<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 16, 1996
APACHE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-4300 41-0747868
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
2000 POST OAK BOULEVARD
SUITE 100
HOUSTON, TEXAS 77056-4400
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (713) 296-6000
<PAGE> 2
ITEM 5. OTHER EVENTS
On April 16, 1996, the Registration Statement on Form S-4 of Apache
Corporation ("Apache") was declared effective by the Securities and Exchange
Commission. The Registration Statement includes a prospectus with respect to
the shares of Apache common stock to be issued in the proposed merger (the
"Merger") of YPY Acquisitions, Inc., a Delaware corporation that is a wholly
owned subsidiary of Apache, with The Phoenix Resource Companies, Inc., a
Delaware corporation ("Phoenix"), and a proxy statement soliciting the vote of
the stockholders of Phoenix to approve the Merger. Phoenix's Board of Directors
has called a special meeting of stockholders of Phoenix to be held on May 20,
1996 to consider the approval and adoption of the Merger. The Proxy
Statement/Prospectus included as a part of the Registration Statement is
attached hereto as Exhibit 99.1.
The Merger is subject to the satisfaction or waiver of certain conditions
including, among other matters, the satisfaction of representations, warranties
and covenants as of the closing date, the approval of the Merger by the holders
of a majority of the outstanding shares of common stock of Phoenix, the absence
of any material adverse changes, the receipt of required third party or
governmental approvals or consents, and holders of not more than ten percent of
the outstanding shares of Phoenix Common Stock properly demanding appraisal
rights. In addition, the Merger Agreement may be terminated by Phoenix or
Apache under certain circumstances including, among other matters, termination
of the agreement by Phoenix if Phoenix or its stockholders receives an
acquisition proposal which the Board of Directors of Phoenix determines is
likely to result in a transaction more favorable to the holders of Phoenix
common stock from a financial point of view than the Merger, and the Board of
Directors also determines the failure to withdraw, modify or change its
recommendation would constitute a breach of its fiduciary duties to Phoenix
stockholders.
This Current Report on Form 8-K shall not constitute an offer to sell, or
the solicitation of an offer to purchase, any securities, 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.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
EXHIBIT DOCUMENT
------- --------
23.1 Consent of Arthur Andersen L.L.P. (Apache)
23.2 Consent of Coopers & Lybrand
<PAGE> 3
23.3 Consent of Arthur Andersen L.L.P. (Phoenix)
23.4 Consent of Ryder Scott Company Petroleum Engineers
23.5 Consent of Petrie Parkman & Co.
23.6 Consent of Andrews & Kurth L.L.P.
23.7 Consent of Netherland, Sewell & Associates, Inc.
99.1 Proxy Statement/Prospectus dated April 17, 1996
99.2 Financial Statements of The Phoenix Resource Companies, Inc.
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APACHE CORPORATION
Date: April 18, 1996 /s/ Z.S. KOBIASHVILI
----------------------------------
Z.S. Kobiashvili
Vice President and General Counsel
<PAGE> 5
INDEX TO EXHIBITS
23.1 Consent of Arthur Andersen L.L.P. (Apache)
23.2 Consent of Coopers & Lybrand
23.3 Consent of Arthur Andersen L.L.P. (Phoenix)
23.4 Consent of Ryder Scott Company Petroleum Engineers
23.5 Consent of Petrie Parkman & Co.
23.6 Consent of Andrews & Kurth L.L.P.
23.7 Consent of Netherland, Sewell & Associates, Inc.
99.1 Proxy Statement/Prospectus dated April 17, 1996
99.2 Financial Statements of The Phoenix Resource Companies, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation
by reference in this Current Report on Form 8-K of our report dated February 27,
1996 included in Apache Corporation's Annual Report on Form 10-K for the year
ended December 31, 1995, and to the incorporation by reference of such report
into Apache Corporation's previously filed Registration Statements on Form S-3
(Nos. 33-51253, 33-53129, 33-62753 and 33-63923), Form S-4 (Nos. 33-66169 and
333-2305) and Form S-8 (Nos. 33-31407, 33-37402, 33-53442, 33-59721, 33-59723
and 33-63817). It should be noted that we have not audited any financial
statements of Apache Corporation subsequent to December 31, 1995 or performed
any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Houston, Texas
April 16, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF COOPERS & LYBRAND
We hereby consent to the incorporation in this Current Report on Form 8-K of
Apache Corporation of our report dated February 13, 1995 on our audits of the
consolidated financial statements of DEKALB Energy Company as of December 31,
1994 and 1993 and for the years ended December 31, 1994 and 1993, and to the
incorporation by reference of such report into Apache Corporation's previously
filed Registration Statements on Form S-3 (Nos. 33-51253, 33-53129, 33-62753 and
33-63923), Form S-4 (Nos. 33-61669 and 333-2305) and Form S-8 (Nos. 33-31407,
33-37402, 33-53442, 33-59721, 33-59723 and 33-63817).
/s/ COOPERS & LYBRAND
Coopers & Lybrand
Chartered Accountants
Calgary, Alberta, Canada
April 16, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
report dated February 23, 1996, covering the audited financial statements of The
Phoenix Resource Companies, Inc. included in or made a part of this Current
Report on Form 8-K and to the incorporation by reference of such report into
Apache Corporation's previously filed Registration Statements on Form S-3 (Nos.
33-51253, 33-53129, 33-62753 and 33-63923), Form S-4 (Nos. 33-66169 and
333-2305) and Form S-8 (Nos. 33-31407, 33-37402, 33-53442, 33-59721, 33-59723
and 33-63817). It should be noted that we have not audited any financial
statements of The Phoenix Resource Companies, Inc. subsequent to December 31,
1995 or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
April 16, 1996
<PAGE> 1
[RYDER SCOTT COMPANY LETTERHEAD]
EXHIBIT 23.4
As independent petroleum engineers, we hereby consent to the reference
in this Current Report on Form 8-K of Apache Corporation to our Firm's name and
our Firm's review of the proved oil and gas reserve quantities of Apache
Corporation and of DEKALB Energy Company, as of January 1, 1995, and to the
incorporation by reference of our Firm's name and review into Apache
Corporation's previously filed Registration Statements on Form S-3
(Nos. 33-51253, 33-53129, 33-62753 and 33-63923), Forms S-4 (Nos. 33-61669 and
333-2305), Form S-8 (Nos. 33-31407, 33-37402, 33-53442, 33-59721, 33-59723 and
33-63817), and to the incorporation by reference of such report into any
Registration Statement filed by Apache under Rule 462 related to any of
Apache's previously filed Registration Statements referenced above.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
April 18, 1996
<PAGE> 1
EXHIBIT 23.5
CONSENT OF PETRIE PARKMAN & CO.
The undersigned hereby consents to the references to the name of the
undersigned in this Form 8-K and to the incorporation by reference of such
references into Apache Corporation's previously filed Registration Statements
on Form S-3 (No. 33-51253, 33-53129, 33-62753 and 33-63923), Forms S-4 (Nos.
33-61669 and 333-2305), Form S-8 (Nos. 33-31407, 33-37402, 33-53442, 33-59721,
33-59723 and 33-63817), and to any Registration Statement filed by Apache under
Rule 462 related to Apache's previously filed Registration Statements
referenced above.
/s/ JAMES E. PARKMAN
CONSENT OF PETRIE PARKMAN & CO.
Houston, Texas
April 18, 1996
<PAGE> 1
EXHIBIT 23.6
CONSENT OF ANDREWS & KURTH L.L.P.
We hereby consent to the reference in this Current Report on Form 8-K of
Apache Corporation to our Firm's name and to the incorporation by reference of
our Firm's name into Apache Corporation's previously filed Registration
Statements on Form S-3 (Nos. 33-51253, 33-53129, 33-62753 and 33-63923), Forms
S-4 (Nos. 33-61669 and 333-2305) and Forms S-8 (Nos. 33-31407, 33-37402,
33-53442, 33-59721, 33-59723 and 33-63817), and to the incorporation by
reference of such report into any Registration Statement filed by Apache under
Rule 462 related to any of Apache's previously filed Registration Statements
referenced above.
/s/ ANDREWS & KURTH L.L.P.
Andrews & Kurth L.L.P.
Houston, Texas
April 18, 1996
<PAGE> 1
EXHIBIT 23.7
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
---------------------------------------------------------
As independent petroleum engineers, we hereby consent to the reference in
this Current Report on Form 8-K of Apache Corporation to our Firm's name and our
Firm's review of the proved oil and gas reserve quantities of The Phoenix
Resource Companies, Inc. as of January 1, 1996, and to the incorporation by
reference of our Firm's name and review into Apache Corporation's previously
filed Registration Statements on Form S-3 (Nos. 33-51253, 33-53129, 33-62753,
and 33-63923), Forms S-4 (No. 33-61669 and 333-2305) and Form S-8 (Nos.
33-31407, 33-37402, 33-53442, 33-59721, 33-59723, and 33-63817), and to the
incorporation by reference of such report into any Registration Statement filed
by Apache under Rule 462 related to any of Apache's previously filed
Registration Statements referenced above.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ CLARENCE M. NETHERLAND
----------------------------------
Clarence M. Netherland
Chairman
Dallas, Texas
April 18, 1996
<PAGE> 1
EXHIBIT 99.1
APACHE CORPORATION
THE PHOENIX RESOURCE COMPANIES, INC.
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus relates to the proposed merger of YPY
Acquisitions, Inc., a Delaware corporation ("Merger Sub") and a wholly-owned
subsidiary of Apache Corporation, a Delaware corporation ("Apache"), with The
Phoenix Resource Companies, Inc., a Delaware corporation ("Phoenix"), pursuant
to the Agreement and Plan of Merger, dated March 27, 1996, among Apache, Merger
Sub and Phoenix (the "Merger Agreement"). The merger contemplated by the Merger
Agreement is referred to herein as the "Merger."
As a result of the Merger, (i) each share of common stock, $.01 par value,
of Phoenix ("Phoenix Common Stock") outstanding immediately prior to the
effective time of the Merger will be converted into the right to receive .75
shares of the common stock, $1.25 par value, of Apache ("Apache Common Stock")
and $4.00 in cash and (ii) the surviving corporation of the Merger will become a
wholly-owned subsidiary of Apache.
This Proxy Statement/Prospectus is being furnished to holders of Phoenix
Common Stock in connection with the solicitation of proxies from holders of
Phoenix Common Stock by the Board of Directors of Phoenix for use at the Special
Meeting of holders of Phoenix Common Stock to be held on May 20, 1996 (the
"Special Meeting"). This Proxy Statement/Prospectus and the accompanying form of
proxy are being mailed to holders of Phoenix Common Stock on or about April 17,
1996. At the Special Meeting, holders of Phoenix Common Stock will be asked to
consider approval and adoption of the Merger Agreement.
This Proxy Statement/Prospectus also constitutes a prospectus of Apache
with respect to up to 12,550,000 shares of Apache Common Stock to be issued
pursuant to the Merger Agreement in exchange for outstanding shares of Phoenix
Common Stock.
On April 15, 1996, the per share closing market prices of Apache Common
Stock and Phoenix Common Stock, as reported on the New York Stock Exchange
Composite Transactions Reporting System and the American Stock Exchange
Composite Transactions Reporting System, respectively, were $28 1/4 and $24 1/2.
SEE "RISK FACTORS AND CERTAIN CONSIDERATIONS" BEGINNING ON PAGE 14 FOR A
DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE SECURITIES OFFERED HEREBY.
---------------------
THESE SECURITIES 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 PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS APRIL 17, 1996.
<PAGE> 2
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 OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY APACHE OR PHOENIX. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, ANY SECURITIES, 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 AN IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF APACHE OR PHOENIX SINCE THE DATE HEREOF OR THAT THE
INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN DOCUMENTS
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. APACHE AND PHOENIX EACH
UNDERTAKES TO PROVIDE COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE),
WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF PHOENIX COMMON
STOCK, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR
ORAL REQUEST TO, IN THE CASE OF DOCUMENTS RELATING TO APACHE: CHERI L. PEPER,
CORPORATE SECRETARY, APACHE CORPORATION, ONE POST OAK CENTRAL, 2000 POST OAK
BOULEVARD, SUITE 100, HOUSTON, TEXAS 77046-4400 (TELEPHONE (713) 296-6000), AND,
IN THE CASE OF DOCUMENTS RELATING TO PHOENIX: PATRICIA J. MURANO, CORPORATE
SECRETARY, THE PHOENIX RESOURCE COMPANIES, INC., 6525 NORTH MERIDIAN AVENUE,
OKLAHOMA CITY, OKLAHOMA 73116-1491 (TELEPHONE (405) 728-5100).
AVAILABLE INFORMATION
Apache and Phoenix are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, file reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by Apache and Phoenix can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven
World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, reports, proxy statements and other information concerning
Apache may be inspected at the offices of the New York Stock Exchange, Inc.
("NYSE"), 20 Broad Street, New York, New York 10005, and also at the offices of
the Chicago Stock Exchange (the "CSE"). Reports, proxy statements and other
information concerning Phoenix may be inspected at the offices of the American
Stock Exchange, Inc. ("AMEX"), 86 Trinity Place, New York, New York 10006 and
also at the offices of The Pacific Stock Exchange (the "PSE").
Apache has filed with the Commission a Registration Statement on Form S-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Apache Common Stock to be issued pursuant
to the Merger Agreement. The information contained herein with respect to Apache
and its affiliates, including Merger Sub, has been provided by Apache, and the
information contained herein with respect to Phoenix and its affiliates has been
provided by Phoenix. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which were
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed, each such statement being qualified in its entirety
by such reference.
2
<PAGE> 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission pursuant
to the Exchange Act, are incorporated herein by reference:
1. Apache's Annual Report on Form 10-K for the year ended December 31,
1995.
2. Apache's Current Report on Form 8-K dated March 27, 1996, as amended.
3. Phoenix's Annual Report on Form 10-K for the year ended December 31,
1995.
4. Phoenix's Current Report on Form 8-K dated March 27, 1996.
All documents filed by Apache and Phoenix pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the final adjournment of the
Special Meeting shall be deemed to be incorporated by reference herein and to be
a part hereof from the date of filing of such documents. Any statement contained
herein or in a document 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
other subsequently filed document, 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, except as so modified or
superseded, to constitute a part of this Proxy Statement/Prospectus.
OIL AND GAS VOLUME ABBREVIATIONS
Unless otherwise stated, all terms defined in Rule 4-10(a) of Regulation
S-X promulgated by the Commission are used herein with such meanings. Quantities
of natural gas are expressed in terms of thousand cubic feet (Mcf), million
cubic feet (MMcf) or billion cubic feet (Bcf). Oil is quantified in terms of
barrels (bbls), thousands of barrels (Mbbls) and millions of barrels (MMbbls).
Natural gas is compared to oil in terms of barrels of oil equivalent (boe) or
million barrels of oil equivalent (MMboe). Oil and natural gas liquids are
compared with natural gas in terms of million cubic feet equivalent (MMcfe) and
billion cubic feet equivalent (Bcfe). One barrel of oil is the energy equivalent
of six Mcf of natural gas. Daily oil and gas production is expressed in terms of
barrels of oil per day (b/d) and thousands of cubic feet of gas per day (Mcfd),
respectively. Gas sales volumes may be expressed in terms of one million British
thermal units (MMBtu), which is approximately equal to one Mcf. With respect to
information relating to a working interest in wells or acreage, net oil and gas
wells or acreage is determined by multiplying gross wells or acreage by the
working interest therein. Unless otherwise specified, all references to wells
and acres are gross.
3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION.......................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.................................... 3
OIL AND GAS VOLUME ABBREVIATIONS............... 3
SUMMARY........................................ 5
The Companies.................................. 5
The Special Meeting............................ 5
The Merger..................................... 6
Certain Terms of the Merger Agreement.......... 9
Market Prices and Dividend Information......... 11
Apache Corporation Selected Historical and Pro
Forma Consolidated Financial Data............ 12
The Phoenix Resource Companies, Inc. Selected
Historical Consolidated Financial Data....... 13
RISK FACTORS AND CERTAIN CONSIDERATIONS........ 14
Fixed Merger Consideration..................... 14
Cautionary Statement Regarding Forward-Looking
Information.................................. 14
Diversified Business Operations................ 14
Effect of Volatile Product Prices.............. 14
Reliance on Estimates of Proved Reserves and
Future Net Cash Flows; Depletion of
Reserves..................................... 15
THE COMPANIES.................................. 16
Apache and Merger Sub.......................... 16
Phoenix........................................ 17
THE SPECIAL MEETING............................ 17
Time, Date, Place and Purpose of Special
Meeting...................................... 17
Record Date and Shares Entitled to Vote........ 17
Voting and Revocation of Proxies............... 17
Quorum and Vote Required....................... 17
Solicitation of Proxies........................ 18
Other Matters.................................. 18
THE MERGER..................................... 18
General Description of the Merger.............. 18
Background..................................... 19
Certain Information Provided................... 21
Apache's Reasons for the Merger................ 22
Factors Affecting Forward-Looking Statements... 23
Phoenix's Reasons for the Merger;
Recommendation of Phoenix's Board of
Directors.................................... 24
Opinion of Petrie Parkman as Phoenix's
Financial Advisor............................ 26
Interests of Certain Persons in the Merger..... 30
Certain United States Income Tax
Consequences................................. 32
Accounting Treatment........................... 35
Governmental and Regulatory Approvals.......... 35
Restrictions on Resales by Affiliates.......... 35
Appraisal Rights of Dissenting Phoenix
Stockholders................................. 35
<CAPTION>
PAGE
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<S> <C>
CERTAIN TERMS OF THE MERGER AGREEMENT.......... 38
Effective Time of the Merger................... 38
Consideration to be Paid in the Merger and
Conversion of Shares......................... 38
Treatment of Phoenix Options................... 39
Conditions to the Merger....................... 39
Representations and Warranties................. 39
Certain Covenants; Conduct of Business Prior to
the Merger................................... 40
No Solicitation................................ 41
Appointment of Director........................ 42
Certain Post-Merger Matters.................... 42
Termination of the Merger Agreement............ 42
Fees and Expenses.............................. 42
Indemnification................................ 43
AGREEMENT BY PHOENIX MANAGEMENT.. 43
MARKET PRICES OF COMMON STOCK AND DIVIDEND
INFORMATION.................................. 44
APACHE CORPORATION AND SUBSIDIARIES UNAUDITED
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS................................... 45
STOCKHOLDERS OF APACHE AND PHOENIX............. 52
Stock Ownership of Apache Directors and
Executive Officers........................... 52
Principal Stockholders of Apache............... 53
Principal Stockholders of Phoenix.............. 54
DIRECTORS OF APACHE............................ 54
DESCRIPTION OF APACHE CAPITAL
STOCK........................................ 57
Apache Common Stock............................ 57
Preferred Stock................................ 57
Rights......................................... 57
COMPARATIVE RIGHTS OF APACHE AND PHOENIX
STOCKHOLDERS................................. 58
Number and Classification of Board of
Directors.................................... 58
Power to Call Special Meetings................. 58
Voting Rights.................................. 58
Stockholder Vote Required for Certain
Transactions................................. 58
Action by Written Consent...................... 59
Certain Anti-takeover Provisions............... 59
INDEPENDENT PUBLIC ACCOUNTANTS................. 59
LEGAL MATTERS.................................. 59
EXPERTS........................................ 60
APPENDICES
Appendix: I -- Agreement and Plan of Merger
Appendix: II -- Petrie Parkman & Co. Fairness
Opinion
Appendix: III -- Section 262 of the Delaware
General Corporation Law
</TABLE>
4
<PAGE> 5
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained in or
incorporated by reference in this Proxy Statement/Prospectus. Stockholders are
urged to carefully read this Proxy Statement/Prospectus in its entirety. As used
in this Proxy Statement/Prospectus, unless otherwise required by the context,
the term "Apache" means Apache Corporation and its consolidated subsidiaries and
the term "Phoenix" means The Phoenix Resource Companies, Inc. and its
consolidated subsidiaries. Capitalized terms used herein without definition are,
unless otherwise indicated, defined in the Merger Agreement and used herein with
such meanings.
THE COMPANIES
Apache and Merger Sub. Apache, a Delaware corporation formed in 1954, is an
independent energy company that explores for, develops, produces, gathers,
processes and markets natural gas, crude oil and natural gas liquids. In North
America, Apache's exploration and production interests are focused on the Gulf
Coast, the Gulf of Mexico, the Anadarko Basin, the Permian Basin, East Texas and
the Western Sedimentary Basin of Canada. Outside of North America, Apache has
exploration and production interests offshore Western Australia and in Egypt,
and exploration interests in Indonesia, offshore China and offshore Ivory Coast.
Merger Sub is a wholly-owned subsidiary of Apache. The principal executive
offices of Apache and Merger Sub are located at One Post Oak Central, 2000 Post
Oak Boulevard, Suite 100, Houston, Texas 77056-4400, and the telephone number at
such offices is (713) 296-6000. Apache Common Stock has been listed on the NYSE
since 1969, and on the CSE since 1960.
Phoenix. Phoenix is an independent oil and gas company operating primarily
in the Arab Republic of Egypt ("Egypt"). Phoenix is headquartered in Oklahoma
City, Oklahoma and maintains an office in Cairo, Egypt.
Phoenix's principal assets are its interests in the Khalda and Qarun oil
and gas concessions in the Western Desert of Egypt, which in the aggregate
contain 18 oil fields and six gas fields. The sale of crude oil and natural gas
accounted for all of Phoenix's operating revenues during the past three years.
Phoenix's operations include exploring, developing and operating crude oil and
natural gas properties in Egypt. Phoenix's oil and gas operations are currently
conducted through Egyptian operating companies owned jointly by the Egyptian
General Petroleum Corporation ("EGPC"), the national oil company of Egypt,
Phoenix and certain other participants. Apache is one of the participants with
Phoenix in the Qarun concession.
The principal executive offices of Phoenix are located at 6525 North
Meridian Avenue, Oklahoma City, Oklahoma 73116-1491, and the telephone number at
such offices is (405) 728-5100.
THE SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
The Special Meeting of the holders of Phoenix Common Stock will be held on
May 20, 1996, at The Willard Inter-Continental Hotel, 1401 Pennsylvania Avenue,
N.W., Washington, D.C. 20004, commencing at 11:00 a.m., local time, for the
purpose of (i) considering and voting upon a proposal to approve and adopt the
Merger Agreement and (ii) transacting such other business as may properly come
before the Special Meeting.
RECORD DATE AND SHARES ENTITLED TO VOTE
Holders of record of shares of Phoenix Common Stock at the close of
business on April 15, 1996 (the "Record Date") are entitled to notice of and to
vote at the Special Meeting. On the Record Date, there were 16,100,256 shares of
Phoenix Common Stock outstanding, each of which will be entitled to one vote on
each matter to be acted upon at the Special Meeting.
5
<PAGE> 6
QUORUM AND VOTE REQUIRED
The presence, in person or by proxy, at the Special Meeting of the holders
of a majority of the shares of Phoenix Common Stock outstanding and entitled to
vote at the Special Meeting is necessary to constitute a quorum at the meeting.
The affirmative vote of a majority of the shares of Phoenix Common Stock
outstanding and entitled to vote thereon at the Special Meeting is required to
approve and adopt the Merger Agreement. Abstentions and non-voted shares,
including broker non-votes, represented in person or by proxy, will be
considered as being present for purposes of determining the existence of a
quorum and will have the same effect as votes cast against the proposal to
approve and adopt the Merger Agreement.
PHOENIX MANAGEMENT'S SECURITY OWNERSHIP AND AGREEMENT
As of the Record Date, directors and executive officers of Phoenix and
their affiliates were record owners of an aggregate of approximately 587,000
outstanding shares of Phoenix Common Stock (approximately 3.6 percent of such
shares then outstanding). The directors and executive officers of Phoenix have
signed an agreement obligating them to vote all shares of Phoenix Common Stock
that they hold on the Record Date in favor of the Merger in accordance with the
recommendation of the Board of Directors of Phoenix. See "Agreement by Phoenix
Management."
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
At the Effective Time (as hereinafter defined) of the Merger, Merger Sub
and Phoenix will merge, and the surviving corporation will become a wholly-owned
subsidiary of Apache. As a result of the Merger, each outstanding share of
Phoenix Common Stock will be converted into the right to receive .75 shares of
Apache Common Stock and $4.00 in cash (the "Cash Consideration") (such shares of
Apache Common Stock and the Cash Consideration being referred to collectively
herein as the "Merger Consideration"). The full text of the Merger Agreement is
included in this Proxy Statement/Prospectus as Appendix I.
Based upon the number of shares of Phoenix Common Stock outstanding as of
the Record Date, approximately 12.1 million shares of Apache Common Stock will
be issuable and approximately $64 million will be payable pursuant to the
Merger. Such number of shares of Apache Common Stock would represent
approximately 14 percent of the total number of shares of Apache Common Stock
expected to be outstanding immediately after such issuance.
