copy to:
Robert Stillwell
Baker & Botts, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002
Facsimile: 713-229-1522
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(b) if to Arch, to:
Arch Petroleum Inc.
777 Taylor Street, Suite II
Ft. Worth, Texas 76102
Attention: Larry Kalas
Facsimile: 817-332-9249
with a copy to:
Weil, Gotshal & Manges LLC
100 Crescent Court, Suite 1300
Dallas, Texas 75201
Attention: R. Scott Cohen
Craig W. Adas
Facsimile: 214-746-7777
8.4 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents, glossary of defined terms and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Whenever
the word "include," "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation." The phrase
"made available" in this Agreement shall mean that the information referred to
has been made available if requested by the party to whom such information is to
be made available. Unless the context otherwise requires, "or" is disjunctive
but not necessarily exclusive, and words in the singular include the plural and
in the plural include the singular. Any representations and warranties that are
qualified by the phrase "to the knowledge" of a party or phrases with similar
wording shall be interpreted to refer to the actual knowledge of the executive
officers of such party or its Subsidiaries.
8.5 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.6 Entire Agreement; No Third Party Beneficiaries. This Agreement
(together with the Confidentiality Agreement and any other documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereto and (b) except as provided
in Sections 5.5, 5.7, 5.15, 5.16, 5.17, 5.18 and 6.3(c) is not intended to
confer upon any person other than the parties hereto any rights or remedies
hereunder.
8.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
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8.8 No Remedy in Certain Circumstances. Each party agrees that, should
any court or other competent authority hold any provision of this Agreement or
part hereof to be null, void or unenforceable, or order any party to take any
action inconsistent herewith or not to take an action consistent herewith or
required hereby, the validity, legality and enforceability of the remaining
provisions and obligations contained or set forth herein shall not in any way be
affected or impaired thereby, unless the foregoing inconsistent action or the
failure to take an action constitutes a material breach of this Agreement or
makes the Agreement impossible to perform in which case this Agreement shall
terminate pursuant to Article VII hereof. Except as otherwise contemplated by
this Agreement, to the extent that a party hereto took an action inconsistent
herewith or failed to take action consistent herewith or required hereby
pursuant to an order or judgment of a court or other competent authority, such
party shall not incur any liability or obligation unless such party breached its
obligations under Section 5.2 hereof or did not in good faith seek to resist or
object to the imposition or entering of such order or judgment.
8.9 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties, except that Sub may assign, in its sole discretion, any or all of its
rights, interests and obligations hereunder to any newly formed direct wholly
owned Subsidiary of Pogo. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
[The Remainder of This Page Has Been Intentionally Left Blank]
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IN WITNESS WHEREOF, each party has caused this Agreement to be signed by
its respective officers thereunto duly authorized, all as of the date first
written above.
POGO PRODUCING COMPANY
By: /s/ K. R. Good
-------------------------------------
K. R. Good,
Executive Vice President
ALPHAC, INC.
By: /s/ K. R. Good
-------------------------------------
K. R. Good,
Executive Vice President
ARCH PETROLEUM INC.
By /s/ Larry Kalas
-------------------------------------
Larry Kalas
President
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APPENDIX B
[DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION LETTERHEAD APPEARS HERE]
May 28, 1998
Board of Directors
Arch Petroleum Inc.
777 Taylor Street
Penthouse IIA
Fort Worth, TX 76102
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the holders of common stock, par value $0.01 per share, ("Company Common
Stock") of Arch Petroleum, Inc. (the "Company") other than holders who are
affiliates of the Company ("Non-affiliate Stockholders") of the Exchange Ratio
(as defined below) pursuant to the terms of the Agreement and Plan of Merger
(the "Agreement"), dated as of May 28, 1998, among Pogo Producing Company
("Pogo"), Alphac, Inc., a wholly owned subsidiary of Pogo, and the Company,
pursuant to which Alphac, Inc. will be merged (the "Merger") with and into the
Company.
Pursuant to the Agreement, each share of Company Common Stock will be
converted, subject to certain exceptions, into the right to receive 0.09615
shares (the "Exchange Ratio") of common stock, $1.00 par value per share, ("Pogo
Common Stock") of Pogo.