REASONS FOR THE MERGER
The Board of Directors of Phoenix has recommended the Merger to Phoenix's
stockholders for several reasons, including, that (i) the financial resources of
Apache coupled with its aggressive exploration strategy would allow for the full
exploitation of the exploration and development opportunities identified by
Phoenix in the Khalda and Qarun concessions, (ii) the stockholders of Phoenix
would likely have greater liquidity in their stock holdings in Apache following
the Merger and (iii) Apache's geographic diversity would afford Phoenix
stockholders greater diversification. See "The Merger -- Phoenix's Reasons for
the Merger; Recommendation of Phoenix's Board of Directors."
Apache management believes that the Merger would further Apache's
transformation into an international exploration and production company with six
North American core areas and two international core areas (Australia and
Egypt). The Phoenix investment in the Western Desert of Egypt would provide
Apache with increased exposure to an area with significant potential for reserve
growth. The Merger would add the 2.4-million gross acre Khalda and Khalda Offset
concession in which Phoenix owns a 40-percent interest, and an additional
50-percent interest in the 1.9-million gross acre Qarun concession, in which
Apache presently owns a 25-percent interest. See "The Merger -- Apache's Reasons
for the Merger."
6
<PAGE> 7
FORWARD-LOOKING INFORMATION
Information included in this Proxy Statement/Prospectus, including
information incorporated by reference herein, contains forward-looking
statements including projections, estimates and expectations. Those statements
by their nature are subject to certain risks, uncertainties and assumptions and
will be influenced by various factors. Should one or more of these forecasts or
underlying assumptions prove incorrect, actual results could vary materially.
See "Risk Factors and Certain Considerations -- Cautionary Statement Regarding
Forward-Looking Information" and "The Merger -- Factors Affecting
Forward-Looking Information."
DETERMINATIONS OF THE BOARDS OF DIRECTORS
THE BOARD OF DIRECTORS OF PHOENIX HAS DETERMINED THAT THE MERGER IS FAIR
TO, AND IN THE BEST INTERESTS OF, PHOENIX AND ITS STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS TO THE HOLDERS OF PHOENIX COMMON STOCK THAT THEY VOTE FOR ADOPTION
AND APPROVAL OF THE MERGER AGREEMENT. See "The Merger -- Background" and
"-- Phoenix's Reasons for the Merger; Recommendation of Phoenix's Board of
Directors." In considering the recommendation of Phoenix's Board of Directors
with respect to the Merger, Phoenix stockholders should be aware that all of the
officers and directors of Phoenix have certain interests concerning the Merger
separate from their interests as holders of Phoenix Common Stock. See "The
Merger -- Interests of Certain Persons in the Merger."
The Board of Directors of Apache has unanimously approved the Merger, the
Merger Agreement and the issuance and reservation for issuance of Apache Common
Stock pursuant to the terms of the Merger Agreement. See "The
Merger -- Background" and "-- Apache's Reasons for the Merger."
The Merger will result in the issuance of no more than approximately 17
percent of the number of shares of Apache Common Stock previously outstanding,
and, consequently, no vote of Apache stockholders is required in connection with
the Merger under the rules of the NYSE and the CSE on which Apache Common Stock
is listed or under applicable Delaware law. In addition, neither the Restated
Certificate of Incorporation of Apache ("Apache's Charter") nor the bylaws of
Apache ("Apache's Bylaws") provides for any vote of its stockholders in
connection with the Merger.
OPINION OF PETRIE PARKMAN AS PHOENIX'S FINANCIAL ADVISOR
Petrie Parkman & Co., Inc. ("Petrie Parkman") delivered its written
opinion, dated March 27, 1996, to the Board of Directors of Phoenix that, as of
such date, the Merger Consideration was fair from a financial point of view to
holders of Phoenix Common Stock. Petrie Parkman confirmed such opinion as of
April 16, 1996. For information regarding the opinion of Petrie Parkman,
including the assumptions made, matters considered and limitations on the review
undertaken, see "The Merger -- Opinion of Petrie Parkman as Phoenix's Financial
Advisor." Phoenix stockholders are urged to read carefully in its entirety the
opinion of Petrie Parkman dated April 16, 1996, a copy of which is attached as
Appendix II to this Proxy Statement/Prospectus and incorporated herein by
reference.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Each member of Phoenix's Board of Directors and each executive officer has
certain interests concerning the Merger separate from their interests as holders
of Phoenix Common Stock. See "The Merger -- Interests of Certain Persons in the
Merger."
CERTAIN UNITED STATES INCOME TAX CONSEQUENCES
As a condition to the consummation of the Merger, Phoenix will receive an
opinion of special tax counsel to Apache that, for United States federal income
tax purposes, the Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
no gain or loss will be recognized by Phoenix, Apache or Merger Sub as a result
of the Merger, and no gain or loss will be recognized by the stockholders of
Phoenix who are "United States persons" within the meaning of the Code upon the
conversion of their Phoenix Common Stock into shares of Apache Common Stock
7
<PAGE> 8
pursuant to the Merger, except with respect to the Cash Consideration, and cash,
if any, received in lieu of fractional shares of Apache Common Stock or upon
exercise of dissenters' rights of appraisal.
United States persons who are holders of options to acquire Phoenix Common
Stock which are assumed by Apache, as described below under "Certain Terms of
the Merger Agreement -- Treatment of Phoenix Options," will not recognize income
or gain for United States federal income tax purposes upon such assumption.
For a discussion of these and other United States federal income tax
considerations in connection with the Merger, see "The Merger -- Certain United
States Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase for financial accounting
purposes. See "The Merger -- Accounting Treatment."
GOVERNMENTAL AND REGULATORY APPROVALS
Consummation of the Merger is conditioned upon the existence of an
applicable exemption from the provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), or the expiration or
termination of the waiting period under the HSR Act. Neither Apache nor Phoenix
is aware of any other governmental or regulatory approval required for
consummation of the Merger, other than compliance with applicable securities
laws.
RESTRICTIONS ON RESALES
There are certain restrictions on resales of Apache Common Stock to be
received by affiliates of Phoenix. See "The Merger -- Restrictions on Resales by
Affiliates."
APPRAISAL RIGHTS OF DISSENTING PHOENIX STOCKHOLDERS
Holders of Phoenix Common Stock who do not vote in favor of the Merger will
be entitled to statutory rights of appraisal as to their shares of Phoenix
Common Stock in connection with the Merger as provided under Section 262 of the
Delaware General Corporation Law (the "DGCL"). Certain procedures must be
followed by any holder of Phoenix Common Stock who wishes to perfect that
statutory right of appraisal, including both not voting in favor of the Merger
and filing with Phoenix, before the vote on the Merger is taken, a written
demand for appraisal of shares of Phoenix Common Stock owned by such
stockholder. Failure to take any of the required steps will result in
termination of such appraisal rights. Holders of Phoenix Common Stock should
note that surrender of certificates representing their Phoenix Common Stock in
connection with the Merger may constitute a waiver of appraisal rights under the
DGCL. The obligation of Apache to consummate the Merger is subject to the
satisfaction or waiver of the condition that holders of not more than ten
percent of the outstanding shares of Phoenix Common Stock have properly demanded
appraisal rights. See "The Merger -- Appraisal Rights of Dissenting Phoenix
Stockholders," "Certain Terms of the Merger Agreement -- Conditions to the
Merger" and Appendix III to this Proxy Statement/Prospectus, which contains the
full text of Section 262 of the DGCL.
8
<PAGE> 9
CERTAIN TERMS OF THE MERGER AGREEMENT
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware (the "Effective Time"),
unless the certificate of merger specifies a later Effective Time, and the
"Effective Date" shall be the date on which the certificate of merger becomes
effective. Assuming all conditions to the Merger contained in the Merger
Agreement are satisfied or waived prior thereto, it is anticipated that the
Effective Time of the Merger will occur as soon as practicable following the
Special Meeting.
CONSIDERATION TO BE PAID IN THE MERGER AND CONVERSION OF SHARES
At the Effective Time, each outstanding share of Phoenix Common Stock will
be converted into the right to receive .75 shares of Apache Common Stock and
$4.00 in cash. As soon as practical following the Effective Time, the commercial
bank or trust company designated by Apache as exchange agent (the "Exchange
Agent") will mail a letter of transmittal with instructions to each holder of
record of Phoenix Common Stock immediately before the Effective Time for use in
exchanging certificates formerly representing shares of Phoenix Common Stock for
certificates representing shares of Apache Common Stock, Cash Consideration and
cash in lieu of any fractional shares of Apache Common Stock. Certificates
should not be surrendered by the holders of Phoenix Common Stock until they have
received the letter of transmittal from Apache or the Exchange Agent. Letters of
transmittal will also be available following the Effective Time at the offices
of Apache in Houston, Texas. See "Certain Terms of the Merger
Agreement -- Consideration to be Paid in the Merger and Conversion of Shares."
TREATMENT OF PHOENIX OPTIONS
As of the Effective Time, Apache will assume each of the options to acquire
Phoenix Common Stock that remains unexercised in whole or in part (the "Phoenix
Options"). Accordingly, each such Phoenix Option will be deemed to remain
outstanding as an option to purchase, in place of the shares of Phoenix Common
Stock previously subject thereto, that number of shares of Apache Common Stock
and the amount of cash that the holder of the Phoenix Option would have received
upon consummation of the Merger had the Phoenix Option been exercised in full
for Phoenix Common Stock immediately prior to the Effective Time of the Merger.
See "Certain Terms of the Merger Agreement -- Treatment of Phoenix Options."
CONDITIONS TO THE MERGER
The respective obligations of Apache and Phoenix to consummate the Merger
are subject to the satisfaction or waiver of certain conditions, including among
other matters the following: (i) approval and adoption of the Merger Agreement
by the holders of a majority of the outstanding shares of Phoenix Common Stock;
(ii) the approval for listing on the NYSE of the Apache Common Stock to be
issued pursuant to the Merger Agreement; (iii) the absence of certain material
adverse changes; (iv) the receipt of required third party or governmental
approvals or consents; (v) receipt by each party of opinions of United States
counsel and by Apache of Egyptian counsel; (vi) neither Apache's nor Phoenix's
board of directors has amended its resolutions authorizing the Merger; and (vii)
holders of not more than ten percent of the outstanding shares of Phoenix Common
Stock properly demanding appraisal rights. Apache and Phoenix anticipate that
all of the conditions to the consummation of the Merger will be satisfied prior
to or at the time of the Special Meeting. Either Apache or Phoenix may extend
the time for performance of any of the obligations of the other party or may
waive compliance with those obligations at its discretion. See "Certain Terms of
the Merger Agreement -- Conditions to the Merger."
9
<PAGE> 10
NO SOLICITATION
The Merger Agreement provides that Phoenix and its officers, directors and
representatives will not solicit or knowingly encourage the initiation of any
inquiries regarding any "Acquisition Transaction" or "Acquisition Proposal" as
such terms are defined in the Merger Agreement. The Merger Agreement does not,
however, preclude Phoenix's Board of Directors from responding to an unsolicited
offer in the exercise of its fiduciary duties. See "Certain Terms of the Merger
Agreement -- No Solicitation."
APPOINTMENT OF DIRECTOR
Prior to the Effective Time, Apache's Board of Directors shall take all
action necessary to appoint or elect commencing at the Effective Time one of
Phoenix's directors as a member of Apache's Board of Directors.
TERMINATION OF THE MERGER AGREEMENT
By Either Party. The Merger Agreement may be terminated prior to the
Effective Time by either party if (i) the Merger has not been consummated on or
before August 31, 1996, (ii) any court or governmental final order shall have
prohibited consummation of the Merger, or (iii) the required approval of the
holders of Phoenix Common Stock is not received at the Special Meeting.
By Apache. Apache may terminate the Merger Agreement if, among other
events, (i) the Board of Directors of Phoenix (a) withdraws, modifies or amends,
in any manner adverse to Apache, its approval and recommendation in favor of the
Merger, (b) recommends to the stockholders of Phoenix any other Acquisition
Proposal (as hereinafter defined), or (c) publicly announces its intention to
take any of the actions described in (a) or (b), (ii) any person or group (as
defined in Section 13(d)(3) of the Exchange Act), other than Apache or Merger
Sub, acquires, or is granted the option or right to acquire beneficial ownership
of 50 percent or more of the outstanding shares of Phoenix Common Stock, other
than acquisitions for bona fide arbitrage purposes, or (iii) Phoenix enters into
an agreement with a third party with respect to any Acquisition Proposal.
By Phoenix. Phoenix may terminate the Merger Agreement if, among other
events, Phoenix or its stockholders receive an Acquisition Proposal which the
Board of Directors of Phoenix determines is likely to result in a transaction
more favorable to the holders of Phoenix Common Stock from a financial point of
view than the Merger, and the Board of Directors also determines the failure to
withdraw, modify or change its recommendation would constitute a breach of its
fiduciary duties to Phoenix stockholders.
See "Certain Terms of the Merger Agreement -- Termination of the Merger
Agreement."
FEES AND EXPENSES
Each party shall pay its own expenses in connection with the Merger, except
that the cost of printing and mailing this Proxy Statement/Prospectus will be
shared equally. In the event of termination of the Merger Agreement without
consummation of the Merger, each party shall pay its own expenses, except that a
party that has committed a material violation of its representations or
covenants under the Merger Agreement shall pay to the terminating party all fees
and expenses actually incurred by the terminating party in connection with the
contemplated Merger, not to exceed $900,000. Under certain circumstances, if the
Merger is not consummated a fee of $12 million shall be paid to Apache by
Phoenix. See "Certain Terms of the Merger Agreement -- Fees and Expenses."
10
<PAGE> 11
MARKET PRICES AND DIVIDEND INFORMATION
Apache Common Stock is traded on the NYSE and CSE under the symbol "APA."
Phoenix Common Stock is traded on the AMEX and PSE under the symbol "PHN." The
following table sets forth, for the periods indicated, the range of high and low
trading prices per share of Apache Common Stock as reported on the NYSE
Composite Tape and of Phoenix Common Stock as reported on the AMEX, and the
dividend per share of Apache Common Stock and the dividend per share of Phoenix
Common Stock. Phoenix dividends and share prices have been adjusted to reflect
stock splits in January and September 1995.
<TABLE>
<CAPTION>
APACHE COMMON STOCK PHOENIX COMMON STOCK
------------------------ ----------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
---- ---- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter........................... $26 7/8 $22 1/2 $.07 $ 9.97 $ 6.69 $ .0125
Second Quarter........................... 29 1/4 22 1/4 .07 6.91 5.56 .0125
Third Quarter............................ 29 1/4 23 .07 7.94 6.56 .0125
Fourth Quarter........................... 28 7/8 23 5/8 .07 12.00 6.59 .0125
1995
First Quarter............................ 27 3/8 22 1/4 .07 12.47 9.38 .02
Second Quarter........................... 31 25 3/8 .07 17.75 10.88 .02
Third Quarter............................ 30 1/4 25 3/4 .07 20.50 14.00 .02
Fourth Quarter........................... 29 5/8 23 1/8 .07 19.63 16.13 .02
1996
First Quarter............................ 29 1/2 24 3/8 .07 24.50 16.63 .03
Second Quarter(a)........................ 28 3/8 26 1/2 .07(b) 25.00 23.38 --
</TABLE>
- ---------------
(a) Through April 15, 1996.
(b) Payable April 30, 1996.
On March 27, 1996, the last trading day prior to the announcement by Apache
and Phoenix that they had executed the Merger Agreement, the closing market
prices of Apache Common Stock as reported on the NYSE Composite Tape, and
Phoenix Common Stock as reported on the AMEX, were $28 1/2 and $19 7/8,
respectively. See the cover page of this Proxy Statement/Prospectus for recent
closing prices of Apache Common Stock and Phoenix Common Stock.
Following the Merger, Apache Common Stock will continue to be traded on the
NYSE and the CSE. Following the Merger, Phoenix Common Stock will cease to be
traded on the AMEX and on the PSE, and there will be no further market for the
Phoenix Common Stock.
Apache has paid cash dividends on Apache Common Stock for 117 consecutive
quarters through the first calendar quarter of 1996. Future dividend payments by
Apache and Phoenix are subject to action by their respective Boards of Directors
and will depend upon their levels of earnings, financial requirements and other
relevant factors.
11
<PAGE> 12
APACHE CORPORATION
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data of Apache and
subsidiaries shown below as of or for each year in the five-year period ended
December 31, 1995 have been derived from Apache's audited consolidated financial
statements. Apache's previously reported data for 1995 and prior years have been
restated to reflect the merger with DEKALB Energy Company ("DEKALB") under the
pooling of interests method of accounting. This data should be read in
conjunction with the consolidated financial statements and related notes and the
report of independent public accountants included in Apache's Annual Report on
Form 10-K for the year ended December 31, 1995, incorporated by reference in
this Proxy Statement/Prospectus.
The pro forma data are presented to show the pro forma effects of the
Merger of a wholly-owned subsidiary of Apache with Phoenix. The Merger will be
reported using the purchase method of accounting. The pro forma income statement
data are presented as if the Merger occurred effective January 1, 1995 and the
pro forma balance sheet data assume that the Merger occurred on December 31,
1995. The pro forma data should be read in conjunction with Apache's unaudited
pro forma financial statements and related notes thereto, which are included
elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
MERGER AT OR FOR THE YEAR ENDED DECEMBER 31,
--------- ---------------------------------------------------------
1995(A) 1995(A) 1994 1993(B) 1992(C) 1991(D)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
INCOME STATEMENT DATA
Total revenues.......... $ 778,004 $ 750,702 $ 592,626 $ 512,632 $ 517,403 $ 457,872
Income (loss) --
continuing
operations........... 27,050 20,207 45,583 41,421 (14,632) (35,216)
Income (loss) per common
share -- continuing
operations........... .32 .28 .65 .67 (.26) (.65)
Cash dividends per
common share(e)...... .28 .28 .28 .28 .28 .28
BALANCE SHEET DATA
Working capital
(deficit)............ (6,957) (22,013) (3,203) (55,538) (32,775) (57,593)
Total assets............ 3,106,888 2,681,450 2,036,627 1,759,203 1,774,767 1,597,633
Long-term debt.......... 1,136,432 1,072,076 719,033 504,334 524,098 658,395
Shareholders' equity.... 1,414,562 1,091,805 891,087 868,596 554,524 601,181
Book value per common
share................ $ 15.69 $ 14.11 $ 12.79 $ 12.50 $ 10.02 $ 10.87
Common shares
outstanding at end of
year................. 90,139 77,379 69,666 69,504 55,361 55,305
</TABLE>
- ---------------
(a) Includes nonrecurring transaction costs relating to the DEKALB merger
totaling $8.7 million after tax. Also includes hedging loss totaling $5.9
million after tax due to the loss of correlation of New York Mercantile
Exchange ("NYMEX") prices with the cash markets for physical deliveries.
Also includes financial data after February 1995 for properties acquired
from Texaco Exploration and Production, Inc.
(b) Includes financial data for Hadson Energy Resources Corporation
(subsequently Apache Energy Resources Corporation) after June 30, 1993, and
for Hall-Houston Oil Company after July 31, 1993.
(c) The net loss in 1992 resulted from the sale of substantially all of DEKALB's
United States assets for a loss of $25.6 million after tax. DEKALB also
reported Canadian ceiling test write-downs of $15.9 million after tax and
United States ceiling test write-downs of $24.7 million after tax.
(d) Includes financial data for MW Petroleum Corporation (a former subsidiary of
Amoco Production Company acquired by Apache) after June 30, 1991. The net
loss in 1991 resulted from DEKALB reporting United States ceiling test
write-downs of $66.0 million after tax.
(e) Amounts shown reflect the dividends paid by Apache. No cash dividends were
paid on outstanding DEKALB common stock in 1994, 1993 or 1992. Cash
dividends paid on DEKALB common stock totaled $.8 million in 1991.
12
<PAGE> 13
THE PHOENIX RESOURCE COMPANIES, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data of Phoenix and
subsidiaries shown below as of or for each year in the five-year period ended
December 31, 1995 have been derived from Phoenix's audited consolidated
financial statements. This data should be read in conjunction with Phoenix's
consolidated financial statements and related notes and the auditors' report
included in Phoenix's Annual Report on Form 10-K for the year ended December 31,
1995, which is incorporated by reference in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991(A)
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues........................ $23,433 $21,856 $22,302 $22,481 $ 14,727
Revenues dedicated to foreign tax
liability(b).............................. 9,822 10,866 10,578 10,786 --
------- ------- ------- ------- --------
Operating revenues.......................... 33,255 32,722 32,880 33,267 14,727
------- ------- ------- ------- --------
Income (loss) from continuing operations.... 10,611 12,891 12,510 12,692 (612)
Net income (loss)(c)........................ 10,611 12,891 12,336 12,692 (18,310)
Income (loss) from continuing operations per
common share(d)........................... 0.65 0.78 0.74 0.76 (0.05)
Net income (loss) per common share(d)....... 0.65 0.78 0.73 0.76 (1.62)
Cash dividends per common share(d).......... .08 .05 -- -- --
BALANCE SHEET DATA:
Total assets................................ 68,333 56,441 50,863 59,255 51,525
Long-term debt.............................. -- -- -- 708 11,527
Stockholders' equity........................ 51,808 33,558 30,298 17,894 5,263
Book value per common share(d).............. $ 3.20 $ 2.14 $ 1.79 $ 1.05 $ .32
Common shares outstanding at end of
year(d)................................... 16,190 15,708 16,942 16,976 16,616
</TABLE>
- ---------------
(a) Revenues and net income for 1991 reflect reduced revenues due to the
delivery of oil from Phoenix's share of production on the Khalda Concession,
which had been sold and recognized as revenue in 1985. This commitment was
fulfilled in 1991.
(b) The adoption of Statement of Financial Accounting Standards ("SFAS") No. 109
effective January 1, 1992 had the effect of increasing operating revenues
and tax expense for 1992, 1993, 1994 and 1995 by equal and offsetting
amounts, but did not affect net income.
(c) Includes extraordinary losses on the early extinguishment of debt of $17.7
million and $0.2 million in 1991 and 1993, respectively, and income taxes of
$0.2 million, $11.1 million, $10.9 million, $11.1 million and $10.0 million
in 1991, 1992, 1993, 1994 and 1995, respectively.
(d) Gives effect to the two-for-one stock splits effective January and September
1995.
13
<PAGE> 14
RISK FACTORS AND CERTAIN CONSIDERATIONS
Prospective investors should carefully review the following factors
together with the other information contained in this Proxy Statement/Prospectus
prior to making an investment decision.
FIXED MERGER CONSIDERATION
Stockholders of Phoenix should consider that the Merger Consideration is
fixed at .75 shares of Apache Common Stock and $4.00 in cash for each share of
Phoenix Common Stock. As a result, the Merger Consideration will not be adjusted
in the event of an increase or decrease in the market price of either Phoenix
Common Stock or Apache Common Stock, or both. Phoenix stockholders are urged to
obtain current stock market quotations for both Phoenix Common Stock and Apache
Common Stock.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain information regarding the Merger set forth in this Proxy
Statement/Prospectus, including information incorporated by reference herein,
contains statements which may be considered to be forward-looking statements
including projections, estimates and expectations. Reference is made in
particular to statements under "The Merger -- Apache's Reasons for the Merger"
and in Apache's Current Report on Form 8-K dated March 27, 1996, as amended, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Apache's Annual Report on Form 10-K for the year ended
December 31, 1995. These statements include, among other things, (i) an Apache
analysis of the allocation of the Merger consideration to various cost
categories based on various estimates, (ii) Apache estimates of oil and gas
reserves by reserve category, (iii) estimates of the value of future production
available for cost recovery of exploration and development activities, (iv)
certain 1997 production estimates, and (v) estimates of the impact of the Merger
on Apache net income per share and net cash provided by operating activities in
1997. Such statements by their nature are subject to certain risks,
uncertainties and assumptions and will be influenced by various factors. Should
one or more of the underlying assumptions prove incorrect, actual results could
vary materially. Certain material factors affecting forward-looking statements
made herein in respect of Apache and the Merger are described elsewhere under
"Risk Factors and Certain Considerations" and, more specifically, under "The
Merger -- Factors Affecting Forward-Looking Statements."
DIVERSIFIED BUSINESS OPERATIONS
Apache conducts diversified exploration and production operations both
domestically and internationally while Phoenix's oil and gas operations are
focused exclusively in Egypt. A significant discovery in the Khalda or Qarun
concession might have a significant impact upon the market price of Phoenix
Common Stock. Such a discovery would not, however, have as significant an impact
upon the business of Apache and, correspondingly, the market price of Apache
Common Stock, due to the broader diversification and larger size of Apache.
EFFECT OF VOLATILE PRODUCT PRICES
The future financial condition and results of operations of Apache and
Phoenix will depend upon the prices received for oil and natural gas production
and the costs of acquiring, finding, developing and producing reserves. Prices
for oil and natural gas are subject to fluctuations in response to relatively
minor changes in supply, market uncertainty and a variety of additional factors
that are beyond the control of Apache and Phoenix. These factors include
worldwide political instability (especially in the Middle East and other oil-
producing regions), the foreign supply of oil and gas, the price of foreign
imports, the level of consumer product demand, government regulations and taxes,
the price and availability of alternative fuels and the overall economic
environment. A substantial or extended decline in oil and gas prices would have
a material adverse effect on Apache's and Phoenix's financial position, results
of operations, quantities of oil and gas that may be economically produced and
access to capital. In addition, the sale of oil and gas production of Apache and
Phoenix depends upon a number of factors beyond the control of the companies,
including the availability and capacity of transportation and processing
facilities.