In arriving at our opinion, we have reviewed the draft dated May 16, 1998
of the Agreement and the draft dated May 15, 1998, of the stockholder agreement
between Pogo and Threshold Development Company, and the drafts dated May 18,
1998 of the stockholder agreements between Pogo and The Travelers Life and
Annuity Company, The Travelers Indemnity Company, Connecticut General Life
Insurance Company, Cigna Mezzanine Partners III, L.P., and The Lincoln National
Life Insurance Company. We also have reviewed financial and other information
that was publicly available or furnished to us by the Company and Pogo,
including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
respective managements were certain financial projections of the Company for the
period beginning January 1, 1998 and ending December 31, 2007 prepared by the
management of the Company. Also included were Ryder Scott reserve reports for
both the Company and Pogo as of December 31, 1997 and the Company's and Pogo's
1998 capital expenditure budgets. In addition, we have compared certain
financial and securities data of the Company and Pogo with various other
companies whose securities are traded in public markets, reviewed the historical
stock prices and trading volumes of Company Common Stock and Pogo Common Stock,
reviewed prices and premiums paid in certain other business combinations and
conducted such other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion. We were not requested to, nor did we,
solicit the interest of any other party in acquiring the Company.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was
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provided to us by the Company and Pogo or their respective representatives, or
that was otherwise reviewed by us. In particular, we have relied upon the
estimates of (i) management of the Company of the operating synergies achievable
as a result of the Merger and upon our discussion of such synergies with the
management of Pogo and (ii) Ryder Scott as to the oil and gas reserves of each
of the Company and Pogo. With respect to the financial projections supplied to
us, we have assumed that they have been reasonably prepared on the basis
reflecting the best currently available estimates and judgments of the
management of the Company as to the future operating and financial performance
of the Company. We have not assumed any responsibility for making an independent
evaluation of any assets or liabilities or for making any independent
verification of any of the information reviewed by us. We have relied as to
certain legal matters on advice of tax counsel of the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion as to the prices
at which Pogo Common Stock will actually trade at any time. Our opinion does
not address the relative merits of the Merger and the other business strategies
being considered by the Company's Board of Directors, nor does it address the
Board decision to proceed with the Merger. Our opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate or other purposes.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio is fair to the non-affiliate Stockholders
from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ William G. Payne
-------------------------------------
William G. Payne
Vice President
2
<PAGE>
APPENDIX C
STOCKHOLDER AGREEMENT
(DIRECTORS/EXECUTIVE OFFICERS)
This Stockholder Agreement dated as of May __, 1998 is between Pogo
Producing Company, a Delaware corporation ("POGO") and [Insert Name of
Director/Officer] (the "STOCKHOLDER"), an individual and [title] of Arch
Petroleum Inc., a Delaware corporation ("ARCH").
WHEREAS, Pogo, Alphac, Inc., a Delaware corporation and a wholly owned
subsidiary of Pogo ("SUB"), and Arch are entering into an Agreement and Plan of
Merger dated as of the date hereof (as amended from time to time pursuant
thereto, the "MERGER AGREEMENT");
WHEREAS, the Stockholder is the record and beneficial owner of [insert
number] shares of Common Stock, par value $0.01 per share, of Arch (the "ARCH
COMMON STOCK") (such shares of Arch Common Stock, together with any shares of
capital stock of Arch acquired by the Stockholder after the date hereof and
during the term of this Agreement, being collectively referred to herein as the
"STOCKHOLDER SHARES"); and
WHEREAS, as a condition to the willingness of Pogo to enter into the Merger
Agreement, and as an inducement to it to do so, the Stockholder has agreed for
the benefit of Pogo as set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained in this Agreement, the parties
hereby agree as follows (terms defined in the Merger Agreement and used but not
defined herein having the meanings assigned to such terms in the Merger
Agreement):
ARTICLE I
COVENANTS OF THE STOCKHOLDER
Section 1.01. Agreement to Vote. At any meeting of the stockholders of
Arch held prior to the earlier of (i) the Effective Time of the Merger and (ii)
the termination of the Merger Agreement (such earlier time being herein referred
to as the "VOTING TERMINATION DATE"), however called, and at every adjournment
or postponement thereof prior to the Voting Termination Date, or in connection
with any written consent of the stockholders of Arch given prior to the Voting
Termination Date, the Stockholder shall vote or cause to be voted the
Stockholder Shares in favor of the approval of the Merger and each of the other
transactions contemplated by the Merger Agreement and in favor of the approval
and adoption of the Merger
<PAGE>
Agreement, and any actions required in furtherance hereof and thereof. The
Stockholder shall not enter into any agreement or understanding with any person
prior to the Voting Termination Date, directly or indirectly, to vote, grant any
proxy or give instructions with respect to the voting of the Stockholder Shares
in any manner inconsistent with the preceding sentence.
Section 1.02. Proxies and Voting Agreements. The Stockholder hereby
revokes any and all previous proxies granted with respect to matters set forth
in Section 1.01. Prior to the Voting Termination Date, the Stockholder shall
not, directly or indirectly, except as contemplated hereby, grant any proxies or
powers of attorney with respect to matters set forth in Section 1.01, deposit
any of the Stockholder Shares or enter into a voting agreement with respect to
any of the Stockholder Shares.