14
<PAGE> 15
Oil and natural gas prices have historically been volatile and are likely
to continue to be volatile in the future. Such volatility makes it difficult to
estimate the value of producing properties for acquisition and to budget and
project the return on exploration and development projects involving producing
properties. In addition, unusually volatile prices often disrupt the market for
oil and gas properties, as buyers and sellers have more difficulty agreeing on
the purchase price of properties.
Apache engages in hedging activities with respect to some of its projected
oil and gas production through a variety of financial arrangements designed to
protect against price declines, including swaps, collars and futures agreements.
To the extent that Apache engages in such activities, it may be prevented from
realizing the benefits of price increases above the levels of the hedges.
Phoenix does not engage in such activities.
Phoenix's proved reserve base was approximately 85 percent oil on an energy
equivalent basis as of December 31, 1995. By comparison, Apache's proved reserve
base was approximately 60 percent natural gas on an energy equivalent basis as
of December 31, 1995, and 95 percent of Apache's natural gas reserves are
located in the United States and Canada. Accordingly, Apache is more sensitive
to fluctuations in United States natural gas prices than to fluctuations in the
price of oil.
Apache periodically reviews the carrying value of its oil and gas
properties under the full-cost accounting rules of the Commission. Under the
full-cost accounting rules, capitalized costs of oil and gas properties on a
country-by-country basis may not exceed the present value of estimated future
net cash flows from proved reserves, discounted at ten percent, plus the lower
of cost or fair market value of unproved properties as adjusted for related tax
effects. At the end of each fiscal quarter, the test is applied at the
unescalated prices in effect at the applicable time and results in a write-down
if the "ceiling" is exceeded, even if prices decline for only a short period of
time.
RELIANCE ON ESTIMATES OF PROVED RESERVES AND FUTURE NET CASH FLOWS; DEPLETION OF
RESERVES
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and
timing of development expenditures, including many factors beyond the control of
the producer. The reserve data set forth in this Proxy Statement/Prospectus and
incorporated by reference herein represent only estimates. In addition, the
estimates of future net cash flows from proved reserves of Apache and Phoenix
and the present value thereof are based upon various assumptions about future
production levels, prices and costs that may prove to be incorrect over time.
Any significant variance from the assumptions could result in the actual
quantity of reserves of Apache and Phoenix and future net cash flows therefrom
being materially different from the estimates set forth in this Proxy
Statement/Prospectus and incorporated by reference herein. In addition,
estimated reserves of Apache and Phoenix may be subject to downward or upward
revision based upon production history, results of future exploration and
development, prevailing oil and gas prices, operating and development costs and
other factors.
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THE COMPANIES
APACHE AND MERGER SUB
Apache, a Delaware corporation formed in 1954, is an independent energy
company that explores for, develops, produces, gathers, processes and markets
natural gas, crude oil and natural gas liquids. In North America, Apache's
exploration and production interests are focused on the Gulf Coast, the Gulf of
Mexico, the Anadarko Basin, the Permian Basin, East Texas and the Western
Sedimentary Basin of Canada. Outside of North America, Apache has exploration
and production interests offshore Western Australia and in Egypt, and
exploration interests in Indonesia, offshore China and offshore Ivory Coast.
Apache Common Stock has been listed on the NYSE since 1969 and on the CSE since
1960.
Apache completed its 18th consecutive year of production growth and eighth
consecutive year of oil and gas reserves growth in 1995. Apache's average daily
production was approximately 50.2 Mbbls of oil and 577 MMcf of natural gas for
1995. Giving effect to acquisitions, drilling activity and 65.4 MMboe in
property dispositions during the year resulting in proceeds of $271.9 million,
Apache's estimated proved reserves increased by 151.3 MMboe over the prior year
(prior to restatement for the DEKALB merger) to 420.6 MMboe at year-end, of
which approximately 60 percent was natural gas. Apache had net income of $20.2
million, or $.28 per share, on total revenues of $750.7 million for the year.
Net cash provided by operating activities during 1995 was $332.1 million.
In May 1995, Apache acquired DEKALB, an oil and gas company engaged in the
exploration for, and the development of, crude oil and natural gas in Canada,
through a merger which resulted in DEKALB becoming a wholly-owned subsidiary of
Apache. The merger was accounted for as a pooling of interests for financial
accounting purposes. As a result, all financial information contained in this
Proxy Statement/Prospectus concerning Apache has been prepared to present
information for 1995 and all preceding years on a combined basis with DEKALB
using the pooling of interests method of accounting.
Apache's growth strategy is to increase oil and gas production, reserves
and cash flow through a combination of acquisitions, moderate-risk drilling and
development of its inventory of properties. Apache also emphasizes reducing
operating costs per unit produced and selling marginal and non-strategic
properties in order to increase its profit margins.
Because production of oil and gas results in depletion of reserves, future
oil and gas production is highly dependent upon Apache's level of success in
adding reserves. Apache adds reserves by acquisition, active exploration and
development and identification, through engineering studies, of additional
behind-pipe zones or secondary recovery reserves. Apache prefers to operate its
properties so that it can effectively influence their development and Apache,
therefore, operates properties accounting for over 75 percent of its production.
Pursuing its acquire-and-develop strategy, Apache increased its total
proved reserves more than 383 MMboe, more than ten fold in the last ten years
(prior to restatement for the DEKALB merger). In addition to its acquisition
strategy, Apache continues to develop and exploit its existing inventory of
workover, recompletion and other development projects to increase reserves and
production. During 1995, Apache acquired $820.9 million of additional properties
(not including the DEKALB merger) and replaced over 100 percent of its United
States production through upward revisions and its drilling, workover and
recompletion program.
Apache's international investments supplement its long-term growth
strategy. Although international exploration is recognized as higher-risk than
most of Apache's United States and Canadian activities, it offers potential for
greater rewards and significant reserve additions. In recent years, Apache has
directed its international efforts towards development of certain discoveries
offshore Western Australia and in Egypt, and towards further exploration of its
concessions in China, Indonesia, and the Ivory Coast of western Africa.
Apache holds interests in many of its United States and international
properties through operating subsidiaries, such as MW Petroleum Corporation,
Apache Canada Ltd., Apache Energy Limited (formerly known as Hadson Energy
Limited), Apache International, Inc. and Apache Overseas, Inc. Apache treats all
operations as one segment of business.
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Merger Sub is a wholly-owned subsidiary of Apache, was incorporated in
Delaware on March 25, 1996 and has conducted no business other than entering
into the Merger Agreement. The principal executive offices of Apache and Merger
Sub are located at One Post Oak Central, 2000 Post Oak Boulevard, Suite 100,
Houston, Texas 77056-4400, and the telephone number at such offices is (713)
296-6000.
PHOENIX
Phoenix is an independent oil and gas company operating primarily in the
Arab Republic of Egypt. Phoenix is headquartered in Oklahoma City, Oklahoma and
maintains an office in Cairo, Egypt.
Phoenix's principal assets are its interest in the Khalda and Qarun oil and
gas concessions in the Western Desert of Egypt, which in the aggregate contain
18 oil fields and six gas fields. The sale of crude oil and natural gas
accounted for all of Phoenix's operating revenues during the past three years.
Phoenix's operations include exploring, developing and operating crude oil and
natural gas properties in Egypt. Phoenix's oil and gas operations are currently
conducted through Egyptian operating companies owned jointly by EGPC, Phoenix
and certain other participants. Apache is one of the participants with Phoenix
in the Qarun concession. At April 16, 1996, Phoenix had 19 employees.
The principal executive offices of Phoenix are located at 6525 North
Meridian Avenue, Oklahoma City, Oklahoma 73116-1491, and the telephone number at
such offices is (405) 728-5100.
THE SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE OF SPECIAL MEETING
The Special Meeting will be held on May 20, 1996, at the offices of The
Willard Inter-Continental Hotel, 1401 Pennsylvania Avenue, N.W., Washington,
D.C. 20004, commencing at 11:00 a.m., local time, for the purpose of (i)
considering and voting upon a proposal to approve and adopt the Merger
Agreement, as required under the DGCL, and (ii) transacting such other business
as may properly come before the Special Meeting.
RECORD DATE AND SHARES ENTITLED TO VOTE
Holders of record of shares of Phoenix Common Stock at the close of
business on April 15, 1996, the Record Date, are entitled to notice of and to
vote at the Special Meeting. On the Record Date, there were 16,100,256 shares of
Phoenix Common Stock outstanding, each of which will be entitled to one vote on
each matter to be acted upon at the Special Meeting.
VOTING AND REVOCATION OF PROXIES
All properly executed proxies that are not revoked will be voted at the
Special Meeting in accordance with the instructions contained therein. If a
holder of Phoenix Common Stock executes and returns a proxy and does not specify
otherwise, the shares represented by such proxy will be voted "FOR" approval and
adoption of the Merger Agreement in accordance with the recommendation of the
Board of Directors of Phoenix. A holder of Phoenix Common Stock who has executed
and returned a proxy may revoke it at any time before it is voted at the Special
Meeting by (i) executing and returning a proxy bearing a later date, (ii) filing
written notice of such revocation with the Secretary of Phoenix stating that the
proxy is revoked, or (iii) attending the Special Meeting and voting in person.
QUORUM AND VOTE REQUIRED
The presence, in person or by proxy, at the Special Meeting of the holders
of a majority of the shares of Phoenix Common Stock outstanding and entitled to
vote thereat will constitute a quorum for the transaction of business, and
approval and adoption of the Merger Agreement requires the affirmative vote of a
majority of the outstanding shares of Phoenix Common Stock entitled to vote
thereon. On the Record Date, there were 16,100,256 shares of Phoenix Common
Stock outstanding and entitled to vote at the Special Meeting.
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Abstentions and non-voted shares, including broker non-votes, represented in
person or by proxy, will be considered as being present for purposes of
determining the existence of a quorum and will have the same effect as votes
cast against the proposal to approve and adopt the Merger Agreement. As of the
Record Date, holders of approximately 587,000 shares of Phoenix Common Stock (or
approximately 3.6 percent of the shares of Phoenix Common Stock outstanding as
of the Record Date) have executed an agreement agreeing to vote in favor of the
Merger and adoption of the Merger Agreement. See "Certain Terms of the Merger
Agreement -- Agreement by Phoenix Management."
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, employees and
agents of Phoenix and Apache may solicit proxies from the holders of Phoenix
Common Stock by personal interview, telephone, facsimile, telegram or otherwise.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries who hold of record Phoenix Common Stock for the
forwarding of solicitation materials to the beneficial owners thereof. Phoenix
will reimburse such brokers, custodians, nominees and fiduciaries for the
reasonable out-of-pocket expenses incurred by them in connection therewith.
Apache and Phoenix have engaged the services of Georgeson & Company Inc. to
distribute proxy solicitation materials to brokers, banks and other nominees and
to assist in the solicitation of proxies from holders of Phoenix Common Stock.
The cost of such solicitation, which will be paid by Apache, is expected to be
approximately $10,000. Apache and Phoenix will each pay one-half of the costs of
printing and mailing this Proxy Statement/Prospectus. See "Certain Terms of the
Merger Agreement -- Fees and Expenses."
OTHER MATTERS
At the date of this Proxy Statement/Prospectus, the Board of Directors of
Phoenix does not know of any business to be presented at the Special Meeting
other than as set forth in the notice accompanying this Proxy
Statement/Prospectus. If any other matters should properly come before the
Special Meeting, it is intended that the shares of Phoenix Common Stock
represented by proxies at the Special Meeting will be voted with respect to such
matters in accordance with the discretion of the persons voting such proxies.
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, Merger Sub will
merge with Phoenix and the surviving corporation will become a wholly-owned
subsidiary of Apache, pursuant to Section 251 of the DGCL. Under Section 259 of
the DGCL, the surviving corporation will possess the assets and liabilities of
Merger Sub and Phoenix by operation of law at the Effective Time. As a result of
the Merger, each outstanding share of Phoenix Common Stock will be converted
into the right to receive .75 shares of Apache Common Stock and $4.00 in cash.
Cash will be paid in lieu of issuing any fractional shares of Apache Common
Stock.
Based upon the number of shares of Phoenix Common Stock outstanding as of
the Record Date, a total of approximately 12.1 million shares of Apache Common
Stock will be issuable and approximately $64 million will be payable pursuant to
the Merger. Such number of shares of Apache Common Stock would represent
approximately 14 percent of the total number of shares of Apache Common Stock
expected to be outstanding after such issuance.
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BACKGROUND
In 1992, Apache and Phoenix began discussions regarding submitting a bid to
EGPC to acquire the Qarun concession. In July 1992, Apache and Phoenix submitted
the bid to EGPC regarding the concession and in April 1993, the Qarun concession
was awarded to Apache and Phoenix. Since that time, Phoenix and Apache have
conducted joint exploration and development activities on the Qarun concession.
In late June 1995, Mr. G. Steven Farris, President of Apache, telephoned
Mr. George D. Lawrence Jr., President of Phoenix, in order to arrange a meeting
with Mr. Lawrence.
On July 5, 1995, Mr. Farris and Mr. Lawrence met in the offices of Phoenix
in Oklahoma City and discussed the Qarun concession and business conditions and
opportunities in Egypt. Mr. Farris also raised the possibility of Apache and
Phoenix combining their operations. At the meeting, Mr. Lawrence provided Mr.
Farris publicly available information regarding Phoenix.
On July 7, 1995, Mr. Farris again telephoned Mr. Lawrence and expressed
Apache's interest in obtaining confidential information regarding Phoenix for
the purpose of evaluating Phoenix as a possible merger candidate.
In July 1995, Mr. Lawrence advised each Phoenix director by telephone that
he had received an expression of interest from Apache regarding a combination
with Phoenix and that he believed that Phoenix's Board of Directors should
permit Apache to receive confidential information regarding Phoenix and to
conduct other due diligence. Mr. Lawrence also suggested to the directors that
Phoenix should retain Petrie Parkman to act as financial advisor to Phoenix and
render financial advisory and investment banking services to Phoenix. Petrie
Parkman had served in 1994 as co-manager of a secondary offering of Phoenix
Common Stock by a large stockholder of Phoenix.
On July 10, 1995, the Board of Directors of Phoenix met by telephone
conference call to discuss Apache's possible interest in acquiring Phoenix and
its request to obtain confidential information regarding Phoenix. The Board also
discussed the retention of Petrie Parkman to act as financial advisor to
Phoenix. After these discussions, the Board resolved to provide Apache
confidential information regarding Phoenix after Apache executed a
confidentiality and standstill agreement and to retain Petrie Parkman pursuant
to an engagement letter.
On July 12, 1995, at a regularly-scheduled meeting of the Board of
Directors of Apache, Mr. Raymond Plank, Chairman of the Board and Chief
Executive Officer of Apache, discussed Egypt as a possible second core area for
Apache outside of North America, and Mr. Farris outlined possible transactions
in Egypt, including a transaction involving Phoenix.
On July 14, 1995, Apache and Phoenix each executed confidentiality and
standstill agreements. On July 14 and 15, 1995, representatives of Phoenix
presented certain confidential information to representatives of Apache at the
offices of Petrie Parkman in Houston and representatives of Phoenix and
Netherland, Sewell & Associates, Inc., Phoenix's independent petroleum
engineers, met with representatives of Apache in Dallas, Texas to discuss due
diligence matters relating to Phoenix's oil and gas reserves and prospects.
Also in July 1995, Apache contacted Merrill Lynch & Co. ("Merrill Lynch")
regarding representation of Apache as financial advisor in connection with
evaluating a possible business combination with Phoenix.
During June and July 1995, Mr. Plank kept the Board of Directors of Apache
advised both orally and in writing of the status of the proposed transaction.
On July 31, 1995, Mr. Farris sent a letter to Mr. Lawrence in which he
advised Phoenix that Apache was not prepared to make a proposal to Phoenix at
that time, but concluded that in view of the apparent fit between the companies,
Phoenix and Apache should remain in contact for future possibilities.
On August 1 and 2, 1995, the Board of Directors of Phoenix met in
Washington, D.C. and discussed, among other matters, with its legal and
financial advisors its existing short-term, medium-term and long-term business
strategies as well as the alternative of a strategic merger. Petrie Parkman
presented an analysis of the reference value ranges for Phoenix using various
methodologies. As a result of these discussions and the
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presentation by Petrie Parkman, the Board of Directors of Phoenix concluded that
Phoenix would continue to be an aggressive exploration and production company in
Egypt. In addition, while Phoenix was not actively seeking to be acquired,
Phoenix would be receptive to any strategic alternative which would be in the
best interests of its stockholders. The Board of Directors also directed
management of Phoenix to send Apache a letter acknowledging the conclusion of
Apache's due diligence process. Such letter was sent to Apache on August 3,
1995.
On August 29, 1995, Mr. Joseph A. Pardo, Chairman of the Board of Phoenix,
and Mr. Lawrence met with representatives of an international oil and gas
company ("Company One") to discuss oil and gas matters of mutual interest. At
that meeting, the representatives of Company One and Phoenix discussed the
possibility of Phoenix being acquired by another company. The representatives of
Company One indicated that Company One was not then interested in making a
proposal to acquire Phoenix, but was interested in being advised if another
company made an offer to acquire Phoenix.
On September 6, 1995, Petrie Parkman received an inquiry from a
representative of a second international oil and gas company ("Company Two")
regarding a possible transaction with Phoenix.
On September 14, 1995, the Board of Directors of Phoenix met by telephone
conference call and discussed, among other matters, the possibility of allowing
Company Two to review Phoenix's confidential information. The Phoenix Board of
Directors authorized Mr. Lawrence to negotiate and execute a confidentiality and
standstill agreement with Company Two. On September 23, 1995, Phoenix and
Company Two executed a confidentiality and standstill agreement. On September 25
and 26, 1995, representatives of Phoenix and Company Two met and Phoenix
provided certain confidential information to Company Two.
In late October 1995, a representative of Company Two telephoned Petrie
Parkman and advised Petrie Parkman that Company Two would not make an offer to
acquire Phoenix.
On January 30, 1996, Merrill Lynch met with Mr. Plank and Mr. Farris in
Houston to discuss possible structure and financing alternatives available in a
possible business combination with Phoenix.
On February 19, 1996, Merrill Lynch met with Mr. Plank and Mr. Farris in
Houston to prepare a written expression of interest in exploring a possible
business combination of Phoenix and Apache for delivery to Phoenix.
On February 23, 1996, Mr. Farris sent the Board of Directors of Phoenix a
letter in which he expressed his belief that a combination of Phoenix and Apache
would benefit both stockholder groups and made a proposal to offer .70 shares of
Apache Common Stock plus one warrant to purchase Apache Common Stock for each
outstanding share of Phoenix Common Stock. Each warrant would be valid for five
years and would have an exercise price of $40.625 per share of Apache Common
Stock.
On February 28 and 29, 1996, the Board of Directors of Phoenix together
with Phoenix's financial and legal advisors met at Phoenix's offices in Oklahoma
City at its regular meeting to discuss, among other matters, the proposal made
by Apache. After discussion, the Board of Directors decided to meet on March 12,
1996 to continue their deliberations regarding the Apache proposal.
On March 11 and 12, 1996, the Board of Directors of Phoenix together with
Phoenix's financial and legal advisors met in New York City to continue their
deliberations regarding the Apache proposal. The Board of Directors authorized
Mr. Lawrence and Phoenix's financial and legal advisors to meet with
representatives of Apache to discuss the value of the proposed Apache warrant
and to enhance the overall value of the proposal to the Phoenix stockholders.
The Board of Directors also authorized management of Phoenix to permit Apache to
conclude its due diligence review of Phoenix.
On March 15, 1996, Mr. Lawrence and Phoenix's financial and legal advisors
met in Houston with Mr. Farris and other representatives of Apache to discuss
the Apache proposal. On March 15 and 16, 1996, representatives of Phoenix met
with representatives of Apache to review Phoenix's oil and gas prospect
inventory.
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On March 18, 1996, Mr. Lawrence met in Houston with Mr. Farris to discuss
the revised proposal of Apache to acquire Phoenix, which proposal was confirmed
in a letter to the Board of Directors of Phoenix. The revised proposal provided
that Apache would offer .75 shares of Apache Common Stock plus $4.00 in cash for
each outstanding share of Phoenix Common Stock.
On March 20, 1996, the Board of Directors of Phoenix together with its
legal and financial advisors met via telephone conference call to consider
Apache's revised proposal. After discussion, the officers of Phoenix were
authorized to proceed with the negotiation of an agreement and plan of merger
with Apache and to conduct due diligence regarding the business, operations and
prospects of Apache. In addition, the Board of Directors authorized Mr. Francis
L. Durand, a director of Phoenix, to assist the management of Phoenix as a paid
consultant in conducting the due diligence review of Apache.
During the period from March 21, 1996 through March 26, 1996,
representatives of Apache and Phoenix held due diligence meetings in Houston,
Dallas and Oklahoma City covering engineering (reserves), financial, tax,
accounting and litigation matters. During the period from March 22, 1996 through
March 27, 1996, representatives of Apache and Phoenix negotiated in Houston the
terms and provisions of an agreement and plan of merger.
During February and March 1996, Mr. Plank kept the Board of Directors of
Apache advised both orally and in writing of the status of the proposed
transaction.
On March 26 and 27, 1996, the Board of Directors of Apache met in Houston
to consider the Merger, the Merger Agreement, and the issuance of Apache Common
Stock as contemplated in the Merger Agreement. At the meeting, Apache's
management and Merrill Lynch made detailed presentations to the Board of
Directors regarding the results of Apache's due diligence and evaluation of
Phoenix. After further discussions, the Apache Board of Directors determined
that the Merger was in furtherance of the long-term business strategy of Apache
and consistent with and in the best interests of Apache, and the directors
present unanimously approved the Merger and the other transactions contemplated
by the Merger Agreement.
On March 27, 1996, the Board of Directors of Phoenix together with its
legal and financial advisors met in New York City to consider the Merger
Agreement. At this meeting, (i) Mr. Lawrence and Mr. Durand presented an
in-depth review of the due diligence of Apache conducted by Phoenix, (ii) Petrie
Parkman presented an in-depth analysis of the financial aspects of the
transaction, including (a) a review of the potential merits of the strategic
alliance between Phoenix and Apache, (b) the issues to be considered concerning
the transaction, (c) the factors considered by Petrie Parkman in developing its
opinion and (d) its opinion that the consideration to be received by the
stockholders of Phoenix was fair to such stockholders from a financial point of
view, and (iii) legal counsel presented a detailed discussion of the structure
of the transaction. The Board of Directors of Phoenix unanimously approved the
transaction and authorized the proper officers of Phoenix to complete the
negotiations of the Merger Agreement and to execute the definitive Merger
Agreement.
CERTAIN INFORMATION PROVIDED
In connection with the discussions between Apache and Phoenix described
above, Apache provided to Phoenix confidential information and internal
analyses, including certain preliminary financial forecasts with respect to
Apache's operating results, cash flows and financing activities, capitalization
and capital expenditures, and the assumptions on which such preliminary
financial forecasts were based. Such preliminary financial forecasts were
developed by Apache for internal use only, were not prepared with the intent
that they would be publicly distributed, were based on numerous assumptions
(many of which are beyond the control of Apache) and are not necessarily
indicative of future results.
In connection with the discussions between Apache and Phoenix described
above, Phoenix provided to Apache confidential information and internal
analyses, including certain internal operating budgets relating to 1995 and
1996, and the assumptions on which such budgets were based. Such budgets were
prepared by Phoenix for internal use only, were not prepared with the intent
that they would be publicly distributed, were based on numerous assumptions
(many of which are beyond the control of Phoenix) and are not necessarily
indicative of future results.
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APACHE'S REASONS FOR THE MERGER
Apache management believes that the Merger would further Apache's
transformation into an international exploration and production company with six
North American core areas (the Gulf Coast, the Gulf of Mexico, the Anadarko
Basin, the Permian Basin, East Texas, and the Western Sedimentary Basin of
Canada), and two international core areas (Australia and Egypt).
The Phoenix investment in the Western Desert of Egypt would provide Apache
with increased exposure to an area with significant potential for reserve
growth. The area is larger than the state of Oklahoma, but only approximately
450 exploratory wells have been drilled in the Western Desert as compared to
approximately 40,000 exploratory wells in Oklahoma. Phoenix would provide Apache
with an expanded Egyptian operational capacity with significant exploration
potential in an area where proven commercial accumulations of oil and gas have
been found. An emerging gas market may also provide additional opportunities in
future years.
As a result of the Merger, Apache would have interests in concessions of
over 11.6 million gross acres in Egypt. The Merger would add the 2.4-million
gross acre Khalda concession in which Phoenix owns a 40-percent interest, and an
additional 50-percent interest in the 1.9-million gross acre Qarun concession,
in which Apache presently owns a 25-percent interest. Oil production from the
Qarun concession is expected to increase significantly upon completion of a
central production facility and related 50-kilometer pipeline connection to an
existing major crude oil pipeline. This project, scheduled for completion in
late 1996, will boost nominal gross transport capacity from Qarun to 40,000
barrels per day.
In considering the Merger and determining the Merger Consideration, Apache
management considered the financial and operational impact of the Merger and
made several conclusions based upon estimates and projections made by Apache
and, in part, upon information furnished by Phoenix. These conclusions are
discussed below.
The Merger is expected to provide to Apache, following the completion and
full operation of the Qarun facilities, in excess of 15,000 net barrels per day
of oil production in 1997. Apache's total worldwide oil production in 1997 is
expected to reach approximately 75,000 barrels per day.
By early 1997, the Merger is expected to be additive to earnings per share
and net cash provided by operating activities following the expected increases
in gross oil production in Qarun from the current 6,500 barrels per day to
35,000 barrels (assuming full implementation of the Qarun production system on
schedule). Apache estimates that net cash flow provided by operating activities
of the Phoenix properties of approximately $70 million in 1997 should be
obtained based on a realized price of $17 per barrel, and assuming successful
implementation of a two-year capital expenditure program to develop reserves
(which is subject to approval by the other parties to the concession agreements)
at a cost attributable to Phoenix's interest estimated at approximately $125
million.
Another of Apache's reasons for the Merger is the advantage provided by the
cost-recovery mechanisms in the Qarun and Khalda concession agreements. Under
the terms of each concession agreement, the non-governmental participants
(including Phoenix and Apache) pay 100 percent of the capital and operating
costs incurred in connection with operations under the agreements, and the
production is split between EGPC and the private participants. Up to 40 percent
of the oil and gas produced and sold under each respective concession agreement
is available to the private participants to recover costs ("cost recovery" or
"cost recovery petroleum") for operations incurred thereunder, and the remainder
("profit petroleum") is allocable among EGPC and the private participants. Cost
recovery forms a single, unified pool for the recovery of costs incurred in
exploration and development activities in a concession area, without
differentiation between capital and operating costs, except that operating costs
are recovered prior to the recovery of any capital costs. Capital costs (which
include exploration, development and other equipment and facilities costs) are
amortized for recovery over either four or five years, as applicable, while
operating expenses are recoverable on a current basis. To the extent that costs
eligible for recovery in any quarter exceed the amount of cost recovery
petroleum produced and sold in that quarter, such costs are recoverable from
cost recovery petroleum in future quarters with no limit in the ability to carry
forward such costs. In the event the cost recovery pool exceeds the amounts
reimbursable in any period, such excess would revert either in whole to EGPC (in
the case of the
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Qarun concession), or to EGPC and the other participants in accordance with
their interests in the profit petroleum (in the case of the Khalda concession).
Based on Apache's current estimates of proved and probable reserves attributable
to Phoenix's interests, Apache expects to recover all amounts expended in
connection with developing and producing such reserves and, in addition, expects
to have available an additional $200 million of cost recovery for exploration
and development activities on the Qarun and Khalda concessions over their
expected terms.
Apache estimates that net cash provided by operating activities from the
combined Egyptian operations of Apache and Phoenix should be in the range of
$100 million for 1997 assuming $17 per barrel oil prices and the estimated
production levels described above.
Assuming $396 million of Merger Consideration at $26 per share stock value
for Apache Common Stock, Apache expects to allocate to the Phoenix acquisition
approximately $29 million to working capital, $51 million to pipeline and
facilities, $160 million to proved reserves, $58 million to probable reserves
classified as unproved properties, and $99 million to international concession
rights. See Notes to the "Apache Corporation and Subsidiaries Unaudited Pro
Forma Consolidated Condensed Financial Statements" for a discussion of these
allocations on a pro forma basis. After evaluation of updated production data in
the Khalda concession and recent well data in the Qarun concession, Apache
estimated 33.4 MMboe of proved reserves attributable to the Phoenix interests as
of January 1, 1996. Apache estimated as of such date another 21.0 MMboe of
probable reserves (including 10.0 MMboe of discovered, unbooked reserves
awaiting construction of a natural gas pipeline and execution of natural gas
sales contracts) and 32.0 MMboe of possible reserves (risk-adjusted by Apache)
attributable to the Phoenix interests.
Certain statements contained in this Proxy Statement/Prospectus, including
the estimates and projections of Apache described above, are not based on
historical facts, but are forward-looking statements. Numerous assumptions about
future conditions were made in making such statements that may ultimately prove
to be inaccurate. Actual events may materially differ from anticipated results
described in such statements, and Apache's ability to achieve such results is
subject to certain risks and uncertainties.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
The forward-looking statements regarding the Merger made above under the
caption "-- Apache's Reasons for the Merger" and in Apache's Current Report on
Form 8-K dated March 27, 1996, as amended, may be affected by many factors.
Several key factors that have a direct bearing on Apache's ability to attain
these estimates and projections or achieve expectations, some of which are
beyond the control of Apache, are discussed below:
(a) Proved reserve estimates included herein are based on Apache
analysis of oil and gas reserves which meet the definition of "proved"
under Commission rules. Other reserve categories have also been estimated
by Apache. The estimates of future net cash flows and the value thereof are
based upon assumptions of future production levels, prices and costs that
may prove to be incorrect over time. Any significant variance from these
assumptions could result in the actual quantity of the reserves and future
net cash flows therefrom being materially different from these estimates.
Furthermore, such reserves may be subject to revisions based on production
history, results of future exploration and development, prevailing oil and
gas prices, operating and developmental costs, and other factors.
(b) The initial oil and gas prices used in the estimates included
herein are $17 per barrel of oil and $2.40 per MMBtu for gas without
escalation. Prices for oil produced in the Egyptian concessions are based
on oil sold on the world market and are subject to world oil price
fluctuations. Gas prices are based upon 85 percent of a benchmark oil price
and will be subject to fluctuations in such price. Fluctuations in oil
prices will impact estimates that are dependent upon future production
values, including cost recovery value and other revenue related matters.
Actual future results will be affected by the factors described under "Risk
Factors and Certain Considerations -- Effect of Volatile Production
Prices."
(c) The future cost recovery dollars included herein are based on
estimated future production from proved and probable oil and gas reserves
and assume the implementation of a two-year capital expenditure program of
approximately $125 million attributable to Phoenix's interest in these
concessions
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(which will require the approval of the other parties to the concession
agreements). Substantially all of the proved and probable reserves except
for those described in (d) below are associated with additional recoveries
from existing wellbores or additional recovery from waterflood projects.
(d) Approximately 10 MMboe of reserves are attributable to gas
discoveries on the Khalda concession in the Western Desert of Egypt which,
to be deemed "proved," require the construction and completion of gas
pipelines presently in the planning stages and the negotiation and
execution of a gas contract. Allocated value placed on these reserves
assumes market availability through a planned natural gas pipeline
projected for completion in 1999. Factors such as market availability and
competition from alternative fuels may affect the timing of the pipeline
project.
(e) Estimates of 1997 production assume oil production levels from the
Qarun concession in the Western Desert of Egypt at 35,000 barrels per day
(gross). If unanticipated start-up problems occur with the Qarun production
system, full production at projected rates could be delayed. Thus, 1997
estimates of production, net income and cash flow would be affected.
(f) Forward-looking statements regarding Phoenix's operations and
reserves are dependent upon the continued economic and political stability
of Egypt and the surrounding region. Adverse developments in Egypt and
future changes in Egyptian governmental regulations and policies could
adversely affect Phoenix's results of operations. The Phoenix Egyptian
concessions are subject to cancellation upon the occurrence of specific
extraordinary events, including national emergency, unauthorized assignment
of undivided interests in the concessions by the contracting subsidiaries,
the bankruptcy of the contractor and intentional extraction of any mineral
not authorized by the concession agreements. Phoenix's share of crude oil
from its Egyptian concessions is currently being sold exclusively to EGPC.
Although Phoenix believes that in the event of the loss of EGPC as a
purchaser or adverse developments in the business practices of EGPC,
production from Phoenix's Egyptian concessions could be sold at comparable
prices on the international market, there can be no assurances concerning
such sales.
PHOENIX'S REASONS FOR THE MERGER; RECOMMENDATION OF PHOENIX'S BOARD OF DIRECTORS
By the unanimous vote of the Board of Directors of Phoenix at a meeting
held on March 27, 1996, the Board of Directors determined the Merger to be fair
to, and in the best interests of, Phoenix and its stockholders and approved the
Merger and the Merger Agreement. As described above under "-- Background," the
Phoenix Board of Directors' decision to approve the Merger and the Merger
Agreement at its March 27th board meeting followed a number of meetings with
Petrie Parkman regarding Phoenix's business, results of operations and
prospects, Phoenix's and Apache's stock price performance, and the possible
benefits that might exist to Phoenix's stockholders in consummating a merger
with Apache.
At its meeting held on March 27, 1996, the Phoenix Board of Directors
received the presentation of management of Phoenix, Mr. Durand and Petrie
Parkman with respect to Apache, including reviews of, among other things:
historical information relating to the business, financial condition and results
of operations of Apache; information provided by Apache management that was
reviewed by Phoenix management regarding the reserves of Apache; information
regarding the management of Apache; historical data relating to market prices
and trading volumes of Apache Common Stock; and the possible effects of the
Merger on Apache's financial condition and the possible market effects of the
announcement of the proposed Merger and the consummation thereof on Apache
Common Stock.
During the course of its deliberations, the Phoenix Board of Directors,
with the assistance of management and its legal and financial advisors,
considered a number of other factors, including the following:
(i) The strategic and financial alternatives available to
Phoenix, including postponing a sale or merger of Phoenix or remaining a
separate company and pursuing its existing growth strategy;
(ii) The Merger Consideration proposed by Apache and the implied
premium over the then current market price of Phoenix Common Stock as
compared to the premiums and valuations found in certain other
transactions;
(iii) The proposed terms and conditions of the proposed
combination of Apache and Phoenix, including (a) the absence of
significant restrictions on Phoenix's ability to consider unsolicited
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competing merger or acquisition proposals from third parties following
the execution of the Merger Agreement and Phoenix's ability, subject to
certain determinations regarding its fiduciary duties, to provide
information to, and conduct negotiations with, such third parties, (b)
the right of Phoenix to terminate the Merger Agreement upon receipt of
an offer determined by the Phoenix Board of Directors in good faith to
be higher than the per share consideration to be received in the Merger,
(c) the right of Phoenix to terminate the Merger Agreement upon the
occurrence of a material adverse change in Apache, (d) the Phoenix Board
of Directors' ability, subject to certain determinations regarding the
Phoenix Board's fiduciary duties, to withdraw or modify its
recommendation to Phoenix's stockholders and (e) the amount and
structure of the payment of expenses and termination fees;
(iv) The strategic fit between Apache and Phoenix, including the
match of Phoenix's established Egyptian operations with Apache's capital
resources and aggressive acquisition and exploration strategy and the
geographic diversity of Apache's oil and gas properties;
(v) The likelihood that holders of Phoenix Common Stock would
have greater liquidity in their holdings in Apache following the Merger;
(vi) The due diligence investigations of Phoenix's management, Mr.
Durand and Petrie Parkman and presentations of management and Mr. Durand
regarding the growth of Apache's reserves through both acquisition and
exploitation of acreage and reserves and its prospects for future
growth;
(vii) The historical performance and strategic objectives of
Apache, as well as the risks involved in achieving those objectives in
the oil and natural gas industry under current economic and market
conditions;
(viii) The preliminary pro forma financial position, results of
operations and other financial information of the combined entity,
including an analysis of the opportunities for cost savings and
economies of scale;
(ix) The structure of the Merger, which would permit the holders
of Phoenix Common Stock to exchange all their shares for shares of
Apache Common Stock in a transaction intended, in general, to be
tax-free for federal income tax purposes, except with respect to cash to
be received as partial consideration for their shares;
(x) The published reports of research analysts regarding Apache;
and
(xi) The presentations of Petrie Parkman delivered to the Phoenix
Board of Directors at its meetings on August 2, 1995, March 12, 1996,
March 20, 1996 and March 27, 1996, including the written opinion of
Petrie Parkman delivered at the March 27, 1996 meeting to the effect
that, as of March 27, 1996, the Merger Consideration is fair from a
financial point of view to the holders of Phoenix Common Stock.
Petrie Parkman has delivered a written opinion to the Phoenix Board of
Directors, dated March 27, 1996, that, as of the date thereof, the Merger
Consideration to be received pursuant to the Merger Agreement is fair from a
financial point of view to the holders of Phoenix Common Stock. Petrie Parkman
confirmed such opinion as of April 16, 1996. A copy of the written opinion of
Petrie Parkman dated April 16, 1996 setting forth the assumptions made, matters
considered and limitations on the review undertaken by Petrie Parkman in
rendering their opinion is attached to this Proxy Statement/Prospectus as
Appendix II (and is incorporated herein by reference), and stockholders of
Phoenix are urged to read such opinion carefully in its entirely. See "-- Petrie
Parkman Opinion to the Phoenix Board of Directors."
The foregoing discussion of the information and factors considered and
given weight by the Phoenix Board is not intended to be exhaustive. In view of
the variety of factors considered in connection with its evaluation of the
Merger, the Phoenix Board of Directors did not find it practicable to and did
not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of the
Phoenix Board of Directors may have given different weights to different
factors. For a discussion of the interests of Phoenix management and the Phoenix
Board of Directors in the Merger, see "-- Interests of Certain Persons in the
Merger."
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Based on the factors described above, the Phoenix Board of Directors
unanimously declared the Merger fair to, and in the best interests of, the
holders of Phoenix Common Stock. ACCORDINGLY, THE BOARD OF DIRECTORS OF PHOENIX
UNANIMOUSLY RECOMMENDS TO THE HOLDERS OF
PHOENIX COMMON STOCK THAT THE MERGER AND THE MERGER AGREEMENT BE APPROVED AND
ADOPTED.
OPINION OF PETRIE PARKMAN AS PHOENIX'S FINANCIAL ADVISOR
On July 14, 1995, the Phoenix Board of Directors engaged Petrie Parkman to
act as financial advisor to render financial advisory and investment banking
services. In connection with this engagement, the Phoenix Board of Directors
instructed Petrie Parkman, in its role as financial advisor, to evaluate the
fairness, from a financial point of view, to the holders of Phoenix Common Stock
of the Merger Consideration consisting of the right to receive (i) .75 shares of
Apache Common Stock and (ii) $4.00 in cash in exchange for each outstanding
share of Phoenix Common Stock, pursuant to the terms of the Merger Agreement.
Petrie Parkman has delivered its written opinion dated March 27, 1996 to
the Phoenix Board of Directors that, as of the date of such opinion, the Merger
Consideration is fair, from a financial point of view, to the stockholders of
Phoenix. Petrie Parkman confirmed, as of April 16, 1996, its opinion of March
27, 1996. In rendering such confirmation, Petrie Parkman performed procedures to
update certain of its analyses made in connection with its March 27, 1996
opinion and reviewed the assumptions on which such analyses were based and the
factors considered in connection therewith. Petrie Parkman considered, among
other things, Phoenix's and Apache's recent performance and recent market
conditions and developments based on the foregoing.
THE FULL TEXT OF THE OPINION OF PETRIE PARKMAN DATED APRIL 16, 1996, WHICH
SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITS ON THE REVIEW
UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX II TO THIS PROXY
STATEMENT/PROSPECTUS. STOCKHOLDERS OF PHOENIX AND APACHE ARE URGED TO, AND
SHOULD, READ SUCH OPINION IN ITS ENTIRETY, ESPECIALLY WITH REGARD TO THE
ASSUMPTIONS MADE AND MATTERS CONSIDERED BY PETRIE PARKMAN.
In connection with its opinion, Petrie Parkman, among other things (i)
reviewed the Merger Agreement; (ii) reviewed certain publicly available business
and financial information relating to Phoenix and Apache, including the audited
financial statements contained in the Annual Reports on Form 10-K for Phoenix
and Apache as of December 31, 1995; (iii) reviewed the estimates of proved,
probable, and possible oil and gas reserves of Phoenix as prepared by Netherland
Sewell & Associates, Inc. for Phoenix as of January 1, 1996 (the "Reserve
Report") and estimates of proved oil and gas reserves of Apache as prepared by
Apache and audited by Ryder Scott Company as of January 1, 1996; (iv) reviewed
certain other estimates of oil and gas reserves of Apache as of January 1, 1996
as prepared by its management and staff; (v) analyzed certain internal financial
and operating forecasts and financial and operating data and budgets concerning
Phoenix and Apache, all of which were prepared or provided by the management of
Phoenix and Apache, as the case may be; (vi) discussed the current operations
and prospects of Phoenix and Apache with the managements and operating staffs of
Phoenix and Apache, as the case may be; (vii) discussed with the management and
operating staff of Phoenix the expected operations and prospects of the combined
company, giving pro forma effect to the Merger; (viii) reviewed the historical
stock market prices of the shares of Apache Common Stock and Phoenix Common
Stock; (ix) compared the financial terms of the Merger with the financial terms
of certain other transactions which it deemed to be relevant; and (x) made such
other analyses and examinations as it deemed necessary or appropriate.
In rendering its opinion, Petrie Parkman relied without independent
verification upon the accuracy and completeness of all of the financial and
other information reviewed by Petrie Parkman for the purposes of its opinion and
assumed that the financial forecasts provided to Petrie Parkman have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the respective managements of Phoenix and Apache as to the
expected future financial performance of their respective companies individually
and as combined in the Merger. In addition, Petrie Parkman has not made an
independent evaluation or appraisal of the assets or liabilities of Phoenix or
Apache or any of their respective subsidiaries nor, except for the Phoenix and
Apache reserve reports referred to in its opinion, was Petrie Parkman furnished
with any such evaluations or appraisals. Petrie Parkman's opinion relates only
to the Merger Consideration to be received in
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<PAGE> 27
connection with the Merger and does not constitute in any way whatsoever a
recommendation to any holder of Phoenix Common Stock as to how such holder
should vote at the Special Meeting.
In rendering its opinion, Petrie Parkman conducted several analyses
including (i) an analysis of the potential future financial performance of
Phoenix ("Going Concern Analysis"); (ii) analyses of selected comparable
industry transactions ("Comparable Transactions Analyses"); (iii) comparisons
with selected publicly-traded comparable companies ("Common Stock Comparisons");
(iv) discounted cash flow analysis of Phoenix ("Discounted Cash Flow Analysis");
and (v) an analysis of the potential financial effects of the Merger ("Pro Forma
Merger Analysis"). These analyses are described below and on the following
pages. Based upon the reference value ranges resulting from the various analyses
and subject to the assumptions and limitations set forth in its opinion, Petrie
Parkman determined a composite range of asset reference values for Phoenix of
$356 million to $440 million. Based on Phoenix's long-term debt balance at
December 31, 1995 and considering the number of fully-diluted shares of Phoenix
Common Stock outstanding, Petrie Parkman arrived at a composite equity reference
value range per share of Phoenix Common Stock on a fully-diluted basis of $21.00
to $26.00.
Going Concern Analysis. Using this method, Petrie Parkman projected cash
flows for Phoenix for the six-year period 1996 through 2001 using four oil and
gas pricing scenarios and three exploration cases. The four oil pricing
scenarios used by Petrie Parkman were based on benchmarks for posted prices for
West Texas Intermediate ("WTI") equivalent crude oil and adjusted to Dated Brent
crude oil, which is the benchmark upon which Phoenix's crude oil is priced
("Flat Pricing Case," "Pricing Case I," "Pricing Case II," "Pricing Case III").
For the Flat Pricing Case and Pricing Cases I, II, and III, WTI benchmark oil
prices were projected to be $17.50, $16.00, $17.50, and $19.00 per barrel,
respectively, for 1996 and to escalate annually thereafter at the rates of 0.0%,
4.0%, 5.0%, and 6.0%, respectively. Future oil prices in each pricing case were
limited to $50.00 per barrel. Gas prices for Phoenix were based on existing or
projected gas marketing contracts which relate the gas price to oil prices.
Future projections of gas prices were therefore tied to the oil price cases with
appropriate adjustments for heating content. Cash flow projections were prepared
utilizing certain information and projections prepared or provided by Phoenix
management as well as numerous assumptions. The Going Concern Analysis utilized
three exploration cases where gross reserve additions (to the 100% interest)
from future oil and gas discoveries were assumed to be zero ("Exploration Case
I"), 75 million equivalent barrels of oil ("Exploration Case II"), and 150
million equivalent barrels of oil ("Exploration Case III"). A finding cost,
based on Phoenix's historical finding cost, of $1.50 per barrel of oil
equivalent using a six Mcf of gas to one barrel of oil conversion ratio ("BOE6")
was used in each case. The three exploratory cases differed in the amount and
timing of capital expended and reserves discovered over the six-year period.
Other factors in the analysis included a terminal multiple of 6.0x projected
2001 discretionary cash flow and utilization of Phoenix's existing tax position.
This methodology yielded, with 12.5% to 15.0% discount rates, ranges of
equity reference values per share of Phoenix Common Stock, on a fully-diluted
basis, for Exploration Case I of $12.44 to $13.95 using the Flat Pricing Case,
$13.08 to $14.67 using Pricing Case I, $14.92 to $16.75 using Pricing Case II,
and $16.87 to $18.94 using Pricing Case III; for Exploration Case II of $15.42
to $17.32 using the Flat Pricing Case, $16.33 to $18.35 using Pricing Case I,
$18.67 to $20.98 using Pricing Case II, and $21.14 to $23.76 using Pricing Case
III; and for Exploration Case III of $19.29 to $21.68 using the Flat Pricing
Case, $20.49 to $23.04 using Pricing Case I, $23.29 to $26.19 using Pricing Case
II, and $26.26 to $29.55 using Pricing Case III. From these equity reference
value ranges, Petrie Parkman determined composite equity reference value ranges
per share of Phoenix Common Stock on a fully-diluted basis using this method of
$14.81 to $16.71 for Exploration Case I, $18.61 to $21.47 for Exploration Case
II, and $23.37 to $26.22 for Exploration Case III. Lower discount rates
generally increased the above listed per share values by approximately one
dollar per share per 100 basis point (1%) reduction in discount rate.
Comparable Transactions Analyses. In its Comparable Transaction Analyses,
Petrie Parkman analyzed: (i) transactions involving the purchase of oil and gas
assets and (ii) oil and gas company acquisition transactions and offers for
control. Petrie Parkman reviewed certain publicly-available information on 26
international oil and gas asset acquisition transactions which took place
between January 1994 and January 1996. Using publicly-available information,
Petrie Parkman calculated purchase price multiples of
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reported equivalent proved reserves for the acquired assets in each transaction.
Of the 26 asset transactions analyzed, nine of these transactions were
considered appropriate for an analysis of Phoenix and therefore were utilized in
developing comparable transaction parameters. For these nine transactions, the
highest, average, and lowest multiples of equivalent proved reserves were $5.57,
$3.86, and $1.81 per BOE6, respectively, and $5.60, $3.92, and $1.80 per barrel
of oil equivalent, respectively, using a ten Mcf of gas to one barrel of oil
conversion ratio ("BOE10"). Petrie Parkman determined that, with respect to
Phoenix, the appropriate benchmarks for equivalent proved reserves were in the
ranges of $4.00 to $5.00 per BOE6 and $4.00 to $5.00 per BOE10. These benchmarks
were applied by Petrie Parkman to Phoenix's corresponding equivalent proved
reserve figures based on the Reserve Report to yield asset reference value
ranges for Phoenix's reserves. After considering adjustments for Phoenix's
non-reserve assets and December 31, 1995 balance sheet adjustments (which
included net working capital and other liabilities), Petrie Parkman determined
from the asset reference value ranges implied by these multiples a composite
equity reference value range per share of Phoenix Common Stock on a
fully-diluted basis using this method of $10.00 to $11.78.