Section 1.03. No Solicitation.
(a) From and after the date hereof until the termination of the Merger
Agreement, the Stockholder will not, and will not authorize or permit any of his
agents, affiliates or other representatives (collectively, "STOCKHOLDER
REPRESENTATIVES") to, directly or indirectly, solicit or encourage (including by
way of providing information) any prospective acquiror or the invitation or
submission of any inquiries, proposals or offers or any other efforts or
attempts that constitute, or may reasonably be expected to lead to, an
Acquisition Proposal.
(b) The Stockholder shall immediately cease and cause to be terminated any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by the Stockholder or any
Stockholder Representatives with respect to any Acquisition Proposal existing on
the date hereof.
(c) Prior to the termination of the Merger Agreement, the Stockholder will
promptly notify Pogo of any requests for information made to the Stockholder or
any Stockholder Representative or the receipt of any Acquisition Proposal made
to the Stockholder or any Stockholder Representative, including the identity of
the person or group engaging in such discussions or negotiations, requesting
such information or making such Acquisition Proposal, and the material terms and
conditions of any Acquisition Proposal.
(d) Prior to the termination of the Merger Agreement, the Stockholder shall
not enter into any agreement with any person that provides for, or in any way
facilitates, an Acquisition Proposal.
(e) The provisions of this Section 1.03 do not prohibit any Stockholder
Representative who is also an Arch Representative from taking actions permitted
by Section 4.2 of the Merger Agreement.
2
<PAGE>
Section 1.04. Transfer of Stockholder Shares by the Stockholder. Prior to
the record date for the Arch stockholder meeting to vote on the Merger
Agreement, the Stockholder will not sell, transfer, assign, convey or otherwise
dispose of any of the Stockholder Shares.
Section 1.05. Other Actions.
(a) Prior to the termination of the Merger Agreement, the Stockholder shall
not take any action that would in any way restrict, limit, impede or interfere
with the performance of its obligations hereunder or the transactions
contemplated hereby or by the Merger Agreement.
(b) The Stockholder agrees that from and after the date of this Stockholder
Agreement, the Stockholder will not sell or in any other way reduce such party's
risk relative to any Stockholder Shares, shares of Pogo Common Stock, or
securities convertible into Pogo Common Stock controlled, owned or held by such
Stockholder prior to the Merger, nor will it sell, or in any other way reduce
its risk relative to any shares of Pogo Common Stock received in exchange for
the Stockholder Shares in the Merger (within the meaning of Section 201.01 of
the SEC's Financial Reporting Release No. 1) or any securities convertible into
Pogo Common Stock, until the earlier of (i) such time as financial results
(including combined sales and net income) covering at least 30 days of Pogo's
post-merger operations have been published, except as permitted by Staff
Accounting Bulletin No. 76 (or any successor thereto) issued by the SEC and (ii)
60 days after the first full calendar month of Pogo's post-merger operations
(the "RESTRICTED PERIOD").
(c) The Stockholder agrees that, at the Effective Time, he shall convert
all of the Stockholder Shares controlled, owned or held by him in accordance
with, and for the consideration described in, the Merger Agreement.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND ADDITIONAL COVENANTS
OF THE STOCKHOLDER
The Stockholder represents, warrants and covenants to Pogo that:
Section 2.01. Ownership. Except as set forth on Schedule 2.01, the
Stockholder is, as of the date hereof, the beneficial and record owner of the
Stockholder Shares, the Stockholder has the sole right to vote the Stockholder
Shares and there are no restrictions on rights of disposition or other lien,
pledge, security interest, charge or other encumbrance or restriction pertaining
to the Stockholder Shares. None of the Stockholder Shares is subject to any
voting trust or other agreement, arrangement or restriction with respect to the
voting of the Stockholder Shares, and no proxy, power of attorney or other
authorization has been granted with respect to any of the Stockholder Shares.
3
<PAGE>
Section 2.03. Binding Effect. This Agreement has been duly executed and
delivered by the Stockholder and is the valid and binding agreement of the
Stockholder, enforceable against the Stockholder in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights generally and by equitable
principles to which the remedies of specific performance and injunctive and
similar forms of relief are subject.
Section 2.04. Total Shares. The Stockholder Shares are the only shares of
capital stock of Arch owned beneficially or of record as of the date hereof by
the Stockholder, and the Stockholder does not have any option to purchase or
right to subscribe for or otherwise acquire any securities of Arch and has no
other interest in or voting rights with respect to any other securities of Arch.
Section 2.05. Finder's Fees. No investment banker, broker or finder is
entitled to a commission or fee from Arch, Pogo or Sub in respect of this
Agreement based upon any arrangement or agreement made by or on behalf of the
Stockholder.
Section 2.06. Reasonable Efforts. Prior to the Termination Date, the
Stockholder shall, solely in his capacity as a stockholder of Arch, use
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to assist and cooperate with Pogo in doing, all things
necessary, proper or advisable to consummate and make effective the Merger and
the other transactions contemplated by the Merger Agreement and this Agreement.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS OF POGO
Pogo represents, warrants and covenants to the Stockholder that:
Section 3.01. Corporate Power and Authority. Pogo has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. The execution, delivery and performance by Pogo of this
Agreement and the consummation by Pogo of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of Pogo.
Section 3.02. Binding Effect. This Agreement has been duly executed and
delivered by Pogo and is a valid and binding agreement of Pogo, enforceable
against Pogo in accordance with its terms, except as enforcement may be limited
by bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights generally and by equitable principles to which the remedies of
specific performance and injunctive and similar forms of relief are subject.
4
<PAGE>
Section 3.03. Cooperation. Subject to Section 5.16 of the Merger
Agreement and the rules and requirements of applicable securities laws, Pogo
shall use reasonable efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the Stockholder in
doing, all things necessary, proper or advisable to allow the Stockholder to
publicly sell shares of Pogo Common Stock received in the Merger after the
Restricted Period without any unreasonable delay or restrictions.
ARTICLE IV
MISCELLANEOUS
Section 4.01. Expenses. Each party hereto shall pay its own expenses
incident to preparing for entering into and carrying out this Agreement and the
consummation of the transactions contemplated hereby; provided, however, that
Arch may pay such expenses of the Stockholder.
Section 4.02. Further Assurances. From time to time, at the request of
the other party, each party shall execute and deliver or cause to be executed
and delivered such additional documents and instruments and take all such
further action as may be necessary or desirable to consummate the transactions
contemplated by this Agreement.
Section 4.03. Specific Performance. (a) The Stockholder agrees that Pogo
would be irreparably damaged if for any reason the Stockholder fails to perform
any of the Stockholder's obligations under this Agreement, and that Pogo would
not have an adequate remedy at law for money damages in such event. Accordingly,
Pogo shall be entitled to seek specific performance and injunctive and other
equitable relief to enforce the performance of this agreement by the
Stockholder. This provision is without prejudice to any other rights that Pogo
may have against the Stockholder for any failure to perform his obligations
under this Agreement; (b) Pogo agrees that the Stockholder would be irreparably
damaged if for any reason Pogo fails to perform any of Pogo's obligations under
this Agreement, and that the Stockholder would not have an adequate remedy at
law for money damages in such event. Accordingly, the Stockholder shall be
entitled to seek specific performance and injunctive and other equitable relief
to enforce the performance of this agreement by Pogo. This provision is without
prejudice to any other rights that the Stockholder may have against Pogo for any
failure to perform its obligations under this Agreement.
Section 4.04. Notices. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally, telegraphed or
telecopied or sent by certified or registered mail, postage prepaid, and shall
be deemed to be given, dated and received when so delivered personally,
telegraphed or telecopied or, if mailed, five business days after the date of
mailing to the following address or telecopy number, or to such other address or
addresses as such person may subsequently designate by notice given hereunder:
5
<PAGE>
(a) if to Pogo or Sub, to:
Pogo Producing Company
5 Greenway Plaza, Suite 2700
Houston, Texas 77046
Attention: Gerald A. Morton
Facsimile: 713-297-4970
with a copy to:
Robert Stillwell
Baker & Botts, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002
Facsimile: 713-229-1522
(b) if to Stockholder, to:
[Insert name]
[Insert address]
Facsimile: [Insert fax no.]
with a copy to:
________________________
________________________
________________________
Attention: _______________
Facsimile: _______________
Section 4.05. Interpretation. When a reference is made in this Agreement
to Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." Unless the context otherwise requires, "or" is disjunctive
but not necessarily exclusive, and words in the singular include the plural and
in the plural include the singular. The term "person" is to be interpreted
broadly to include any individual, corporation, partnership, trust, limited
liability company, government or other entity and any group (as used with
respect to Section 13(d) of the Securities Exchange Act of 1934, as amended).
Section 4.06. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become
6
<PAGE>
effective when a counterpart has been signed by each of the parties and
delivered to the other party, it being understood that all parties need not sign
the same counterpart.
Section 4.07. Entire Agreement; No Third Party Beneficiaries. This
Agreement (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and (b) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
Section 4.08. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Delaware, without giving
effect to the principles of conflicts of law thereof.
Section 4.09. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other party. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
Section 4.10. Amendments; Termination. This Agreement may not be modified,
amended, altered or supplemented, except upon the execution and delivery of a
written agreement executed by the parties hereto. This Agreement shall
terminate upon the termination of the Merger Agreement in accordance with the
terms thereof.