In addition, Petrie Parkman reviewed certain publicly-available information
on 29 company acquisition transactions and offers for control in the oil and gas
exploration and production industry which took place between June 1994 and
February 1996. Of the 29 transactions analyzed, ten of these transactions were
considered appropriate for an analysis of Phoenix and therefore were utilized in
developing comparable transaction parameters. The ten transactions considered
included (listed by acquiring company/target company): United Meridian
Corp./General Atlantic Resources, Inc.; Canadian 88 Energy Corp./Texaco Canada
Petroleum Company; Apache Corp./DEKALB Energy Company; YPF S.A./Maxus Energy
Corp.; Barrett Resources Corp./Plains Petroleum Company; Hugoton Energy
Corp./Consolidated Oil & Gas, Inc.; Enron Capital & Trade Resources Corp./Coda
Energy, Inc.; Statoil/Aran Energy Plc; Tom Brown, Inc./K N Production Company;
and HS Resources, Inc./Tide West Oil Company. Using publicly-available
information, Petrie Parkman calculated total investment (purchase price plus
obligations assumed) multiples of gross pretax cash flow for the target company
in each transaction. For these ten transactions, the highest, average, and
lowest total investment multiples of gross pretax cash flow were 12.1x, 9.0x,
and 6.4x, respectively. Petrie Parkman also calculated purchase price multiples
of discretionary cash flow and implied purchase price of reserves (purchase
price plus obligations assumed less estimated values of non-reserve assets)
("IPPR") multiples of the standardized measure of discounted future net cash
flows ("SEC Value") and equivalent proved reserves for the target company in
each transaction. The highest, average, and lowest purchase price multiples of
discretionary cash flow were 12.4x, 9.2x, and 6.3x, respectively. The highest,
average, and lowest IPPR multiples of SEC Value were 2.0x, 1.7x, and 1.3x,
respectively. The highest, average, and lowest IPPR multiples of equivalent
proved reserves were $8.60, $5.40, and $2.91 per BOE6, respectively, and $11.70,
$6.84, and $3.30 per BOE10, respectively. Petrie Parkman determined that, with
respect to Phoenix, the appropriate benchmark multiples for gross pretax cash
flow, discretionary cash flow, SEC Value, and equivalent proved reserves were in
the ranges of 7.0 to 10.0x, 7.0 to 11.0x, 1.4 to 1.9x, $5.00 to $6.00 per BOE6,
and $6.00 to $7.50 per BOE10, respectively. These benchmark multiples were
applied by Petrie Parkman to Phoenix's gross pretax cash flow, discretionary
cash flow, SEC Value, and equivalent proved reserves.
For the period between June 1994 and February 1996, Petrie Parkman reviewed
28 offers for control in which the target companies were publicly traded. Of the
28 offers for control, nine offers for control were considered appropriate for
an analysis of Phoenix and therefore were utilized in developing offers for
control parameters. These nine offers for control considered included (listed by
company offering control/target company): United Meridian Corp./General Atlantic
Resources, Inc.; Norcen Energy Resources Ltd./North Canadian Oils Ltd.; Canadian
88 Energy Corp./Texaco Canada Petroleum Company; Premier Consolidated Oilfields
Plc/Pict Petroleum Plc; Apache Corp./DEKALB Energy Company; YPF S.A./Maxus
Energy Corp.; Barrett Resources Corp./Plains Petroleum Company; Talisman Energy,
Inc./Goal Petroleum Plc; and HS Resources, Inc./Tide West Oil Company. For these
offers for control, Petrie Parkman performed a premium analysis which compared
the offer price per target share with the target's share price for the periods
of one day, 30 days, and 60 days prior to announcement of the offer. The
highest, average, and lowest premiums (excess of offer price over target price
stated as a percentage above the target price) for each of these three periods
were 46.7%, 22.9%, and -7.8% for one day prior, respectively, 47.7%, 30.5%, and
13.8% for
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30 days prior, respectively, and 63.0%, 29.8%, and 14.8% for 60 days prior,
respectively. Petrie Parkman determined that, with respect to Phoenix, the
appropriate benchmarks for premium to target price one day prior, 30 days prior,
and 60 days prior were in the ranges of 20% to 40%, 25% to 45%, and 20% to 40%,
respectively. These premium benchmarks were applied by Petrie Parkman to the
corresponding stock price of Phoenix.
Petrie Parkman determined from the asset reference value ranges implied by
these public transaction parameters a composite equity reference value range per
share of Phoenix Common Stock on a fully-diluted basis using this method of
$16.80 to $23.59.
Common Stock Comparison. Using publicly-available information, Petrie
Parkman calculated adjusted capitalization multiples of certain historical
financial criteria (such as gross pretax cash flow, operating cash flow, and SEC
Value) and of equivalent proved reserves and market capitalization multiples of
certain historical financial criteria (such as discretionary cash flow) for a
universe of 33 publicly-traded U.S. based independent oil and gas companies with
adjusted capitalizations between $100 million and $750 million. The adjusted
capitalization of each company was obtained by adding debt to the sum of the
market value of its common equity, the market value of its preferred stock (if
publicly-traded or liquidation or book value if not), and the book value of its
minority interest in other companies and subtracting its cash balance.
Six of these companies -- Barrett Resources Corporation, Cairn Energy USA,
Inc., Chesapeake Energy Corporation, Global Natural Resources, Inc., Texas
Meridian Resources Corporation, and Tom Brown, Inc. -- which in Petrie Parkman's
judgment were appropriate to an evaluation of Phoenix in the context of it being
an active exploration company, were examined in greater detail. For these six
companies, the highest, average, and lowest adjusted capitalization multiples of
gross pretax cash flow were 30.4x, 20.4x, and 10.5x, respectively. The highest,
average, and lowest adjusted capitalization multiples of operating cash flow
were 21.4x, 15.4x, and 8.7x, respectively. The highest, average, and lowest
adjusted capitalization multiples of SEC Value were 5.1x, 3.4x, and 2.2x,
respectively. The highest, average, and lowest adjusted capitalization multiples
of equivalent proved reserves were $37.79, $16.76, and $7.15 per BOE6,
respectively, and $56.25, $24.80, and $9.40, per BOE10, respectively. The
highest, average, and lowest market capitalization multiples of discretionary
cash flow were 29.0x, 20.1x, and 11.5x, respectively. Petrie Parkman determined
that, with respect to Phoenix, the appropriate benchmark for adjusted
capitalization multiples for gross pretax cash flow, operating cash flow, SEC
Value, and equivalent proved reserves were in the ranges of 13.0 to 25.0x, 12.0
to 20.0x, 2.5 to 3.0x, $7.50 to $15.00 per BOE6, and $11.00 to $20.00 per BOE10,
respectively, and that the appropriate benchmark market capitalization multiples
for discretionary cash flow were in the range of 15.0 to 25.0x. These benchmark
multiples were applied by Petrie Parkman to Phoenix's gross pretax cash flow,
operating cash flow, SEC Value, equivalent proved reserves, and discretionary
cash flow. From the asset reference value ranges implied by these multiples,
Petrie Parkman determined a composite equity reference value range per share of
Phoenix Common Stock on a fully diluted basis using this method of $18.27 to
$24.18.
Discounted Cash Flow Analysis. Using this method, Petrie Parkman calculated
estimates of future after-tax cash flows for the reserve assets based on the
Reserve Report and certain prospect information provided by Phoenix and for the
non-reserve assets utilizing information and projections provided by Phoenix. In
the analysis of the reserve assets, four oil and gas pricing scenarios were
utilized as described previously. All Discounted Cash Flow Analyses were based
on the four oil and gas pricing cases. Operating and capital costs were taken
from the Reserve Report and escalated at 4.0% per year. Other factors involved
in this analysis included the use of after-tax discount rates ranging from 10.0%
to 25.0%, Phoenix's existing tax position, certain other assumptions regarding
drilling success, and the evaluation of certain other assets of Phoenix. This
methodology resulted in ranges of equity reference values per share of Phoenix
Common Stock on a fully-diluted basis of $12.09 to $13.99 for the Flat Pricing
Case, $13.11 to $15.37 for Pricing Case I, $15.21 to $17.84 for Pricing Case II,
and $17.37 to $20.39 for Pricing Case III.
Pro Forma Merger Analysis. Petrie Parkman analyzed certain pro forma
financial effects from the Merger projected for the periods 1996 through 2001
after considering the aforementioned information. In connection with such
analysis, Petrie Parkman reviewed the estimates and projections prepared or
provided by
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the managements of Phoenix and Apache, discussed the current operations and
prospects of Phoenix and Apache with the managements and operating staffs of
Phoenix and Apache, as the case may be, and discussed with the management and
operating staff of Phoenix the expected operations and prospects of the combined
company, giving pro forma effect to the Merger, but relied only to a limited
degree on these estimates and projections in conducting its pro forma merger
analysis. This analysis indicated that at oil prices above $16.00 per barrel,
the contemplated transaction would, for the period 1996 through 2001, be
anti-dilutive to Apache's earnings per share. Petrie Parkman concluded that,
based on this analysis, the contemplated transaction would not result in higher
financial leverage for the pro forma combined company.
The description set forth above constitutes a summary of the material
analyses and assumptions employed by Petrie Parkman in rendering its opinion to
the Phoenix Board of Directors. Petrie Parkman believes that its analyses must
be considered as a whole and that selecting portions of its analyses or the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the process underlying its opinion. The preparation
of a fairness opinion is a complex process, judgmental in nature, and not
necessarily susceptible to partial analysis or summary description. In its
analyses, Petrie Parkman made numerous assumptions with respect to industry
performance, capital market conditions, general business, political, and
economic conditions, and other matters, many of which are beyond the control of
Phoenix and Apache. Any estimates contained therein are not necessarily
indicative of actual values, which may be significantly more or less favorable
than as set forth therein. The analyses were prepared solely for the purpose of
Petrie Parkman's providing its opinion to the Phoenix Board of Directors as to
the fairness of the Merger Consideration to the Phoenix stockholders. Estimates
of reference values of companies do not purport to be appraisals or necessarily
reflect the prices at which companies may actually be sold. Analyses based on
forecasts of future results are not necessarily indicative of future results,
which may be significantly more or less favorable than suggested by such
analyses. Because such estimates are inherently subject to uncertainty and based
upon numerous factors or events beyond the control of the parties or their
respective advisors, no assurances can be given that such estimates will prove
to be accurate.
As described above, Petrie Parkman's opinion, which was presented to the
Phoenix Board of Directors, was one of many factors taken into consideration by
the Phoenix Board of Directors in making its determination to approve and
recommend the transaction contemplated in the Merger Agreement.
Petrie Parkman, as part of its investment banking business, is continually
engaged in the evaluation of energy-related businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for corporate and other purposes. Phoenix selected Petrie Parkman as
its financial advisor because it is a nationally recognized investment banking
firm that has substantial experience in transactions similar to the Merger.
Pursuant to the terms of the engagement letter dated July 14, 1995, Phoenix
has paid Petrie Parkman an advisory fee of $95,000 and an additional $195,000 in
connection with rendering its opinion. In addition, Phoenix has agreed to pay
Petrie Parkman a transaction fee related to the Merger. Such transaction fee is
expected to be approximately $3.5 million and is contingent upon and payable
following consummation of a merger with Apache. Whether or not the Merger is
consummated, Phoenix has also agreed to indemnify Petrie Parkman and certain
related persons against certain liabilities relating to or arising out of its
engagement, including certain liabilities under the federal securities laws.
Petrie Parkman has, in the past, performed certain other investment banking
services for Phoenix and Apache.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Phoenix's Board of Directors with
respect to the Merger, Phoenix's stockholders should be aware that all of the
directors and executive officers of Phoenix have certain interests including
those referred to below.
Stock Ownership. Pursuant to the Merger Agreement, shares of Phoenix Common
Stock held by executive officers and directors of Phoenix will be converted into
the same Merger Consideration as will be received by the other shareholders of
Phoenix.
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Nonemployee Director Compensation Plan. Pursuant to the Nonemployee
Director Compensation Plan ("Director Compensation Plan"), each nonemployee
director of Phoenix will be entitled to receive 1,500 shares of Phoenix Common
Stock for each year that individual served as a director during the period
commencing May 11, 1993 and ending upon such director's termination as a
director of Phoenix or, in the case of a change of control, ending on the
expiration of the director's full term (which for all current directors of
Phoenix is May 1998). Since the Merger will constitute a change of control
pursuant to the Director Compensation Plan, the five nonemployee directors of
Phoenix will receive an aggregate of 37,057 shares of Phoenix Common Stock
immediately prior to the Effective Time.
Stock Option Plans. Under the Merger Agreement, Apache and Phoenix have
each agreed to take action as of the Effective Time to permit Apache to assume
each of the then outstanding options to purchase Phoenix Common Stock granted
under the 1990 Employee Stock Option Plan and the 1990 Nonemployee Director
Stock Option Plan. See "Certain Terms of the Merger -- Treatment of Phoenix
Options." Pursuant to such assumption, Apache will substitute shares of Apache
Common Stock and cash for the shares of Phoenix Common Stock purchasable under
each such assumed option ("Assumed Option"). Each Assumed Option shall have the
same terms and conditions as the Phoenix stock option being assumed, except that
all Assumed Options will be fully exercisable. The number of shares of Apache
Common Stock purchasable and cash receivable upon exercise of an Assumed Option
shall be equal to the Merger Consideration subject to adjustments in Apache
Common Stock effected following the Merger in accordance with the terms of the
Assumed Options. Options outstanding (all of which will become fully exercisable
as of the Effective Time) held by directors and executive officers of Phoenix
and the weighted average exercise price per share of such options are as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE
NAME OUTSTANDING PRICE
------------------------------------------------------------- ------- ------
<S> <C> <C>
Mark W. Anschutz............................................. 185,000 $ 8.34
John E. Bruno................................................ 155,000 9.65
Inmann T. Dabney, Jr......................................... 155,000 9.65
Galal P. Doss................................................ 12,000 8.90
Francis L. Durand............................................ 12,000 10.08
George D. Lawrence Jr........................................ 325,000 9.27
Lawrence M. Miller........................................... 14,000 6.50
Michael C. Nemec............................................. 155,000 11.89
Joseph A. Pardo.............................................. 12,000 8.90
Cheryl A. Rich............................................... 155,000 9.65
Rex A. Sebastian............................................. 16,000 6.13
</TABLE>
Employment Contracts. Each executive officer of Phoenix has an employment
contract with Phoenix, which contains a change of control provision that will
entitle the officers, other than the Chief Executive Officer, to receive
immediately prior to the Effective Time 18 months' salary, or an aggregate of
approximately $1,250,000. The Chief Executive Officer will be entitled to
receive immediately prior to the Effective Time two years' salary pursuant to
the change of control provisions contained in his employment contract, or
approximately $575,000. In addition, Apache may offer consulting or employment
agreements, commencing as of the Effective Time, to certain key employees of
Phoenix.
Incentive Compensation Plans. Under Phoenix's Deferred Incentive
Compensation Plan ("Deferred Plan"), each executive officer of Phoenix is
eligible to receive cash bonuses calculated as a function of increases in the
quoted price per share of Phoenix's Common Stock over specified periods. Payment
of bonuses is generally deferred for two years and conditional on the employee
continuing in the employment of Phoenix. The Deferred Plan includes a change of
control provision which will entitle the executive officers of Phoenix to
receive in the aggregate approximately $1,300,000 immediately prior to the
Effective Time.
Under Phoenix's Annual Incentive Plan ("Annual Plan"), the executive
officers of Phoenix are eligible, in the aggregate, to receive annually cash
bonuses of up to 50 percent of their base salaries. The actual amount of such
bonuses is a function of corporate earnings and hydrocarbon reserve levels. The
Annual Plan includes a
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<PAGE> 32
change of control provision which will entitle the executive officers to receive
in the aggregate a total of approximately $300,000 immediately prior to the
Effective Time of the Merger.
Life Insurance. Phoenix provides each executive officer with whole life
insurance with split premium in the amount of $500,000. Upon cancellation of
these whole life insurance policies, Apache has agreed to provide each executive
officer of Phoenix with a paid-up life insurance policy in the face amount of
$100,000.
Certain Additional Agreements. Prior to the Effective Time, the Board of
Directors of Apache will take all necessary action to designate a present
director of Phoenix, in Apache's sole discretion, to serve as an additional
director of Apache commencing at the Effective Time, provided that such designee
shall consent to such appointment.
The Merger Agreement provides that from and after the Effective Time,
Apache will indemnify, defend and hold harmless all past and present officers
and directors of Phoenix and of its Subsidiaries to the fullest extent permitted
under applicable law for any matter existing or occurring at or prior to the
Effective Time. To the fullest extent permitted by applicable law, Apache will
pay all litigation fees and expenses incurred by such officers and directors in
connection with defending any action arising out of such matters.
The directors and executive officers of Phoenix have signed an agreement
obligating each of them to vote all shares of Phoenix Common Stock that they
hold on the Record Date in favor of the Merger in accordance with the
recommendation of the Board of Directors of Phoenix.
CERTAIN UNITED STATES INCOME TAX CONSEQUENCES
The following is a general summary of the material United States federal
income tax consequences of the Merger to the holders of Phoenix Common Stock and
Phoenix Options and is based upon current provisions of the Code, existing,
temporary and final regulations thereunder and current administrative rulings
and court decisions, all of which are subject to change (possibly on a
retroactive basis). No attempt has been made to comment on all United States
federal income tax consequences of the Merger that may be relevant to particular
holders, including holders that are subject to special tax rules such as dealers
in securities, mutual funds, insurance companies, tax-exempt entities and
holders who do not hold their shares as capital assets.
The tax discussion set forth below is included for general information
only. It is not intended to be, nor should it be construed to be, legal or tax
advice to any particular holder of Phoenix Common Stock or Phoenix Options.
Holders of Phoenix Common Stock and Phoenix Options are advised and expected to
consult with their own legal and tax advisers regarding the United States
federal income tax consequences of the Merger in light of their particular
circumstances, and any other consequences to them of the Merger under state,
local and foreign tax laws.
Exchange of Phoenix Common Stock Pursuant to the Merger. As a condition to
the consummation of the Merger, Phoenix will receive an opinion effective as of
the Closing Date and based on factual representations by Phoenix and Apache,
from Andrews & Kurth L.L.P., special tax counsel to Apache, to the effect that
the Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, that Phoenix, Merger Sub and
Apache will each be a party to that reorganization within the meaning of Section
368(b) of the Code and that no gain or loss will be recognized by a stockholder
of Phoenix as a result of the Merger with respect to the shares of Phoenix
Common Stock converted into Apache Common Stock, except to the extent of the
Cash Consideration and cash received in lieu of fractional shares.
An opinion of counsel is not binding on the Internal Revenue Service or on
the courts. Therefore, there can be no assurance that the Merger will constitute
a tax-free reorganization or that any of the favorable tax treatments pursuant
to a tax-free reorganization will be available to Phoenix stockholders. Because
of the complexity of the tax laws and because the tax consequences to any
particular stockholder may be affected by matters not discussed herein, each
Phoenix stockholder is advised to consult its own tax advisor concerning the
applicable federal, state and local income tax consequences of the Merger.
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<PAGE> 33
Assuming qualification as a tax-free reorganization under the Code, (i) no
gain or loss will be recognized by Phoenix, Apache or Merger Sub as a result of
the Merger, (ii) no gain or loss will be recognized by the stockholders of
Phoenix who are United States persons within the meaning of the Code (a "U.S.
Stockholder") upon the conversion of their Phoenix Common Stock into shares of
Apache Common Stock pursuant to the Merger, except with respect to the Cash
Consideration and cash, if any, received in lieu of fractional shares of Apache
Common Stock or upon exercise of dissenters' rights of appraisal, (iii) the
aggregate basis of the shares of Apache Common Stock received by a U.S.
Stockholder in exchange for shares of Phoenix Common Stock pursuant to the
Merger (including fractional shares of Apache Common Stock for which cash is
received) will be the same as the aggregate federal income tax basis for such
shares of Phoenix Common Stock at the Effective Time of the Merger, decreased by
any tax basis allocable to shares with respect to which dissenters' rights of
appraisal were exercised for which cash is received and (iv) the holding period
for shares of Apache Common Stock received by a U.S. Stockholder in exchange for
shares of Phoenix Common Stock pursuant to the Merger will include the holding
period of such shares of Phoenix Common Stock, provided such shares of Phoenix
Common Stock were held as capital assets by the holder at the Effective Time.
To the extent a U.S. Stockholder receives Cash Consideration or cash in
lieu of a fractional share of Apache Common Stock, such U.S. Stockholder will
recognize gain or loss equal to the difference, if any, between such holder's
basis in the share or fractional share and the amount of cash received. Such
gain or loss will be a capital gain or loss if the Phoenix Common Stock is held
by such holders as a capital asset at the Effective Time.
The tax opinion discussed above is subject to certain assumptions and based
on certain representations of Apache and Phoenix and certain representations and
agreements of certain stockholders of Phoenix. One of the requirements for a
tax-free reorganization is that stockholders of Phoenix retain a significant
continuing equity interest in Apache after the Merger. In that regard, the tax
opinion assumes that, as of the Effective Time of the Merger, there will be no
plan or intention on the part of the stockholders of Phoenix to sell, exchange
or otherwise dispose of a number of shares of Apache Common Stock received in
the Merger that would reduce the Phoenix stockholders' ownership of Apache
Common Stock to a number of shares having a value, as of the date of the Merger,
of less than 50 percent of the value of all the formerly outstanding shares of
Phoenix Common Stock as of the same date. For purposes of this assumption,
shares of Phoenix Common Stock exchanged for cash or other property, surrendered
by dissenters or exchanged for cash in lieu of fractional shares of Apache
Common Stock will be treated as outstanding Phoenix Common Stock on the date of
the Merger. Moreover, shares of Phoenix Common Stock and Apache Common Stock
held by holders of Phoenix Common Stock and otherwise sold, redeemed or disposed
of prior or subsequent to the Merger will also be considered for purposes of
this assumption. To the best knowledge of the management of Phoenix, such
assumption is correct. However, if a significant portion of the Apache Common
Stock received by Phoenix stockholders in the Merger is sold shortly after the
Merger, the Merger could be treated as a taxable transaction in which all
stockholders of Phoenix (including stockholders who did not sell their Apache
Common Stock) would recognize gain or loss equal to the difference between the
fair market value of the Apache Common Stock received and the basis of the
Phoenix Common Stock surrendered in the Merger.
A holder of Phoenix Common Stock who seeks appraisal rights as described
below under "-- Appraisal Rights of Dissenting Phoenix Stockholders" should, in
general, treat the difference between the tax basis of the Phoenix Common Stock
held by such holder with respect to which such rights are exercised and the
amount received through the exercise of such rights as capital gain or loss
although, depending on the holder's particular circumstances, the amount
received through the exercise of such rights might be treated for U.S. federal
income tax purposes as dividend income.
Dividends and other distributions paid with respect to the shares of Apache
Common Stock issued upon exchange of the Phoenix Common Stock, as described
below under "Certain Terms of the Merger Agreement -- Consideration to be Paid
in the Merger and Conversion of Shares," will generally be taxable as dividend
income to the extent of Apache's current and accumulated earnings and profits.
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A holder of Phoenix Common Stock that, for United States federal income tax
purposes, is a non-resident alien individual, a foreign corporation, a foreign
partnership or a foreign estate or trust (a "Non-U.S. Stockholder") generally
will not be subject to United States federal income tax (by withholding or
otherwise) on the receipt of Apache Common Stock, cash in lieu of a fractional
share of Apache Common Stock or on the receipt of cash pursuant to the exercise
of dissenter's rights of appraisal, as described above. However, a Non-U.S.
Stockholder that holds shares of Phoenix Common Stock will generally be subject
to United States federal income tax on the receipt of Cash Consideration, cash
in lieu of fractional shares or on the receipt of cash as the result of the
exercise of dissenter's rights of appraisal if (i) the resulting income or gain
is effectively connected with the conduct of a trade or business of the Non-U.S.
Stockholder within the United States, (ii) the Non-U.S. Stockholder is a
non-resident alien individual who holds the Phoenix Common Stock as a capital
asset, and such individual is present in the United States for 183 days or more
in the taxable year of the Merger and either has a "tax home" in the United
States or the sale is attributable to an office or other fixed place of business
maintained in the United States or (iii) the Non-U.S. Stockholder is subject to
tax pursuant to the provisions of United States federal tax law applicable to
certain United States expatriates. Different rules may apply to any amounts
treated as dividend income under the rules referred to above.
Although uncertain, Phoenix believes that, at the Effective Time of the
Merger, Phoenix may be a "United States real property holding corporation" under
the Foreign Investment in Real Property Tax Act ("FIRPTA"). If Phoenix is a
"United States real property holding corporation" at the Effective Time, under
certain circumstances, a Non-U.S. Stockholder may be subject to United States
federal income and withholding tax under FIRPTA if such Non-U.S. Stockholder has
held, directly or indirectly (i) more than five percent of the Phoenix Common
Stock at any time during the five-year period ending on the Effective Date or
(ii) Phoenix Common Stock that, on the date it was acquired, had a fair market
value (when combined with the fair market value at that time of Phoenix Common
Stock previously acquired and continued to be owned) of more than five percent
of the value at that time of all outstanding Phoenix Common Stock. Non-U.S.
Stockholders are advised and expected to consult with their own tax advisers
regarding the United States federal income tax consequences of the Merger in
light of their own personal circumstances.
Apache will be immediately following and after taking into account the
Merger, and Apache believes that Apache thereafter will continue to be, a
"United States real property holding corporation" under FIRPTA. As a result, if
a Non-U.S. Stockholder subsequently sells, exchanges or otherwise disposes of
shares of Apache Common Stock received in the Merger and such Non-U.S.
Stockholder held, directly or indirectly at any time during the five year period
ending on the date of disposition (or such shorter period that such shares were
held), more than five percent of the outstanding Apache Common Stock, such
Non-U.S. Stockholder will generally be subject to United States federal income
tax under FIRPTA on any gain realized by such Non-U.S. Stockholder on such sale,
exchange or other disposition (unless an applicable exception under FIRPTA
applies).
Dividends on Apache Common Stock paid to a Non-U.S. Stockholder will
generally be subject to a United States withholding tax.