Section 4.11. Certain Events. The Stockholder agrees that this Agreement
and the obligations hereunder shall attach to the Stockholder Shares
beneficially owned by such Stockholder and shall be binding upon any person to
which legal or beneficial ownership of such shares shall pass, whether by
operation of law or otherwise.
Section 4.12. Severability. Whenever possible, each provision or portion
of any provision of this Agreement will be interpreted in such manner as to be
effective and valid but if any provision or portion of any provision of this
agreement is held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision, and this Agreement will be reformed, construed and
enforced as if such invalid, illegal or unenforceable provision or portion of
any provision had never been contained herein. The parties shall endeavor in
good faith negotiations to replace any invalid, illegal or unenforceable
provision with a valid provision the effects of which come as close as possible
to those of such invalid, illegal or unenforceable provision.
Section 4.13. Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements, in addition to any other relief to which such party may be
entitled.
7
<PAGE>
IN WITNESS WHEREOF, Pogo and the Stockholder have caused this Agreement to
be duly executed as of the day and year first above written.
-----------------------------------------------
[Stockholder]
POGO PRODUCING COMPANY
By_____________________________________________
Gerald A. Morton
Vice President-Law
and Corporate Secretary
8
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL, inter alia, empowers a Delaware corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of the corporation) by reason of the fact that
such person is or was a director, officer, employee or agent of another
corporation or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. Similar indemnity is authorized for such persons against expenses
(including attorneys' fees) actually and reasonably incurred in connection
with the defense or settlement of any such threatened, pending or completed
action or suit if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent
jurisdiction otherwise provides) such person shall not have been adjudged
liable to the corporation. Any such indemnification may be made only as
authorized in each specific case upon a determination by the stockholders or
disinterested directors or by independent legal counsel in a written opinion
that indemnification is proper because the indemnitee has met the applicable
standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
Pogo maintains policies insuring its and its subsidiaries' officers and
directors against certain liabilities for actions taken in such capacities,
including liabilities under the Securities Act.
Article XI of the Restated Certificate of Incorporation of Pogo eliminates
the personal liability of each director of Pogo to Pogo and its stockholders
for monetary damages for breach of fiduciary duty as a director involving any
act or omission of any such director occurring on or after September 30, 1986;
provided, however, that such provision does not eliminate or limit the
liability of a director (i) for any breach of such director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Title 8, Section 174 of the General Corporation Law of the State
of Delaware or (iv) for any transaction from which such director derived an
improper personal benefit.
The Bylaws of Pogo provide that Pogo will indemnify and hold harmless, to
the fullest extent permitted by applicable law as in effect as of the date of
the adoption of the Bylaws or as it may thereafter be amended, any person who
was or is made or is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director, officer, employee
or agent of Pogo or is or was serving at the request of Pogo as a director,
officer, employee, fiduciary or agent of another corporation or of a
partnership, joint venture, trust, enterprise or non-profit entity including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses reasonably incurred by such person. The Bylaws further
provide that Pogo will indemnify a person in connection with a proceeding
initiated by such person only if the proceeding was authorized by the Board of
Directors of Pogo.
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<PAGE>
The Bylaws further provide that Pogo will pay the expenses incurred in
defending any proceeding in advance of its final disposition, provided,
however, that the payment of expenses incurred by a director or officer in his
capacity as a director or officer (except with regard to service to an
employee benefit plan or non-profit organizations in advance of the final
disposition of the proceeding) will be made only upon receipt of an
undertaking by the director or officer to repay all amounts advanced if it
should be ultimately determined that the director or officer is not entitled
to be indemnified.
Pogo has placed in effect insurance which purports (a) to insure it against
certain costs of indemnification which may be incurred by it pursuant to the
aforementioned Bylaw provision or otherwise and (b) to insure the officers and
directors of Pogo and of specified subsidiaries against certain liabilities
incurred by them in the discharge of their functions as officers and directors
except for liabilities arising from their own malfeasance.
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES
The following instruments and documents are included as Exhibits to this
Registration Statement. Exhibits incorporated by reference are so indicated by
parenthetical information.
(a) Exhibits:
<TABLE>
<C> <S>
2.1 --Agreement and Plan of Merger, dated as of May 28, 1998, among Pogo
Producing Company, Alphac, Inc. and Arch Petroleum Inc. (included as
Appendix A to the Proxy Statement/Prospectus which forms a part of
this Registration Statement).*
2.2 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and Connecticut General Life Insurance Company.*
2.3 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and CIGNA Mezzanine Partners III, L.P.*
2.4 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and The Lincoln National Life Insurance Company.*
2.5 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and The Threshold Development Company.*
2.6 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and The Travelers Life and Annuity Company.*
2.7 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and The Travelers Indemnity Company.*
2.8 --Form of Stockholder Agreement, between Pogo Producing Company and
the directors and executive officers of Arch Petroleum Inc.
(included as Appendix C to the Proxy Statement/Prospectus which
forms a part of this Registration Statement).*
5 --Opinion of Gerald A. Morton, Esq.*
8 --Opinion of Arthur Andersen LLP, tax advisor.*
23.1 --Consent of Arthur Andersen LLP (Houston, Texas).
23.2 --Consent of Arthur Andersen LLP (Fort Worth, Texas).
23.3 --Consent of PricewaterhouseCoopers LLP, independent accountants.
23.4 --Consent of Ryder Scott Company Petroleum Engineers.
23.5 --Consent of Gerald A. Morton, Esq. (contained in his opinion filed
as Exhibit 5).*
23.6 --Consent of Arthur Andersen LLP, tax advisor (contained in its
opinion filed as Exhibit 8).*
</TABLE>
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<TABLE>
<C> <S>
23.7 --Consent of Donaldson, Lufkin & Jenrette Securities Corporation.
24 --Powers of Attorney from each Director of Pogo Producing Company
whose signature is affixed to this Registration Statement.*
99.1 --Proxy Card of Arch Petroleum Inc.
99.2 --Letter of Chairman of Arch Petroleum Inc. to Stockholders regarding
Special Meeting.
99.3 --Notice of Special Meeting of Stockholders of Arch.
99.4 --Fairness Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation (included as Appendix B to the Proxy
Statement/Prospectus which forms a part of this Registration
Statement).*
</TABLE>
(b) Financial Statement Schedules:
All Financial Statement Schedules have been omitted because they are not
required, are not applicable or the information required has been included
elsewhere herein.
- --------
* Previously filed.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(b) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(c) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 20 above, or
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<PAGE>
otherwise, the registrant has been advised that, in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless,
in the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on July 9, 1998.
Pogo Producing Company
By: /s/ Paul G. Van Wagenen
----------------------------------
PAUL G. VAN WAGENEN
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE DATE
/s/ Paul G. Van Wagenen Chairman of the July 9, 1998
- ----------------------------------- Board, President
PAUL G. VAN WAGENEN and Chief Executive
Officer (Principal
Executive Officer
and Director)
/s/ John W. Elsenhans Vice President and July 9, 1998
- ----------------------------------- Chief Financial
JOHN W. ELSENHANS Officer (Principal
Financial Officer)
/s/ Thomas E. Hart Vice President and July 9, 1998
- ----------------------------------- Controller (Principal
THOMAS E. HART Accounting Officer)
* Director July 9, 1998
- -----------------------------------
TOBIN ARMSTRONG
* Director July 9, 1998
- -----------------------------------
JACK S. BLANTON
* Director July 9, 1998
- -----------------------------------
W. M. BRUMLEY, JR.
* Director July 9, 1998
- -----------------------------------
JOHN B. CARTER, JR.
* Director July 9, 1998
- -----------------------------------
WILLIAM L. FISHER
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* Director July 9, 1998
- -----------------------------------
GERRIT W. GONG
* Director July 9, 1998
- -----------------------------------
J. STUART HUNT
* Director July 9, 1998
- -----------------------------------
FREDERICK A. KLINGENSTEIN
* Director July 9, 1998
- -----------------------------------
JACK A. VICKERS
/s/ Thomas E. Hart
*By: ______________________________
THOMAS E. HART, ATTORNEY-IN-FACT)
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. INDEX TO EXHIBITS
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<C> <S>
2.1 --Agreement and Plan of Merger, dated as of May 28, 1998, among Pogo
Producing Company, Alphac, Inc. and Arch Petroleum Inc. (included as
Appendix A to the Proxy Statement/Prospectus which forms a part of
this Registration Statement).*
2.2 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and Connecticut General Life Insurance Company.*
2.3 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and CIGNA Mezzanine Partners III, L.P.*
2.4 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and The Lincoln National Life Insurance Company.*
2.5 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and The Threshold Development Company.*
2.6 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and The Travelers Life and Annuity Company.*
2.7 --Stockholder Agreement, dated as of May 28, 1998, between Pogo
Producing Company and The Travelers Indemnity Company.*
2.8 --Form of Stockholder Agreement, between Pogo Producing Company and
the directors and executive officers of Arch Petroleum Inc. (included
as Appendix C to the Proxy Statement/Prospectus which forms a part of
this Registration Statement).*
5 --Opinion of Gerald A. Morton, Esq.*
8 --Opinion of Arthur Andersen LLP, tax advisor.*
23.1 --Consent of Arthur Andersen LLP (Houston, Texas).