Assumption of Phoenix Options Pursuant to the Merger. Holders of Phoenix
Options who elect to exercise the Phoenix Options assumed by Apache will
generally recognize ordinary compensation income as a result of the receipt of
the Apache Common Stock and cash upon exercise of such options. The amount
treated as compensation income will equal the fair market value of the Apache
Common Stock at the time of receipt plus the amount of cash received, less the
exercise price. Such a holder of a Phoenix Option will have a tax basis in the
Apache Common Stock received in exchange for the Phoenix Option equal to the
fair market value of the Apache Common Stock at the time of receipt.
Amounts described above as being treated as compensation income upon the
exercise of an assumed Phoenix Option will be subject to tax at rates applicable
to ordinary income and will be subject to tax under the Federal Insurance
Contribution Act (i.e., FICA tax), (subject to certain limitations in the case
of the old-age, survivors and disability insurance portion of the FICA tax). The
number of shares of Apache Common Stock otherwise issuable to a holder of a
Phoenix Option assumed by Apache, which is exercised, and the
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<PAGE> 35
amount of cash to be received as a result of such exercise, may be reduced by an
amount of cash or by a number of shares of Apache Common Stock having a total
fair market value equal to the foregoing taxes and any other amounts required by
law to be withheld.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase of Phoenix by Apache. For
presentation of certain anticipated effects of the accounting treatment on the
consolidated financial position and results of operations of Apache after giving
effect to the Merger, see "Unaudited Pro Forma Consolidated Condensed Financial
Statements."
GOVERNMENTAL AND REGULATORY APPROVALS
Consummation of the Merger is conditioned upon the existence of an
applicable exemption from the provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), or the expiration or
termination of the waiting period under the HSR Act. Apache has requested that
the Federal Trade Commission ("FTC") confirm Apache's interpretation that the
Merger is exempt from the provisions of the HSR Act under a recently promulgated
regulation. If such confirmation is not obtained, Apache and Phoenix intend to
file notification reports with the Department of Justice and the FTC, and the
Merger may not be consummated until such time as the specified waiting period
requirements of the HSR Act have been satisfied.
At any time before or after the Effective Time, the Department of Justice
and FTC or a private person or entity could seek under the antitrust laws, among
other things, to enjoin the Merger or to cause Apache to divest itself, in whole
or in part, of Phoenix or of other businesses conducted by Apache. There can be
no assurance that a challenge to the Merger will not be made or that, if such a
challenge is made, Apache and Phoenix will prevail.
Apache and Phoenix are aware of no other governmental or regulatory
approvals required for consummation of the Merger, other than compliance with
applicable securities laws.
RESTRICTIONS ON RESALES BY AFFILIATES
The issuance of the shares of Apache Common Stock to be received by Phoenix
stockholders in connection with the Merger, have been registered under the
Securities Act. Except as set forth in this paragraph, such shares of Apache
Common Stock may be traded without restriction under the Securities Act. The
shares of Apache Common Stock to be issued in the Merger and received by persons
who are deemed to be "affiliates" (as that term is defined in Rule 144 under the
Securities Act) of Phoenix prior to the Merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act (or, in the case of any such person who becomes an affiliate of Apache, Rule
144 under the Securities Act) or as otherwise permitted under the Securities
Act. The principal limitation imposed by Rule 145 is that an affiliate of
Phoenix may not (together with other persons whose sales are aggregated under
Rule 145) sell during any three-month period a number of shares of Apache Common
Stock exceeding the greater of (i) one percent of the total number of
outstanding shares of Apache Common Stock or (ii) the average weekly trading
volume of Apache Common Stock for a specified four-week period.
APPRAISAL RIGHTS OF DISSENTING PHOENIX STOCKHOLDERS
Any person who is a holder of record of shares of Phoenix Common Stock and
who objects to the terms of the Merger may seek appraisal of the "fair value" of
such holder's Phoenix Common Stock under and in compliance with the requirements
of Section 262 of the DGCL (the Phoenix Common Stock as to which such appraisal
rights have been asserted being referred to herein as the "Dissenting Shares").
Section 262 provides a procedure by which persons who are holders of Phoenix
Common Stock at the Effective Time of the Merger may seek an appraisal of part
of or all their Phoenix Common Stock in lieu of accepting shares of Apache
Common Stock in exchange therefor as described above under "-- General
Description of the Merger." In any such appraisal proceeding, the Delaware Court
of Chancery (the "Chancery Court") would
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determine the "fair value" of the Dissenting Shares. Holders of Phoenix Common
Stock should recognize that such an appraisal could result in a determination of
a value higher or lower than, or equivalent to, .75 shares of Apache Common
Stock and $4.00 in cash per share of Phoenix Common Stock. The following is a
summary of the principal provisions of Section 262 and does not purport to be a
complete description. A copy of Section 262 is attached hereto as Appendix III
and is incorporated herein by reference.
FAILURE TO TAKE ANY NECESSARY STEPS FULLY AND PRECISELY TO SATISFY THE
REQUIREMENTS OF SECTION 262 OF THE DGCL WILL RESULT IN A TERMINATION OR WAIVER
OF THE APPRAISAL RIGHTS OF THE PHOENIX COMMON STOCKHOLDER UNDER SUCH SECTION. IN
THAT CASE, EACH SHARE OF PHOENIX COMMON STOCK OWNED BY SUCH STOCKHOLDER
IMMEDIATELY PRIOR TO THE EFFECTIVE TIME WILL BE CONVERTED INTO THE RIGHT TO
RECEIVE .75 SHARES OF APACHE COMMON STOCK AND $4.00 IN CASH, WITHOUT INTEREST,
PURSUANT TO THE MERGER AGREEMENT.
Under Section 262, a corporation, not less than 20 days prior to the
meeting at which a proposed merger is to be voted on, must notify each of its
stockholders entitled to appraisal rights as of the record date of the meeting
that such appraisal rights are available and include in such notice a copy of
Section 262. This Proxy Statement/Prospectus constitutes such notice to the
holders of Phoenix Common Stock. Stockholders wishing to exercise appraisal
rights are urged to review carefully the complete text of Section 262.
A holder of Phoenix Common Stock electing to exercise appraisal rights
under Section 262 must (a) deliver to Phoenix, before the taking of the vote on
the Merger Agreement, a written demand for appraisal that is made by or on
behalf of the person who is the holder of record of the Dissenting Shares and
(b) not vote in favor of adoption of the Merger Agreement. A proxy or vote
against approval and adoption of the Merger Agreement does not constitute such a
demand. In addition, mere failure, after the completion of the Merger, to
execute and return a letter of transmittal to the Exchange Agent does not
constitute a demand. A holder of Phoenix Common Stock electing to demand
appraisal must do so before the taking of the vote on the Merger Agreement by a
separate written demand that reasonably informs Phoenix of the identity of the
holder of Phoenix Common Stock of record and of such holder's intention thereby
to demand the appraisal of such holder's Phoenix Common Stock. Written demands
for appraisal should be directed to The Phoenix Resource Companies, Inc., 6525
N. Meridian Avenue, Oklahoma City, Oklahoma, 73116-1491, Attention: Patricia J.
Murano, Secretary.
Only the holder of record of Phoenix Common Stock is entitled to assert
appraisal rights for the Phoenix Common Stock registered in that holder's name.
The holder of Phoenix Common Stock asserting appraisal rights must hold Phoenix
Common Stock of record on the date of making the demand and continuously through
the Effective Time. The demand should be executed by or for the holder of
record, fully and correctly, as the holder's name appears on the holder's stock
certificates. If the stock is owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, execution of the demand should be made in
that capacity, and if the stock is owned of record by more than one person, as
in a joint tenancy or tenancy in common, the demand should be executed by or for
all owners. An authorized agent, including one of two or more joint owners, may
execute the demand for appraisal for a holder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is acting as agent for the record owner or
owners.
A record holder who holds Phoenix Common Stock as nominee for beneficial
owners may exercise the holder's right of appraisal with respect to the Phoenix
Common Stock held for all or less than all of such beneficial owners. In such
case, the written demand should set forth the number of shares of Phoenix Common
Stock covered by it. Where no number of shares of Phoenix Common Stock is
expressly mentioned, the demand will be presumed to cover all Phoenix Common
Stock held in the name of the record holder.
Within ten days after the Effective Time, the Surviving Corporation, will
send notice as to the effectiveness of the Merger to each person who, prior to
the Effective Time of the Merger, made proper written demand for appraisal and
who did not vote in favor of, or consent to, the Merger.
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Within 120 days after the Effective Time, the Surviving Corporation or any
holder of Dissenting Shares may file a petition in the Chancery Court demanding
a determination of the fair value of all of the Dissenting Shares. Holders of
Dissenting Shares should not assume that (i) the Surviving Corporation will file
a petition with respect to the appraisal value of their Dissenting Shares, (ii)
the Surviving Corporation will initiate any negotiations with respect to the
"fair value" of such Dissenting Shares or (iii) the Surviving Corporation will
notify them of any act in connection with the Merger other than as required by
law. Accordingly, holders of Phoenix Common Stock should regard it as their
obligation to initiate all necessary action with respect to the perfection of
their appraisal rights within the time periods prescribed in Section 262.
Within 120 days after the Effective Time, any holder of Dissenting Shares
is entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of Dissenting Shares and the
aggregate number of holders of such Dissenting Shares. The Surviving Corporation
is required to mail such statement within ten days after it receives a written
request therefor.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Chancery Court will determine the holders of Phoenix Common Stock
entitled to appraisal rights and will appraise the Dissenting Shares owned by
such holders, determining their "fair value" exclusive of any element of value
arising from the accomplishment or expectation of the Merger and will determine
a fair rate of interest, if any, to be paid upon the "fair value." In
determining "fair value" of the Dissenting Shares, the Chancery Court shall take
into account all relevant factors. The Delaware Supreme Court has stated that
such factors include "market value, asset value, dividends, earnings prospects,
the nature of the enterprise and any other facts which were known or which could
be ascertained as of the date of merger which throw any light on future
prospects of the merged corporation." In Weinberger v. UOP, Inc. the Delaware
Supreme Court stated, among other things, that "proof of value by any techniques
or methods generally considered acceptable in the financial community and
otherwise admissible in court" should be considered in an appraisal proceeding.
The value so determined for the Dissenting Shares could be more or less than, or
the same as, .75 shares of Apache Common Stock and $4.00 in cash per share. The
Chancery Court may allocate the costs of the appraisal proceedings as it deems
equitable in the circumstances. The Chancery Court may also order that all or a
portion of the expenses incurred by any holder of Dissenting Shares in
connection with an appraisal proceeding, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts utilized in the
appraisal proceeding, be charged pro rata against the value of all the
Dissenting Shares.
Any holder of Phoenix Common Stock who has duly demanded an appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote the Phoenix Common Stock subject to such demand for any purpose or be
entitled to the payment of dividends or other distributions on such Phoenix
Common Stock (other than those payable or deemed to be payable to holders of
Phoenix Common Stock of record as of a date prior to the Effective Time) or on
any shares of Apache Common Stock otherwise issuable, but for such appraisal
demand, in substitution therefor.
A holder of Phoenix Common Stock will fail to perfect, or effectively lose,
such holder's right to appraisal if no petition for appraisal is filed within
120 days after the Effective Time, or if the holder of Phoenix Common Stock
delivers to Phoenix a written withdrawal of such holder's demand for an
appraisal and an acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Effective Time requires the written
approval of the Surviving Corporation. Holders of Phoenix Common Stock should
also note that surrender to the designated exchange agent of certificates for
their Phoenix Common Stock may constitute a waiver of appraisal rights under the
DGCL.
If an appraisal proceeding is timely instituted, such proceeding may not be
dismissed as to any holder of Phoenix Common Stock who has perfected his right
of appraisal without the approval of the Chancery Court.
Under the DGCL, holders of Apache Common Stock will not be entitled to any
appraisal or dissenter's rights in connection with the Merger.
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CERTAIN TERMS OF THE MERGER AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the full text of the Merger Agreement attached
to this Proxy Statement/Prospectus as Appendix I and incorporated herein by
reference. Certain capitalized terms used in this description and not elsewhere
defined are defined in the Merger Agreement and used with the meanings provided
therein.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, no later than the first business day
after the satisfaction or waiver of the conditions to closing the Merger, the
parties shall cause the Merger to be consummated by filing a Certificate of
Merger with the Secretary of State of the State of Delaware, in such form as
required by, and executed in accordance with the relevant provisions of, the
DGCL. It is anticipated that, if the Merger Agreement is approved and adopted at
the Special Meeting and all other conditions to the Merger have been satisfied
or waived, the Effective Time will occur on the date of the Special Meeting or
as soon thereafter as practicable.
CONSIDERATION TO BE PAID IN THE MERGER AND CONVERSION OF SHARES
At the Effective Time, each outstanding share of Phoenix Common Stock will
be converted into the right to receive .75 shares of Apache Common Stock and
$4.00 in cash. Notwithstanding the foregoing, if between the date of the Merger
Agreement and the Effective Time the outstanding shares of Apache Common Stock
shall have been changed into a different number of shares or a different class
by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, the exchange ratio
shall be correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares.
As soon as practicable following the Effective Time, the Exchange Agent
will mail to each person who was a record holder of Phoenix Common Stock
immediately prior to the Effective Time a letter of transmittal and other
information advising such holder of the consummation of the Merger and for use
in exchanging Phoenix Common Stock certificates for Apache Common Stock
certificates, the Cash Consideration and cash in lieu of fractional shares of
Apache Common Stock. Letters of transmittal will also be available following the
Effective Time at the offices of Apache in Houston, Texas. After the Effective
Time, there will be no further registration of transfers on the stock transfer
books of the Surviving Corporation of shares of Phoenix Common Stock that were
outstanding prior to the Effective Time. Share certificates should not be
surrendered for exchange by stockholders of Phoenix prior to the receipt of a
letter of transmittal.
No fractional shares of Apache Common Stock will be issued in the Merger.
Each stockholder of Phoenix entitled to a fractional share of Apache Common
Stock will receive an amount in cash equal to such fraction multiplied by the
closing price per share of Apache Common Stock on the NYSE Composite
Transactions Reporting System on the last trading day immediately preceding the
Effective Time. No interest will be paid on such cash amounts, and all shares of
Phoenix Common Stock held by a record holder shall be aggregated for purposes of
computing the amount of any such payment.
Until so surrendered and exchanged, after the Effective Time each
certificate previously evidencing Phoenix Common Stock shall represent solely
the right to receive Apache Common Stock, the Cash Consideration and cash in
lieu of fractional shares of Apache Common Stock. Unless and until such a
Phoenix Common Stock certificate shall be so surrendered and exchanged, no
dividends or other distributions payable to the holders of record of Apache
Common Stock as of any time on or after the Effective Time shall be paid to the
holder of such certificate previously evidencing Phoenix Common Stock; provided,
however, that, upon surrender and exchange of a Phoenix Common Stock
certificate, there shall be paid to the record holder of the Apache Common Stock
certificate issued and exchanged therefor (i) the amount, without interest
thereon, of dividends and other distributions, if any, with a record date on or
after the Effective Time theretofore paid with respect to the number of whole
shares of Apache Common Stock issued upon such exchange and surrender, and (ii)
at the appropriate payment date, the amount of dividends or other distributions,
if any, with
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<PAGE> 39
a record date on or after the Effective Time but prior to surrender and a
payment date occurring after surrender, payable with respect to such whole
shares of Apache Common Stock.
TREATMENT OF PHOENIX OPTIONS
The Merger Agreement provides that Apache and Phoenix will take such action
as may be necessary to permit Apache to assume, at the Effective Time, each
Phoenix Option that remains unexercised in whole or in part. The assumed Phoenix
Option will not give the optionee additional benefits which such optionee did
not have under the Phoenix Option, and shall be assumed on the same terms and
conditions as the Phoenix Option being assumed, subject to the matters described
in the following paragraph.
The number of shares of Apache Common Stock purchasable and cash receivable
upon exercise of any Phoenix Option assumed by Apache will be equal to the
number of whole shares of Apache Common Stock plus the amount of cash that the
holder of the Phoenix Option would have received upon consummation of the Merger
had such Phoenix Option been exercised (without regard to any vesting schedule)
in full immediately prior to the Effective Time. The option exercise price per
assumed Phoenix Option after the Effective Time shall remain unchanged, and
shall be the same as the exercise price per assumed Phoenix Option immediately
prior to the Effective Time.
CONDITIONS TO THE MERGER
The respective obligations of Apache and Phoenix to consummate the Merger
are subject to the satisfaction or waiver of certain conditions, including,
among other matters, the following: (i) approval and adoption of the Merger
Agreement by the holders of a majority of the outstanding shares of Phoenix
Common Stock; (ii) the absence of any order making the Merger illegal or
otherwise prohibiting consummation of the Merger; (iii) the accuracy of the
representations and warranties of each party; (iv) performance by each party of
their respective obligations under the Merger Agreement; (v) the approval for
listing on the NYSE of the Apache Common Stock to be issued pursuant to the
Merger Agreement; (vi) the receipt of required third party or governmental
approvals or consents, including the consent of certain lenders; (vii) receipt
by each party of opinions of United States counsel and by Apache of Egyptian
counsel; (viii) no amendment of the resolutions authorizing the Merger by either
Apache's or Phoenix's Board of Directors; and (ix) no proper demand of appraisal
rights by holders of more than ten percent of the outstanding shares of Phoenix
Common Stock.
Apache and Phoenix anticipate that all of the conditions to the
consummation of the Merger will be satisfied prior to or at the time of the
Special Meeting. Either Apache or Phoenix may extend the time for performance of
any of the obligations of the other party or may waive compliance with those
obligations at its discretion.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Phoenix and Apache relating to, among other things, (i) each of their respective
organizations and similar corporate matters; (ii) each of their respective
capital structures; (iii) authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters, and the absence of
conflicts, violations and defaults under their respective certificates of
incorporation and bylaws and certain other agreements and documents; (iv) the
documents and reports filed by each of them with the Commission and the accuracy
of the information contained therein; (v) the absence of Material Adverse
Changes; (vi) litigation; (vii) compliance with laws; (viii) brokers; (ix)
director, officer and employee agreements; (x) certain business practices; (xi)
environmental matters; (xii) undisclosed liabilities; (xiii) material contracts;
and (xiv) tax-free reorganization.
The Merger Agreement also includes representations and warranties of
Phoenix relating to, among other things, (i) excess parachute payments or
compensation; (ii) takeover defense mechanisms; (iii) Phoenix's Egyptian
Agreements; (iv) Phoenix's reserve report; and (v) title to stock owned by a
subsidiary of Phoenix in
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<PAGE> 40
certain operating companies. The Merger Agreement includes representations and
warranties of Apache relating to, among other things, (i) title to oil and gas
leases and (ii) advances from gas purchasers.
No person other than Phoenix, Apache and Merger Sub has any rights or
remedies under the Merger Agreement with respect to such representations and
warranties. The representations and warranties of Phoenix, Apache and Merger Sub
all expire at the Effective Time.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Each of Phoenix and Apache has agreed that, prior to the Effective Time, it
will and will cause its subsidiaries to carry on its business in all material
respects in, and not enter into any material transaction other than in, the
ordinary course of business and, to the extent consistent therewith, use all
reasonable efforts to preserve intact its current business organization, keep
available the services of its current respective officers and employees, and
preserve its relationships with its customers, suppliers, and others having
business dealings with it, with a view to retaining its goodwill and ongoing
business unimpaired at the Effective Time.
Without limiting the generality of the covenants described above, and
except as expressly contemplated by the Merger Agreement or consented to in
writing by Apache, and except for advances and expenditures for cash calls made
by the operator of each of the concessions in amounts consistent with their
respective capital budgets, Phoenix has agreed not to, and not to permit its
subsidiaries to: (i) declare, set aside or pay any dividends on, or make any
other actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to stockholders of Phoenix in
their capacity as such, other than (a) ordinary quarterly cash dividends,
consistent with past practice not to exceed $.03 per share of Phoenix Common
Stock, or (b) dividends payable to Phoenix declared by any of Phoenix's
wholly-owned subsidiaries; (ii) split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock; (iii) purchase,
redeem or otherwise acquire any shares of capital stock of Phoenix or any of its
subsidiaries or any other securities thereof or any rights, warrants or options
to acquire any such shares or other securities; (iv) issue, deliver, sell,
pledge, dispose of or otherwise encumber any shares of its capital stock, any
other voting securities or equity equivalent or any securities convertible into,
or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities or equity equivalent (other than, in the
case of Phoenix, the issuance of Phoenix Common Stock during the period from the
date of the Merger Agreement through the Effective Time upon the exercise of
Phoenix Options outstanding on the date of the Merger Agreement); (v) amend its
certificate of incorporation or amend its bylaws; (vi) acquire or agree to
acquire by merging or consolidating with, or by purchasing all or substantially
all of the assets of or equity in, or by any other manner, any business or any
corporation, partnership, association or other business organization or division
thereof; (vii) sell, lease or otherwise dispose of or agree to sell, lease or
otherwise dispose of, any of its assets except for (a) sales of actual
production in the ordinary course of business, and (b) sales of assets (other
than oil and gas properties or related plant, equipment, pipeline or gathering
system assets or real property) made in the ordinary course of business
consistent with past practice and not involving any asset with a value greater
than $200,000 or assets with an aggregate value greater than $200,000; (viii)
except in the ordinary course of business consistent with past practice and
limited to borrowings under the IFC Loan Agreement or other transactions not
exceeding an aggregate amount equal to $200,000 (a) incur any indebtedness for
borrowed money or guarantee any such indebtedness or issue or sell any debt
securities or guarantee any debt securities of others or (b) make any loans,
advances or capital contributions to, or investments in, any other person, other
than Phoenix or any wholly-owned subsidiary of Phoenix; (ix) alter through
merger, liquidation, reorganization, restructuring or in any other fashion the
corporate structure or ownership of any subsidiary of Phoenix; (x) enter into,
adopt or amend any severance plan, agreement or arrangement, any employee
benefit plan or any employment or consulting agreement or hire any additional
employees or consultants except for temporary staff hired in the ordinary course
of business; (xi) make or incur any capital expenditures except for amounts
aggregating less than $200,000; (xii) make any election relating to taxes or
settle or compromise any tax liability except for amounts aggregating less than
$200,000; (xiii) change any material accounting principle used by it, except for
any change required by generally accepted accounting principles or by the rules
of the Commission; (xiv) waive the benefits of, or agree to modify in any
manner, any confidentiality, standstill or
40
<PAGE> 41
similar agreement (except for any agreement with Apache) to which Phoenix or any
of its subsidiaries is a party; or (xv) authorize any of, or commit or agree to
take any of, the foregoing actions.
Without limiting the generality of the covenants described above, and
except as expressly contemplated by the Merger Agreement or consented to in
writing by Phoenix, Apache has agreed not to, and not to permit its subsidiaries
to: (i) declare, set aside or pay any dividends on, or make any other actual,
constructive or deemed distributions in respect of, any of its capital stock, or
otherwise make any payments to stockholders of Apache in their capacity as such,
other than (a) ordinary quarterly cash dividends by Apache consistent with past
practice in an amount not in excess of $.07 per share of Apache Common Stock,
(b) dividends declared prior to the date of the Merger Agreement, or (c)
dividends payable to Apache declared by any of its subsidiaries; (ii) split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock; (iii) purchase, redeem or otherwise acquire any
shares of capital stock of Apache or any of its subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such shares
or other securities; (iv) amend its Certificate of Incorporation; (v) acquire or
agree to acquire by merger of consolidation with or into Apache, any
corporation, partnership, association or other business organization or division
thereof other than Subsidiaries of Apache; (vi) change any material accounting
principle used by it, except for any change required by generally accepted
accounting principles or by the rules of the Commission; (vii) engage in hedging
transactions and other risk management activities in any manner materially
inconsistent with Apache's current risk policies; or (viii) authorize any of, or
commit or agree to take any of, the foregoing actions.
NO SOLICITATION
The Merger Agreement provides that Phoenix and its officers, directors and
representatives will not solicit or knowingly encourage the initiation of any
inquiries regarding any Acquisition Transactions and Acquisition Proposals, and
will promptly notify Apache of any such inquiries, offers or proposals. An
"Acquisition Transaction" means any (i) merger or consolidation of Phoenix or
any of its Significant Subsidiaries (within the meaning of Rule 1-02 of
Regulation S-X promulgated by the Commission) in a transaction which results in
the stockholders of Phoenix receiving securities, cash or other consideration
for their shares of Phoenix Common Stock, (ii) sale, lease or other disposition
of all or substantially all of the assets of Phoenix or any of its Significant
Subsidiaries or the sale by Phoenix of at least a majority of the equity
securities of any of its Significant Subsidiaries, (iii) a tender or exchange
offer for at least a majority of the equity securities of Phoenix or any of its
Significant Subsidiaries, (iv) any corporation, partnership trust, association,
entity or group (as defined in Section 13(d)(3) of the Exchange Act), other than
Apache or Merger Sub, shall have acquired beneficial ownership of 50 percent or
more of the outstanding shares of Phoenix Common Stock, other than acquisitions
for bona fide arbitrage purposes, or (v) similar transactions involving Phoenix
or any of its Significant Subsidiaries. An "Acquisition Proposal" means any (i)
publicly announced proposal, (ii) regulatory application or notice (whether in
draft or final form), (iii) agreement or understanding, (iv) disclosure of an
intention to make a proposal, or (v) amendment to any of the foregoing, made or
filed on or after the date of the Merger Agreement, in each case with respect
to: (x) an Acquisition Transaction, or (y) after the date of the Merger
Agreement, a purchase or other acquisition (including by way of share exchange,
tender offer or otherwise) of securities representing 20 percent or more of the
voting power of Phoenix or any Significant Subsidiary.