23.2 --Consent of Arthur Andersen LLP (Fort Worth, Texas).
23.3 --Consent of PricewaterhouseCoopers LLP, independent accountants.
23.4 --Consent of Ryder Scott Company Petroleum Engineers.
23.5 --Consent of Gerald A. Morton, Esq. (contained in his opinion filed as
Exhibit 5).*
23.6 --Consent of Arthur Andersen LLP, tax advisor (contained in its
opinion filed as Exhibit 8).*
23.7 --Consent of Donaldson, Lufkin & Jenrette Securities Corporation.
24 --Powers of Attorney from each Director of Pogo Producing Company
whose signature is affixed to this Registration Statement.*
99.1 --Proxy Card of Arch Petroleum Inc.
99.2 --Letter of Chairman of Arch Petroleum Inc. to Stockholders regarding
Special Meeting.
99.3 --Notice of Special Meeting of Stockholders of Arch.
99.4 --Fairness Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation (included as Appendix B to the Proxy Statement/Prospectus
which forms a part of this Registration Statement).*
</TABLE>
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* Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the registration statement (File No. 333-57367), as amended by this
amendment No. 1 to registration statement of our report dated February 13, 1998
included in Pogo Producing Company's Form 10-K for the year ended December 31,
1997 and to all references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
July 9, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of the
registration statement (File No. 333-57367), as amended by this amendment No. 1
to registration statement.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
July 9, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-4 of Pogo Producing Company (File No. 333-
57367), as amended by this Amendment No. 1 to Registration Statement on Form S-4
of Pogo Producing Company, of our report dated March 25, 1997 relating to the
consolidated financial statements of Arch Petroleum Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PRICEWATERHOUSECOOPERS LLP
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the reference in the Registration Statement on Form
S-4 of Pogo Producing Company (File No. 333-57367), as amended by Amendment No.
1 to Registration Statement on Form S-4 of Pogo Producing Company, and the
related Proxy Statement/Prospectus, to our report relating to our review of the
oil and gas reserves of Arch Petroleum Inc. for 1997. We also consent to all
references to our firm included in or made a part of such Registration Statement
and Proxy Statement/Prospectus.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
July 9, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
We hereby consent to the use of our name and to the description of our
opinion letter, dated May 28, 1998, in, and to the inclusion of such opinion
letter as Appendix B to, the Proxy Statement/Prospectus of Arch Petroleum Inc.,
which Joint Proxy Statement/Prospectus is part of the Registration Statement on
Form S-4 (File Number 333-57367) of Pogo Producing Company, as amended by
Amendment No. 1 to Registration Statement on Form S-4 of Pogo Producing Company.
By giving such consent we do not thereby admit that we are experts with respect
to any part of such Registration Statement within meaning of the term "expert"
as used in, or that we come within the category of persons whose consent is
required under, the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Donaldson, Lufkin & Jenrette
Securities Corporation
By: /s/ D. Dwight Scott
-----------------------------
D. Dwight Scott
Sr. Vice President
Houston, Texas
July 9, 1998
<PAGE>
EXHIBIT 99.1
ARCH PETROLEUM INC.
PROXY FOR A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 14, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Arch Petroleum Inc., a Delaware corporation
(the "Company"), hereby acknowledges receipt of the Proxy Statement/Prospectus
dated July 15, 1998 and appoints Larry V. Kalas or Randall W. Scroggins, and
each of them, attorneys-in-fact and proxies with full power of substitution,
to vote all shares of the Company's common stock or preferred stock (together,
"Arch Stock") that the undersigned would be entitled to vote if then and there
personally present, at a special meeting of stockholders of the Company to be
held at the corporate offices of the Company at 777 Taylor Street, Suite II-A,
Fort Worth, Texas, on August 14, 1998 at 9:00 a.m., local time, or at any
adjournment or postponement thereof, revoking all previous proxies, with all
powers the undersigned would possess if present, to act upon the following
matters and upon such other business as may properly come before the meeting
or any adjournment or postponement thereof.
---------
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
[CONTINUED AND TO BE SIGNED ON REVERSE SIDE]
<PAGE>
ARCH PETROLEUM INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY
[ ]
1. APPROVAL OF AGREEMENT AND PLAN OF MERGER: For Against Abstain
To approve the Agreement and Plan of Merger, 0 0 0
dated as of May 28, 1998 (the "Merger Agreement"),
by and among Pogo Producing Company, a Delaware
corporation ("Pogo"), Alphac Inc., a Delaware
corporation and wholly owned subsidiary of Pogo,
and the Company, and the transactions contemplated
thereby. As a result of the merger, the Company
will become a wholly owned subsidiary of Pogo and
the stockholders of Arch will be entitled to receive
shares of Pogo common stock for their shares of Arch
Stock in accordance with the terms of the
Merger Agreement.