Notwithstanding the foregoing, if the Board of Directors of Phoenix
determines, after consultation with independent counsel, that it has a fiduciary
obligation to take such action, nothing in the Merger Agreement shall prevent
(i) Phoenix from furnishing confidential information subject to customary
confidentiality agreements, to an unsolicited potential bidder for Phoenix or
(ii) the Phoenix Board of Directors from either (a) approving or recommending to
the Phoenix stockholders an unsolicited tender or exchange offer that the Board
of Directors determines in good faith may result in a transaction more favorable
to the Phoenix stockholders from a financial point of view than the Merger, (b)
considering, negotiating and approving an unsolicited bona fide proposal or
offer for Phoenix or (c) withdrawing or modifying its approval or recommendation
of the Merger or the Merger Agreement.
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<PAGE> 42
APPOINTMENT OF DIRECTOR
Prior to the Effective Time, Apache's Board of Directors shall take all
actions necessary to appoint or elect commencing at the Effective Time one of
Phoenix's directors as a member of Apache's Board of Directors.
CERTAIN POST-MERGER MATTERS
Once the Merger is consummated, the Surviving Corporation will possess all
of the assets, rights and obligations of Merger Sub and Phoenix.
Pursuant to the Merger Agreement, Merger Sub's Charter and Merger Sub's
Bylaws, as in effect immediately prior to the Effective Time, will be the
certificate of incorporation and bylaws of the Surviving Corporation. The
officers and directors of Merger Sub at the Effective Time shall be the initial
officers and directors of the Surviving Corporation.
TERMINATION OF THE MERGER AGREEMENT
By Either Party. The Merger Agreement may be terminated prior to the
Effective Time (i) by mutual consent of Apache and Phoenix, or (ii) by either
party if (a) the Merger has not been consummated on or before August 31, 1996
(provided that the terminating party shall not have failed to fulfill any
obligation under the Merger Agreement that resulted in the Merger not having
been consummated), (b) any court or governmental final order shall have
prohibited consummation of the Merger, or (c) the required approval of the
holders of Phoenix Common Stock is not received at the Special Meeting.
By Apache. Apache may terminate the Merger Agreement (i) if Phoenix fails
to comply in any material respect with any covenant or agreement in the Merger
Agreement, or upon Phoenix's breach of one or more representations or
warranties, which breach would have a Material Adverse Effect on Phoenix, and if
such failure or breach is not cured within ten business days following notice,
(ii) if the Board of Directors of Phoenix (a) withdraws, modifies or amends in
any manner adverse to Apache its approval or recommendation in favor of the
Merger, (b) recommends to the stockholders of Phoenix any other Acquisition
Proposal, or publicly announces its intention to do so, or (c) resolves or
publicly announces its intention to take any of the actions described in (a) or
(b), (iii) any corporation, partnership, person, trust, association, entity, or
group (as defined in Section 13(d)(3) of the Exchange Act), other than Apache or
the Merger Sub, shall have acquired, or shall have been granted the option or
right, conditional or otherwise, to acquire beneficial ownership of 50 percent
or more of the outstanding shares of Phoenix Common Stock, other than
acquisitions for bona fide arbitrage purposes, or (iv) Phoenix shall have
entered into an agreement with a third party with respect to any Acquisition
Proposal.
By Phoenix. Phoenix may terminate the Merger Agreement (i) if Apache fails
to comply in any material respect with any covenant or agreement set forth in
the Merger Agreement, or upon Apache's breach of one or more representations or
warranties, which breach would have a Material Adverse Effect on Apache, and if
such failure or breach is not cured within ten business days following notice or
(ii) if Phoenix or its stockholders receive a proposal to enter into an
Acquisition Transaction which the Board of Directors of Phoenix determines in
good faith after consultation with its financial advisors, (a) is likely to
result in a transaction more favorable to the holders of Phoenix Common Stock
from a financial point of view than the Merger, and (b) after consultation with
outside counsel, that the recommendation to Phoenix stockholders of the Merger,
or the failure to withdraw, modify or change its recommendation, would
constitute a breach of fiduciary duties of the directors under applicable law.
FEES AND EXPENSES
If the Merger Agreement is terminated due to (i) a party's failure to
comply in any material respect with any covenant or agreement in the Merger
Agreement or (ii) a party's breach of one or more representations or warranties
which breach has a Material Adverse Effect, the party terminating will be
entitled to receive from the other party, all out-of-pocket expenses and fees
(including, without limitation, fees and expenses payable
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<PAGE> 43
to investment banking firms and other financial advisors and their respective
counsel, accountants, engineers, outside counsel, experts and consultants)
actually incurred by the terminating party or its subsidiaries or on its or
their behalf in connection with the consummation of all transactions
contemplated by the Merger Agreement (the "Merger Expenses"); provided, however,
that the Merger Expenses paid by the other party cannot exceed a maximum of
$900,000.
In addition to the reimbursement of Merger Expenses described above, if the
Merger Agreement is terminated due to (i) the entry by Phoenix into an agreement
with a third party with respect to an Acquisition Proposal, (ii) the withdrawal,
modification or amendment of the approval or recommendation of the Merger by the
Phoenix Board of Directors in a manner adverse to Apache, (iii) the
recommendation, authorization or proposal of any Acquisition Proposal by the
Phoenix Board of Directors, (iv) the resolution or the public announcement by
the Phoenix Board of Directors of its intention to take any of the actions
described in (ii) or (iii), (v) the determination by the Phoenix Board of
Directors that, in light of an Acquisition Transaction proposed to Phoenix or
its stockholders, it would be a breach of the directors' fiduciary duties to
recommend the Merger or fail to withdraw, modify or change such recommendation,
(vi) (a) an Acquisition Proposal is made prior to a meeting of Phoenix
stockholders held for the purpose of approving the Merger Agreement and prior to
termination of the Merger Agreement by its terms, (b) the Merger Agreement is
terminated due to (1) Phoenix's failure to materially comply with any agreement
or covenant in the Merger Agreement, (2) Phoenix's breach of any representation
or warranty which breach has a Material Adverse Effect, (3) the Merger not being
effected by August 31, 1996 through no fault of Apache or Merger Sub (other than
as a result of the stockholders of Phoenix not approving the Merger Agreement at
a meeting duly called for such purpose) or (4) the acquisition by a third party
of 50 percent or more of Phoenix Common Stock, and (c) at any time prior to the
date which is nine months after the termination of the Merger Agreement an
Acquisition Transaction is consummated or (vii) Phoenix consummates an
Acquisition Transaction with a third party prior to the termination of the
Merger Agreement; then, Phoenix shall promptly, but in no event later than five
business days after written demand from Apache, pay Apache a fee of $12 million.
Notwithstanding the foregoing, the $12 million fee shall be reduced by any
reimbursement of Merger Expenses by Phoenix.
Except as described above, all costs and expenses incurred in connection
with the Merger Agreement and the transactions contemplated thereby will be paid
by the party incurring such expense, except that expenses incurred in connection
with printing and mailing this Proxy Statement/Prospectus and the Registration
Statement shall be shared equally.
INDEMNIFICATION
After the Effective Time, Apache (i) will indemnify all past and present
officers, directors and employees of Phoenix or any of its Subsidiaries, to the
fullest extent permitted under applicable law, against any loss arising from a
claim based in whole or in part out of the fact that such person is or was a
officer, director or employee of Phoenix, including actions arising out of or in
connection with the Merger, and (ii) will, to the fullest extent permitted under
applicable law, advance litigation expenses incurred by such officers, directors
and employees in connection with defending any action arising out of such acts
or omissions.
AGREEMENT BY PHOENIX MANAGEMENT
The directors and executive officers of Phoenix, who as of the Record Date
are holders of approximately 587,000 shares of Phoenix Common Stock (or
approximately 3.6 percent of the shares of Phoenix Common Stock outstanding),
executed an agreement agreeing to vote all shares of Phoenix Common Stock owned
by such persons as of the Record Date thereof in favor of the Merger in
accordance with the recommendation of the Phoenix Board of Directors.
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MARKET PRICES OF COMMON STOCK AND DIVIDEND INFORMATION
Apache Common Stock is traded on the NYSE and the CSE under the symbol
"APA." The Phoenix Common Stock is traded on the AMEX and PSE under the symbol
"PHN." The following table sets forth, for the periods indicated, the range of
high and low trading prices per share of Apache Common Stock as reported on the
NYSE Composite Tape and of Phoenix Common Stock as reported on the AMEX, and the
dividend per share of Apache Common Stock and the dividend per share of Phoenix
Common Stock. Phoenix dividends and share prices have been adjusted to reflect
stock splits in January and September 1995.
<TABLE>
<CAPTION>
APACHE COMMON STOCK PHOENIX COMMON STOCK
-------------------------- ------------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
---- ---- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter.................... $26 7/8 $22 1/2 $.07 $ 9.97 $ 6.69 $.0125
Second Quarter................... 29 1/4 22 1/4 .07 6.91 5.56 .0125
Third Quarter.................... 29 1/4 23 .07 7.94 6.56 .0125
Fourth Quarter................... 28 7/8 23 5/8 .07 12.00 6.59 .0125
1995
First Quarter.................... 27 3/8 22 1/4 .07 12.47 9.38 .02
Second Quarter................... 31 25 3/8 .07 17.75 10.88 .02
Third Quarter.................... 30 1/4 25 3/4 .07 20.50 14.00 .02
Fourth Quarter................... 29 5/8 23 1/8 .07 19.63 16.13 .02
1996
First Quarter.................... 29 1/2 24 3/8 .07 24.50 16.63 .03
Second Quarter(a)................ 28 3/8 26 1/2 .07(b) 25.00 23.38 --
</TABLE>
- ---------------
(a) Through April 15, 1996.
(b) Payable April 30, 1996.
On March 27, 1996, the last trading day prior to the announcement by Apache
and Phoenix that they had executed the Merger Agreement, the closing market
prices of Apache Common Stock as reported on the NYSE Composite Tape, and
Phoenix Common Stock as reported on the AMEX, were $28 1/2 and $19 7/8,
respectively. See the cover page of this Proxy Statement/Prospectus for recent
closing prices of Apache Common Stock and Phoenix Common Stock.
Following the Merger, Apache Common Stock will continue to be traded on the
NYSE and the CSE. Following the Merger, Phoenix Common Stock will cease to be
traded on the AMEX and the PSE, and there will be no further market for the
Phoenix Common Stock.
Apache has paid cash dividends on Apache Common Stock for 117 consecutive
quarters through the first calendar quarter of 1996. Future dividend payments by
Apache and Phoenix are subject to action by their respective Boards of Directors
and will depend upon the level of earnings, financial requirements and other
relevant factors.
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APACHE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following unaudited condensed financial statements and notes thereto
are presented to show the pro forma effects of the Merger. The Merger will be
reported using the purchase method of accounting.
The condensed pro forma statement of income is presented as if the Merger
occurred effective January 1, 1995 and the condensed pro forma balance sheet
assumes that the Merger occurred on December 31, 1995.
Pro forma data are based on assumptions and include adjustments as
explained in the notes to the unaudited pro forma consolidated condensed
financial statements. The pro forma data are not necessarily indicative of the
financial results that would have occurred had the transactions been effective
on and as of the dates referenced above, and should not be viewed as indicative
of operations in future periods. The unaudited pro forma consolidated condensed
financial statements should be read in conjunction with the notes thereto, and
Apache's and Phoenix's Annual Reports on Form 10-K for the fiscal year ended
December 31, 1995, which are incorporated by reference.
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<PAGE> 46
APACHE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
APACHE PHOENIX PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas production revenues............ $ 653,144 $ 23,433 $ 676,577
Revenues dedicated to foreign tax
liability............................... 9,822 $ (6,298)(e) 3,524
Gathering, processing and marketing
revenues................................ 97,207 -- 97,207
Other revenues............................. 351 1,781 (1,436)(d) 696
-------- ------- -------- --------
750,702 35,036 (7,734) 778,004
-------- ------- -------- --------
OPERATING EXPENSES:
Depreciation, depletion and amortization... 297,485 5,795 8,505 (a) 311,785
Operating costs............................ 211,742 6,421 218,163
Gathering, processing and marketing
costs................................... 91,243 -- 91,243
Administrative, selling and other.......... 36,552 2,194 38,746
Merger costs............................... 9,977 -- 9,977
Financing costs, net....................... 70,560 -- (11,708)(b) 61,837
4,421 (c)
(1,436)(d)
-------- ------- -------- --------
717,559 14,410 (218) 731,751
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES................... 33,143 20,626 (7,516) 46,253
Provision for income taxes................. 12,936 10,015 (3,748)(e) 19,203
-------- ------- -------- --------
NET INCOME................................... $ 20,207 $ 10,611 $ (3,768) $ 27,050
======== ======= ======== ========
INCOME PER COMMON SHARE...................... $ .28 $ .65 $ .32
======== ======= ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING... 71,792 12,760 (f) 84,552
======== ======== ========
</TABLE>
The accompanying notes to unaudited pro forma financial statements are an
integral part of this statement.
46
<PAGE> 47
APACHE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
APACHE PHOENIX PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Current assets.......................... $ 208,336 $ 41,496 $ (1,900)(i) $ 247,932
Property and equipment, net............. 2,401,561 23,153 396,113 (g) 2,783,719
3,000 (h)
(49,908)(k)
9,800 (j)
Other assets............................ 71,553 3,684 75,237
---------- ------- -------- ----------
$2,681,450 $ 68,333 $ 357,105 $3,106,888
========== ======= ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities..................... $ 230,349 $ 12,540 $ 9,000 (l) $ 254,889
3,000 (h)
Long-term debt.......................... 1,072,076 -- 64,356 (g) 1,136,432
Other non-current liabilities........... 105,645 988 -- 106,633
Deferred tax liabilities................ 181,575 2,997 9,800 (j) 194,372
Shareholders' equity.................... 1,091,805 51,808 (1,900)(i) 1,414,562
331,757 (g)
(49,908)(k)
(9,000)(l)
---------- ------- -------- ----------
$2,681,450 $ 68,333 $ 357,105 $3,106,888
========== ======= ======== ==========
</TABLE>
The accompanying notes to unaudited pro forma financial statements are an
integral part of this statement.
47
<PAGE> 48
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The unaudited pro forma consolidated condensed financial statements are
based on the audited statements of Apache and Phoenix for the year ended
December 31, 1995 and on the adjustments and assumptions described below.
Pursuant to the terms of the Merger Agreement, pro forma data are based on
the assumption (using a ratio of .75) that 12,067,000 shares of Apache Common
Stock will be issued for approximately 16,089,000 shares of Phoenix Common Stock
outstanding as of the Record Date. It is also assumed that under the terms of
the Merger Agreement, 693,000 shares of Apache Common Stock will be issued with
respect to the Phoenix Options. Assuming a value of $26 per share, the value of
the shares of Apache Common Stock issued would equate to approximately $332
million before deducting costs of issuance.
Pro forma data also reflect a $4 per share cash payment for each share of
Phoenix Common Stock outstanding as of the Record Date resulting in a total
payment to Phoenix stockholders of approximately $64 million.
The purchase price, before consideration of transaction costs and a
deferred tax liability adjustment required by accounting rules, totals
approximately $396 million based on the assumptions described above. Of this
total, approximately $51 million has been allocated to pipelines and facilities,
$160 million to proved properties, $58 million to unproved properties, $99
million to international concession rights, with the remaining value
attributable to working capital and miscellaneous assets. International
concession rights include the estimated value attributable to approximately 50
drilling prospects identified to date on 4.3 million gross Qarun and Khalda
concession acres. Under features of the production sharing contracts, costs
incurred to explore and develop will be reimbursable through increased future
production sharing ratios.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The unaudited pro forma statement of income reflects the following adjustments.
(a) Record incremental depreciation, depletion and amortization expense based on
the purchase price allocation, and using a combined units-of-production rate
for Egyptian properties and a 20-year straight-line method for facilities
and pipelines.
(b) Record capitalized interest relating to unevaluated properties in the amount
of approximately $170 million, including international concession rights, at
6.87 percent, which approximates Apache's cost of debt for 1995.
(c) Record interest expense on debt incurred with respect to the cash
consideration paid to Phoenix stockholders, assuming an interest rate of
6.87 percent.
(d) Reclassification of Phoenix's interest income from revenues to financing
costs, net, to conform to Apache's presentation.
(e) Adjust tax provision and the related Phoenix Egyptian tax gross-up to
reflect pro forma adjustments (a), (b) and (c).
(f) Increase weighted average shares outstanding by an estimated 12,760,000
shares of Apache Common Stock issued.
The unaudited condensed pro forma balance sheet reflects the following
adjustments:
(g) Record the consideration issued totaling $396.1 million, which consists of
12,760,000 shares of Apache Common Stock valued at $26 per share and $64.4
million cash, and the related debt incurred.
48
<PAGE> 49
APACHE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
(h) Record estimated transaction costs.
(i) Record purchase of 100,000 shares of Phoenix Common Stock for $1.9 million
by Phoenix subsequent to December 31, 1995.
(j) Record SFAS No. 109 deferred tax liability for the book basis in excess of
tax basis after adjustment for assumed utilization of Phoenix net operating
loss carryforwards and foreign tax credits.
(k) Eliminate historical Phoenix stockholders' equity, net of pro forma entry
described in pro forma adjustment(i).
(l) Record Apache Common Stock issuance costs.
49
<PAGE> 50
APACHE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURES
The following table sets forth certain unaudited pro forma information
concerning Apache's proved oil and gas reserves at December 31, 1995, giving
effect to the Merger as if the Merger had occurred on January 1, 1995. There are
numerous uncertainties inherent in estimating the quantities of proved reserves
and projecting future rates of production and timing of development
expenditures. The following reserve data represents estimates only and should
not be construed as being exact.
PROVED OIL AND NATURAL GAS RESERVES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NATURAL GAS
---------------------------------------------------------------
APACHE
------------------------------------
U.S. INTERNATIONAL(1) TOTAL PHOENIX PRO FORMA
-------- ---------------- ------- -------- ---------
(MILLIONS OF CUBIC FEET)
<S> <C> <C> <C> <C> <C>
Beginning of year....................... 984,288 331,867 1,316,155 32,666 1,348,821
Extension, discoveries and other
additions............................. 85,032 68,820 153,852 4,810 158,662
Purchase of minerals in place........... 335,865 4,662 340,527 -- 340,527
Revisions of previous estimates......... 56,281 (15,799) 40,482 (9,771) 30,711
Production.............................. (182,661) (27,971) (210,632) (1,796) (212,428)
Sale of properties...................... (138,464) -- (138,464) -- (138,464)
--------- -------- --------- -------- ---------
End of year............................. 1,140,341 361,579 1,501,920 25,909 1,527,829
========== ========= ========== ========= ==========
Proved developed reserves
Beginning of year....................... 888,039 296,876 1,184,915 4,110 1,189,025
========== ========= ========== ========= ==========
End of year............................. 1,003,853 294,614 1,298,467 6,317 1,304,784
========== ========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
OIL, CONDENSATE AND NATURAL GAS LIQUIDS
---------------------------------------------------------------
APACHE
------------------------------------
U.S. INTERNATIONAL(1) TOTAL PHOENIX PRO FORMA
-------- ---------------- ------- -------- ---------
(THOUSANDS OF BARRELS)
<S> <C> <C> <C> <C> <C>
Beginning of year....................... 94,445 16,179 110,624 20,039 130,663
Extension, discoveries and other
additions............................. 6,685 3,364 10,049 8,699 18,748
Purchase of minerals in place........... 99,148 119 99,267 -- 99,267
Revisions of previous estimates......... 12,172 (378) 11,794 (1,025) 10,769
Production.............................. (17,011) (2,076) (19,087) (1,995) (21,082)
Sale of properties...................... (42,318) -- (42,318) -- (42,318)
--------- -------- --------- -------- ---------
End of year............................. 153,121 17,208 170,329 25,718 196,047
========== ========= ========== ========= ==========
Proved developed reserves
Beginning of year....................... 84,085 15,934 100,019 8,998 109,017
========== ========= ========== ========= ==========
End of year............................. 123,726 13,738 137,464 9,555 147,019
========== ========= ========== ========= ==========
</TABLE>
- ---------------
(1) Includes Canadian oil and gas reserves reflecting the pooling of interests
transaction with DEKALB.
50
<PAGE> 51
APACHE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURES -- (CONTINUED)
The following table sets forth unaudited pro forma information concerning
the discounted future net cash flows from proved oil and gas reserves of Apache
as of December 31, 1995, net of income tax expense and giving effect to the
Merger as if the Merger had occurred on January 1, 1995. Income tax expense has
been computed using assumptions relating to the future tax rates and the
permanent differences and credits under the tax laws relating to oil and gas
activities at December 31, 1995 and do not take into account subsequent changes
in tax laws. The information should be viewed only as a form of standardized
disclosure concerning future cash flows that would result under the assumptions
used, but should not be viewed as indicative of fair market value. Reference is
made to Phoenix's and Apache's financial statements for the year ended December
31, 1995, which are incorporated herein by reference, for a discussion of the
assumptions used in preparing the information presented.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
RESERVES,
NET OF INCOME TAX EXPENSE AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
APACHE
------------------------------------
U.S. INTERNATIONAL(1) TOTAL PHOENIX PRO FORMA
-------- ---------------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows.............................. $5,617,297 $838,444 $6,455,741 $516,193 $6,971,934
Production and development costs........ (2,126,984) (285,733) (2,412,717) (180,725) (2,593,442)
Income tax expense...................... (753,425) (135,644) (889,069) (132,134) (1,021,203)
--------- -------- --------- -------- ---------
Net cash flows.......................... 2,736,888 417,067 3,153,955 203,334 3,357,289
10-percent annual discount rate......... (1,105,629) (178,767) (1,284,396) (73,975) (1,358,371)
--------- -------- --------- -------- ---------
Discounted future net cash flows........ $1,631,259 $238,300 $1,869,559 $129,359 $1,998,918
========== ========= ========== ========= ==========
</TABLE>
CHANGE IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATED TO PROVED RESERVES FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
APACHE PHOENIX PRO FORMA
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales, net of production costs................................... $(443,175) $(17,012) $(460,187)
Net change in prices and production costs........................ 201,723 26,831 228,554
Discoveries and improved recovery, net of related costs.......... 210,151 48,250 258,401
Change in future development costs............................... 74,047 (12,829) 61,218
Revision of quantities........................................... 127,939 (7,831) 120,108
Purchases........................................................ 726,240 -- 726,240
Accretion of discount............................................ 160,093 8,004 168,097
Change in income taxes........................................... (186,415) -- (186,415)
Sales of properties.............................................. (232,629) -- (232,629)
Change in production rates and other............................. (80,960) 3,907 (77,053)
--------- -------- ---------
$ 557,014 $ 49,320 $ 606,334
========== ========= ==========
</TABLE>
- ---------------
(1) Includes Canadian oil and gas reserves reflecting the pooling of interests
transaction with DEKALB.
51
<PAGE> 52
STOCKHOLDERS OF APACHE AND PHOENIX
STOCK OWNERSHIP OF APACHE DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of February 29, 1996, the beneficial
ownership of Apache Common Stock of each director, each director-nominee, the
chief executive officer and the four other most highly compensated executive
officers of Apache, and all directors, director-nominees and executive officers
of Apache as a group. All ownership information is based upon filings made by
such persons with the Commission or upon information provided to Apache.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF
NATURE OF BENEFICIAL CLASS
NAME OF BENEFICIAL OWNER OWNERSHIP(1) OUTSTANDING
------------------------------------------- -------------------- -----------
<S> <C> <C>
Frederick M. Bohen......................... 3,649(2) *
Virgil B. Day.............................. 130,438(2)(3) *
G. Steven Farris........................... 87,692(4)(5) *
Randolph M. Ferlic......................... 220,013(2)(6) *
Eugene C. Fiedorek......................... 4,000(2) *
W. Brooks Fields........................... 27,312(2)(7) *
Robert V. Gisselbeck....................... 37,893(2) *
Stanley K. Hathaway........................ 7,109(2) *
John A. Kocur.............................. 40,130(2)(8) *
Mary Ralph Lowe............................ 5,700 *
Raymond Plank.............................. 211,237(4)(5) *
Joseph A. Rice............................. 5,000(2) *
James R. Bauman............................ 52,658(4) *
H. Craig Clark............................. 14,603(4)(5) *
Floyd R. Price............................. 15,371(4)(5) *
All directors, nominees, and executive
officers as a group (including the above
named persons)........................... 1,120,765(4)(5) 1.45
</TABLE>
- ---------------
* Represents less than one percent of the outstanding shares.