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING AND ANY POSTPONEMENTS OR
ADJOURNMENTS THEREOF FOR A VOTE OF THE COMMON STOCK.
NOTE: Please sign this proxy exactly as your name appears on the books of the
Company. Joint owners should each sign personally. Trustees and other
fiduciaries should indicate the capacity in which they sign, and where more
than one name appears, a majority must sign. If a corporation is signing, the
signature should be that of an authorized officer and should state his or her
title.
Dated: ______________________, 1998
Signature(s) ______________________
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
____ ____
<PAGE>
EXHIBIT 99.2
[ARCH LETTERHEAD]
July 15, 1998
To Our Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders of Arch
Petroleum Inc. ("Arch") at the corporate offices of Arch at 777 Taylor Street,
Suite II-A, Fort Worth, Texas, on August 14, 1998, at 9:00 a.m., local time.
At the Special Meeting, you will be asked to approve and adopt an Agreement
and Plan of Merger (the "Merger Agreement") among Arch, Pogo Producing Company
("Pogo") and a wholly owned subsidiary of Pogo, pursuant to which the subsidiary
would merge (the "Merger") with and into Arch. If the Merger becomes effective,
each share of Arch common stock will be converted into the right to receive
0.09615 of a share of Pogo common stock, and each share of Arch preferred stock
will be converted into the right to receive 0.9615 of a share of Pogo common
stock, in each case together with any associated rights to purchase Series A
Junior Participating Preferred Stock of Pogo. The determination of the exchange
ratios is described more fully in the accompanying Proxy Statement/Prospectus.
The Board of Directors of Arch believes that the proposed Merger is fair to,
and in the best interests of, Arch and its stockholders and unanimously
recommends that you vote FOR adoption and approval of the Merger Agreement and
the transactions contemplated thereby. In addition, the Board of Directors has
received the opinion of Donaldson, Lufkin & Jenrette Securities Corporation that
the consideration to be received by non-affiliated holders of Arch common stock
in the Merger is fair to such non-affiliate stockholders from a financial point
of view. Approval and adoption of the Merger Agreement requires the affirmative
vote of (i) the holders of a majority of the outstanding shares of Arch common
stock and Arch preferred stock voting together as one class and (ii) the holders
of at least 66 2/3% of Arch preferred stock voting as a separate class.
You are urged to read carefully the accompanying Proxy Statement/Prospectus
and the Appendices in their entirety for a complete description of the Merger
and the Merger Agreement. Whether or not you plan to attend the Special Meeting,
please be sure to date, sign and return the proxy card in the enclosed postage-
paid envelope as promptly as possible so that your shares may be represented at
the Special Meeting and voted in accordance with your wishes.
Sincerely,
Johnny H. Vinson
Chairman of the Board
<PAGE>
EXHIBIT 99.3
ARCH PETROLEUM INC.
777 TAYLOR STREET
SUITE II-A
FORT WORTH, TEXAS 76102
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 14, 1998
TO THE STOCKHOLDERS OF ARCH PETROLEUM INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Arch
Petroleum Inc. ("Arch") will be held at the corporate offices of Arch at 777
Taylor Street, Suite II-A, Fort Worth, Texas on August 14, 1998, at 9:00 a.m.,
local time, to vote upon approval and adoption of an Agreement and Plan of
Merger (the "Merger Agreement"), which is described in and attached as Appendix
A to the accompanying Proxy Statement/Prospectus, and the transactions
contemplated thereby.
Pursuant to the Merger Agreement, (a) a wholly owned subsidiary of Pogo
Producing Company ("Pogo") will merge with and into Arch, (b) Arch will become a
wholly owned subsidiary of Pogo and (c) each issued and outstanding share of
Arch common stock and Arch preferred stock would be converted into a fraction of
a share of Pogo common stock.
Only Arch stockholders of record at the close of business on July 10, 1998 are
entitled to notice of and to vote at the Special Meeting. A complete list of
stockholders entitled to vote at the Special Meeting will be available for
inspection by any Arch stockholder, for purposes germane to the Special Meeting,
during normal business hours for a period of ten days prior to the Special
Meeting at the principal executive office of Arch, 777 Taylor Street,
Suite II-A, Fort Worth, Texas 76102.
We hope you will be represented at the meeting by signing, dating and
returning the enclosed proxy card in the accompanying envelope as promptly as
possible, whether or not you expect to be present in person. Your proxy may be
revoked at any time by following the procedures set forth in the accompanying
Proxy Statement/Prospectus.
By order of the Board of Directors
Randall W. Scroggins
Secretary
Fort Worth, Texas
July 15, 1998