(1) All ownership is sole and direct unless otherwise noted. Inclusion of any
shares not owned directly shall not be construed as an admission of
beneficial ownership. Fractional shares have been rounded to the nearest
whole share.
(2) Includes 1,000 shares of restricted stock awarded in 1994 under Apache's
equity compensation plan for non-employee directors.
(3) Includes 1,100 shares owned by Mrs. Day.
(4) Includes the following shares issuable upon the exercise of outstanding
stock options which are exercisable within 60 days: Mr. Farris -- 56,875;
Mr. Plank -- 52,500; Mr. Bauman -- 41,125; Mr. Clark -- 8,500; Mr.
Price -- 9,750; and all directors and executive officers as a
group -- 315,625.
(5) Includes units held by the trustee of Apache's Retirement/401(k) Savings
Plan equivalent to the following shares: Mr. Farris -- 14,317; Mr.
Plank -- 1,115; Mr. Clark -- 5,103; Mr. Price -- 5,121; and all directors
and executive officers as a group -- 64,460.
(6) Includes 17,500 shares owned indirectly by Dr. Ferlic through his interest
in Surgical Services of the Great Plains, P.C. Employee Benefit Trust, and
6,000 shares owned directly by Ferlic Investments, Ltd. in which Dr. Ferlic
owns a 36-percent interest. Also includes a total of 1,700 shares held by
Dr. Ferlic's mother, daughters, son and grandchildren, as to which he
disclaims beneficial ownership.
(7) Includes 10,868 shares owned by Mrs. Fields.
(8) Includes 3,940 shares owned by Mrs. Kocur.
52
<PAGE> 53
In February 1990, Bijan Mossavar-Rahmani, president and a former employee
of Apache International, Inc., was granted 250 shares of Apache International's
common stock, representing five percent of the outstanding shares of Apache
International, pursuant to the terms of the Apache International Common Stock
Award Plan. No voting rights relating to Apache Common Stock are associated with
such Apache International stock.
Section 16(a) of the Exchange Act requires Apache's directors and officers,
as well as beneficial owners of ten percent or more of Apache Common Stock, to
report their holdings and transactions in Apache's securities.
PRINCIPAL STOCKHOLDERS OF APACHE
The following table sets forth the only persons known to Apache, as of
February 29, 1996, to be the owner of more than five percent of outstanding
shares of Apache Common Stock, according to reports filed with the Commission:
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF
NAME AND ADDRESS NATURE OF BENEFICIAL CLASS
OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING
------------------------------------------- -------------------- -----------
<S> <C> <C>
Merrill Lynch & Co. Inc. 5,615,783(1) 7.25
World Financial Center, North Tower
250 Vesey Street
New York, New York 10281
FMR Corp 4,454,373(2)(3) 5.75
82 Devonshire Street
Boston, MA 02109-3614
College Retirement Equities Fund 3,973,088(4) 5.13
TIAA Separate Account VA-1
730 Third Avenue
New York, NY 10017
</TABLE>
- ---------------
(1) According to information contained in a Schedule 13G filed with the
Commission, dated January 25, 1996.
(2) According to information contained in a Schedule 13G filed with the
Commission, dated February 14, 1996.
(3) Does not include 894,462 shares held by Fidelity Management Trust Company
("FMTC") as trustee of Apache's Retirement/401(k) Savings Plan. FMTC is a
wholly owned subsidiary of FMR Corp.
(4) According to information contained in a Schedule 13G filed with the
Commission, dated February 1, 1996.
53
<PAGE> 54
PRINCIPAL STOCKHOLDERS OF PHOENIX
The following table sets forth the total number and percentage of the
outstanding shares of Phoenix Common Stock beneficially owned as of the Record
Date with respect to each person (including any "group" as defined in Section
13(d)(3) of the Exchange Act) Phoenix knows to have beneficial ownership of more
than five percent of outstanding Phoenix Common Stock. The information in this
table is based solely on statements filed by the beneficial owners listed with
the Commission pursuant to Section 13(d) or 13(g) of the Exchange Act, and
Phoenix has not made any independent investigation into the accuracy of this
information. Except as noted below, each stockholder has sole voting and
investment power with respect to all shares owned by such stockholder.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT
NAME AND ADDRESS NATURE OF BENEFICIAL OF CLASS
OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING
------------------------------------------- -------------------- -----------
<S> <C> <C>
Leon S. Gross 2,631,692(1) 16.35
River Park House
3600 Conshohocken Avenue
Philadelphia, PA 19131
Metropolitan Life Insurance Company 1,947,760(2) 12.10
One Madison Avenue
New York, NY 10010-3690
Guardian Life Insurance Company of America 1,467,400(3) 9.12
201 Park Avenue South
New York, NY 10003
</TABLE>
- ---------------
(1) Mr. Gross reported sole voting power with respect to all of the shares and
shared power to dispose of 341,600 shares and shared power to dispose of
2,291,092 shares.
(2) State Street Research and Management Company, One Financial Center, 38th
Floor, Boston, MA 02111-2690 reported ownership of these same securities but
disclaimed beneficial interest in the securities, noting that the securities
are, in fact, owned by various clients. Metropolitan reported sole power to
dispose and voting power of 1,947,760 shares; State Street reported sole
power to dispose of 1,919,160 shares and sole voting power of 1,737,900
shares.
(3) Guardian Life Insurance Company of America reported sole power to dispose
and voting power of 603,200 shares and shared power to dispose and voting
power of 864,200 shares.
DIRECTORS OF APACHE
Apache's Bylaws provide that the board of directors shall consist of a
minimum of seven and a maximum of 13 directors. There are currently 11 directors
on Apache's Board of Directors and, if all of the nominees are elected at the
1996 annual meeting of stockholders, Apache will have 12 directors. Apache's
Charter provides that as nearly as numerically possible, one-third of the
directors shall be elected at each annual meeting of stockholders. Unless
directors earlier resign or are removed, their terms are for three years, and
continue thereafter until their successors are elected and qualify as directors.
The affirmative vote of the holders of a plurality of the shares of common stock
present, in person or represented by proxy, at the annual meeting is required to
elect directors to the board of directors. A majority of the directors then in
office may elect, in their sole discretion, a replacement director to serve
during the unexpired term of any director whose office is vacant for any reason,
and such directors may also elect directors to fill any newly created
directorships created by Apache's Board of Directors.
The terms of incumbent directors G. Steven Farris, Randolph M. Ferlic,
Robert V. Gisselbeck and John A. Kocur will expire at the 1996 annual meeting.
Messrs. Farris, Ferlic, Gisselbeck and Kocur have been nominated to an
additional three-year term and, if elected, each will serve commencing upon his
election and qualification until the annual meeting of stockholders in May 1999.
In addition, Mary Ralph Lowe has been nominated for a term of two years and if
elected, at the annual meeting of stockholders of Apache to be held in
54
<PAGE> 55
May 1996, she will serve commencing upon her election and qualification until
the annual meeting of stockholders in May 1998. Each of the nominees for
director has been recommended by Apache's nominating committee and nominated by
Apache's Board of Directors for election by Apache's stockholders.
Certain biographical information for each director of Apache, and for
director-nominee Mary Ralph Lowe, is set forth below. Unless otherwise stated,
the principal occupation of each director has been the same for the past five
years.
<TABLE>
<CAPTION>
DIRECTOR TERM
SINCE EXPIRES
-------- -------
<S> <C> <C>
G. STEVEN FARRIS, 48, has been president and chief operating officer of 1994 1996
Apache since May 1994, and was elected to Apache's Board of Directors
in December 1994. He was senior vice president of Apache from 1991 to
1994, and vice president -- exploration and production of Apache from
1988 to 1991. Prior to that, Mr. Farris was vice president of finance
and acquisitions for Terra Resources, Inc., a Tulsa, Oklahoma oil and
gas company, from 1983 to 1988, and executive vice president for Robert
W. Berry, Inc., a Tulsa, Oklahoma oil and gas company, from 1978 to
1983.
RANDOLPH M. FERLIC, 59, retired in December 1993 from his practice as a 1986 1996
thoracic and cardiovascular surgeon. He is the founder of Surgical
Services of the Great Plains, P.C., and served as its president from
1974 to 1991. Dr. Ferlic is a member of the audit committee, the
executive committee, and the nominating committee.
ROBERT V. GISSELBECK, 72, is the founder of Gisselbeck & Associates, a 1982 1996
real estate development company in Naples, Florida, and has served as
its president since 1960. Mr. Gisselbeck is a member of the audit
committee.
JOHN A. KOCUR, 68, is engaged in the private practice of law. He served 1977 1996
as vice chairman of Apache's Board of Directors from 1988 until 1991.
Mr. Kocur was employed by Apache from 1969 until his retirement in
1991, and served as Apache's president from 1979 until 1988. He is
chairman of the executive committee, chairman of the nominating
committee, and a member of the management development and compensation
committee.
MARY RALPH LOWE, 49, has been president and chief executive officer of -- --
Maralo, Inc., a Houston, Texas independent oil and gas exploration and
production company, since 1988 and a member of its board of directors
since 1975. She has been the managing partner of MLR Partners, LP, an
oil and gas exploration and production company, since 1990 and has been
president and the sole director of Lowe Petroleum Company since 1988
which, in addition to oil and gas exploration and production, owns and
manages commercial real estate in Midland, Texas. Ms. Lowe is president
of the Lowe Foundation, a trustee of the Houston Museum of Natural
Science and the Houston Museum of Fine Arts, and is involved in
numerous other civic and charitable activities.
FREDERICK M. BOHEN, 58, has been executive vice president and chief 1981 1997
operating officer of The Rockefeller University since 1990. He was
senior vice president of Brown University from 1983 to 1990, and served
as vice president of finance and operations at the University of
Minnesota from 1981 to 1983. Mr. Bohen worked with the U.S. Department
of Health, Education and Welfare as assistant secretary for management
and budget from 1977 to 1981. He is a director of the College
Construction Loan Insurance Association (Connie Lee), a director of
Oppenheimer and Company, and a director of the Mexico Equity Income
Fund, Inc. Mr. Bohen is a chairman of the management development and
compensation committee and chairman of the stock option plan committee.
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
DIRECTOR TERM
SINCE EXPIRES
-------- -------
<S> <C> <C>
VIRGIL B. DAY, 80, has been a senior partner in the law firm of Vedder, 1974 1997
Price, Kaufman, Kammholz & Day since 1974. He was the first labor
counsel for General Electric Company, where he subsequently held
various management positions involving employee and union relations,
public affairs and governmental relations. From 1961 to 1973, Mr. Day
was a vice president of General Electric Company and in 1971, he became
chairman of the industry members of the U.S. Pay Board. Mr. Day is a
member of the management development and compensation committee.
EUGENE C. FIEDOREK, 64, has been the managing director of EnCap 1988 1998
Investments L.C., a Dallas, Texas energy investment banking firm, since
1988. Mr. Fiedorek was the managing director of the Energy Banking
Group of First RepublicBank Corp. in Dallas, Texas, from 1978 to 1987.
He is a director of Energy Capital Investment Company. Mr. Fiedorek is
a member of the audit committee.
W. BROOKS FIELDS, 77, is retired. From 1984 until 1990, he was president 1973 1998
and chief executive officer of Minnesota Racetrack, Inc., also known as
Canterbury Downs, a racetrack development company. From 1968 to 1990,
Mr. Fields was chairman of the board of Scottland, Inc., a real estate
development company, for which a plan of reorganization pursuant to
Chapter 11 of the Bankruptcy Code was confirmed in June 1990. From 1955
until 1984, he was the executive vice president and director of Burdick
Grain Company, a grain merchandising company. Mr. Fields is a member of
the audit committee, the executive committee and the nominating
committee.
STANLEY K. HATHAWAY, 71, has been a senior partner in the law firm of 1977 1997
Hathaway, Speight, Kunz & Trautwein since 1976. From June through
October 1975, Mr. Hathaway served as the U.S. Secretary of the
Interior. He was Governor of the State of Wyoming from 1967 to 1975.
Mr. Hathaway is chairman of the audit committee.
RAYMOND PLANK, 73, has been chairman of the board and chief executive 1954 1998
officer of Apache since 1979, and served as Apache's president from
1954 until 1979. Mr. Plank is a member of the executive committee and
the nominating committee.
JOSEPH A. RICE, 71, retired in 1988 as chairman of the board, chief 1989 1997
executive officer and a director of Irving Trust Company and Irving
Bank Corporation, having served in those capacities since 1984. Mr.
Rice served as president, chief operating officer and a director of
those organizations from 1975 to 1984. He is a director of Avon
Products, Inc. Mr. Rice is a member of the management development and
compensation committee and the stock option plan committee.
</TABLE>
56
<PAGE> 57
DESCRIPTION OF APACHE CAPITAL STOCK
At April 15, 1996, Apache's authorized capital stock consists of 5,000,000
shares of preferred stock, none of which were outstanding, and 215,000,000
shares of Apache Common Stock, of which 77,540,208 were outstanding.
The descriptions set forth below of the Apache Common Stock, preferred
stock and rights constitute brief summaries of certain provisions of Apache's
Charter and Apache's Bylaws and the Rights Agreement between Apache and Norwest
Bank Minnesota, N.A., dated January 31, 1996 (the "Rights Agreement"), and are
qualified in their entirety by reference to the relevant provisions of such
documents, all of which are filed as exhibits to the Registration Statement of
which this Proxy Statement/Prospectus is a part and are incorporated herein by
reference.
APACHE COMMON STOCK
All outstanding shares of Apache Common Stock are fully paid and
nonassessable, and all holders of Apache Common Stock have full voting rights
and are entitled to one vote for each share held of record on all matters
submitted to a vote of stockholders. The Board of Directors of Apache is
classified into three groups of approximately equal size, one-third elected each
year. Stockholders do not have the right to cumulate votes in the election of
directors and have no preemptive or subscription rights. Apache Common Stock is
neither redeemable nor convertible, and there are no sinking fund provisions
relating to such stock.
Subject to preferences that may be applicable to any shares of preferred
stock outstanding at the time, holders of Apache Common Stock are entitled to
dividends when and as declared by the Board of Directors from funds legally
available therefor and are entitled, in the event of liquidation, to share
ratably in all assets remaining after payment of liabilities.
Apache's current policy is to reserve one ten-thousandth (1/10,000) of a
share of Series A Preferred Stock (as defined below) for each share of Apache
Common Stock issued in order to provide for possible exercises of Rights (as
defined below) under Apache's existing Rights Agreement.
The currently outstanding Apache Common Stock and the Rights under Apache's
existing Rights Agreement are listed on the NYSE and the CSE.
Norwest Bank Minnesota, National Association, is the transfer agent and
registrar for Apache Common Stock.
Apache typically mails its annual report to stockholders within 120 days
after the end of its fiscal year. Notices of stockholder meetings are mailed to
record holders of Apache Common Stock at their addresses shown on the books of
the transfer agent and registrar.
PREFERRED STOCK
Apache has five million shares of no par preferred stock authorized, of
which 25,000 shares have been designated Series A Junior Participating Preferred
Stock (the "Series A Preferred Stock") and authorized for issuance pursuant to
the preferred stock purchase rights that trade with Apache Common Stock. No
preferred stock is currently outstanding; however, shares of Series A Preferred
Stock shares have been reserved for issuance in accordance with the Rights
Agreement relating to the preferred stock purchase rights described below. The
Board of Directors of Apache may authorize the issuance of shares of preferred
stock with such voting powers and in such classes and series, and with such
designations, preferences, and relative, participating, optional or other
special rights, qualifications, limitations or restrictions (including
conversion into or exchange for other securities of Apache or its subsidiaries),
as may be stated and expressed in a resolution or resolutions adopted by
Apache's Board of Directors providing for the issuance on such stock.
RIGHTS
In December 1995, Apache declared a dividend of one right (a "Right") for
each outstanding share of Apache Common Stock effective on January 31, 1996.
Each Right entitles the registered holder to purchase
57
<PAGE> 58
from Apache one ten-thousandth (1/10,000) of a share of Series A Preferred Stock
at a price of $100 per one ten-thousandth of a share, subject to adjustment. The
Rights are exercisable ten calendar days following a public announcement that
certain persons or groups acquired 20 percent or more of the outstanding shares
of Apache Common Stock or ten business days following commencement of an offer
for 30 percent or more of the outstanding shares of Apache Common Stock. Unless
and until the Rights become exercisable, they will be transferred with and only
with the shares of Apache Common Stock. If Apache engages in certain business
combinations or a 20-percent stockholder engages in certain transactions with
Apache, the Rights become exercisable for Apache Common Stock or common stock of
the corporation acquiring Apache (as the case may be) at 50 percent of the
then-market price. Any Rights that are or were beneficially owned by a person
who has acquired 20 percent or more of the outstanding shares of Apache Common
Stock and who engages in certain transactions or realizes the benefits of
certain transactions with Apache will become void. Apache may redeem the Rights
at $.01 per Right at any time until ten business days after public announcement
that a person has acquired 20 percent or more of the outstanding shares of
Apache Common Stock. The Rights will expire on January 31, 2006, unless earlier
redeemed by Apache. Unless the Rights have been previously redeemed, all shares
of Apache Common Stock issued by Apache will include Rights.
COMPARATIVE RIGHTS OF APACHE AND PHOENIX STOCKHOLDERS
If the Merger is consummated, the stockholders of Phoenix will become
stockholders of Apache. The rights of the stockholders of both Apache and
Phoenix are governed by and subject to the provisions of the DGCL. The rights of
current Phoenix stockholders following the Merger will be governed by Apache's
Charter and Apache's Bylaws rather than the provisions of Phoenix's Amended and
Restated Certificate of Incorporation ("Phoenix's Charter") and Phoenix's
Amended and Restated Bylaws. The following is a brief summary of certain
differences between the rights of Apache stockholders and the rights of Phoenix
stockholders, and is qualified in its entirety by reference to the relevant
provisions of the DGCL and to Apache's Charter, Apache's Bylaws, Phoenix's
Charter and Phoenix's Amended and Restated Bylaws.
NUMBER AND CLASSIFICATION OF BOARD OF DIRECTORS
Phoenix's Board of Directors consists of a single class elected to a
three-year term. Apache's Board of Directors is divided into three classes, with
directors serving staggered three-year terms. Both Phoenix's Bylaws and Apache's
Charter provide that the number of directors shall be fixed from time to time by
their respective Boards of Directors. Currently, the number of Apache directors
is twelve, and the number of Phoenix directors is six.
POWER TO CALL SPECIAL MEETINGS
Apache's Bylaws provide that a special meeting of stockholders may be
called by the Chairman of the Board, and shall be called by the Chairman of the
Board or the Secretary upon the request of a majority of the Board of Directors.
Phoenix's Charter provides that a special meeting of stockholders may be called
by the President, and shall be called by the President or Secretary at the
request of a majority of the Board of Directors or the holders of a majority of
the shares of Phoenix's capital stock then entitled to vote in an election of
directors.
VOTING RIGHTS
Holders of Apache Common Stock and Phoenix Common Stock are entitled to
full voting rights, with one vote for each share held of record on all matters
submitted to a vote of stockholders.
STOCKHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS
Apache's Charter contains certain provisions that require the holders of
more than a majority of its voting shares to approve certain transactions than
would otherwise be required under the DGCL, subject to certain
58
<PAGE> 59
exceptions. See below "-- Certain Anti-takeover Provisions." Phoenix's Charter
does not contain any provisions requiring supermajority approval of any
transactions.
ACTION BY WRITTEN CONSENT
Apache's Charter does not permit action to be taken by stockholders without
a meeting. Phoenix's Charter permits action to be taken without a meeting if a
written consent in lieu of a meeting is signed by the stockholders entitled to
vote at the meeting.
CERTAIN ANTI-TAKEOVER PROVISIONS
Rights. If Apache engages in certain business combinations or a 20-percent
stockholder engages in certain transactions with Apache, the Rights become
exercisable for Apache Common Stock or common stock of the corporation acquiring
Apache (as the case may be) at 50 percent of the then market price. Any Rights
that are or were beneficially owned by a person who has acquired 20 percent or
more of the Apache Common Stock, and who engages in certain transactions or
realized the benefits of certain transactions with Apache, will become void. See
"Description of Apache Capital Stock -- Rights."
Provisions of Certain Debt. Upon a change in control of Apache, certain
indentures and other agreements obligate Apache to purchase or redeem certain
series of the debt securities at their face amount. Those provisions might have
the effect of reducing the economic benefit to be derived by a third party from
acquiring control of Apache.
Apache's Charter. Apache's Charter includes provisions designed to prevent
the use of certain tactics in connection with a potential takeover of Apache.
Article Twelve of Apache's Charter generally stipulates that the affirmative
vote of 80 percent of Apache's voting shares is required to adopt any agreement
for the merger or consolidation of Apache with or into any other corporation
which is the beneficial owner of five percent or more of Apache's voting shares.
Article Twelve further provides that such an 80-percent approval is necessary to
authorize any sale or lease of assets between Apache and any beneficial holder
of five percent or more of Apache's voting shares. Article Fourteen of Apache's
Charter contains a "fair price" provision which requires that any tender offer
made by a beneficial owner of more than five percent of the outstanding voting
stock of Apache in connection with any plan of merger, consolidation or
reorganization, any sale or lease of substantially all of Apache's assets, or
any issuance of equity securities of Apache to the five percent stockholder must
provide at least as favorable terms to each holder of Apache Common Stock other
than the stockholder making the tender offer. Article Fifteen of Apache's
Charter contains an "anti-greenmail" provision which prohibits Apache from
acquiring any voting stock from the beneficial owner of more than five percent
of the outstanding voting stock of Apache, except for acquisitions pursuant to a
tender offer to all holders of voting stock on the same price, terms, and
conditions, acquisitions in compliance with Rule 10b-18 of the Exchange Act, and
acquisitions at a price not exceeding the market value per share. Article
Sixteen of Apache's Charter prohibits the stockholders of Apache from acting by
written consent in lieu of a meeting.
INDEPENDENT PUBLIC ACCOUNTANTS
It is expected that representatives of Arthur Andersen LLP, Phoenix's
independent public accountants, will be present at the Special Meeting to
respond to appropriate questions of Phoenix stockholders and to make a statement
if they so desire.
LEGAL MATTERS
The validity of the issuance of the Apache Common Stock offered hereby has
been passed upon for Apache by Andrews & Kurth L.L.P., Houston, Texas. Certain
United States tax consequences of the Merger have been passed upon for Apache by
Andrews & Kurth L.L.P., Houston, Texas.
59
<PAGE> 60
EXPERTS
The audited consolidated financial statements of Apache and the audited
consolidated financial statements of Phoenix, each incorporated by reference
into this Registration Statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto. In its report on the consolidated financial statements of Apache, that
firm states that with respect to DEKALB Energy Company its opinion is based on
the report of other independent public accountants, namely Coopers & Lybrand.
The financial statements referred to above have been incorporated by reference
herein in reliance upon the authority of those firms as experts in accounting
and auditing in giving said reports.
The audited consolidated financial statements of DEKALB Energy Company as
of December 31, 1994 and for the years ended December 31, 1993 and 1994,
incorporated by reference in this registration statement have been audited by
Coopers & Lybrand, Chartered Accountants, as indicated in their report with
respect thereto, and are incorporated herein in reliance upon the authority of
said firm as experts in accounting and auditing in giving said reports.
The information included and incorporated by reference herein regarding the
total proved reserves of Apache was prepared by Apache and reviewed by Ryder
Scott Company Petroleum Engineers as stated in their letter reports with respect
thereto, and is so included and so incorporated by reference in reliance upon
the authority of said firm as experts in such matters. The reserve review
letters of Ryder Scott as of December 31, 1995, are filed as exhibits to the
Registration Statement of which this Proxy Statement/Prospectus is a part, in
reliance upon the authority of said firm as experts with respect to the matters
covered by their reports and the giving of their reports.
A portion of the information included herein regarding the total proved
reserves of Phoenix was prepared by Netherland, Sewell & Associates, Inc. as of
January 1, 1996, as stated in their letter with respect thereto, and is included
herein in reliance upon the authority of said firm as experts in such matters.
60
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 99.2
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
Page
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Income for each of the three years in the period ended
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheet at December 31, 1994 and 1995 . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Stockholders' Equity for each of the three years
in the period ended December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Cash Flows for each of the three years in the period ended
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Supplementary Information on Oil and Gas Producing Activities . . . . . . . . . . . . . . . . . 15
Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>
1
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PHOENIX RESOURCE COMPANIES, INC.:
We have audited the accompanying consolidated balance sheet of The
Phoenix Resource Companies, Inc. (a Delaware corporation) and subsidiaries as
of December 31, 1995 and 1994, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Phoenix
Resource Companies, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the Index
under Item 8 Financial Statements and Supplementary Data is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not a required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
February 23, 1996
2
<PAGE> 3
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenues:
Oil and gas revenues . . . . . . . . . . . . . . . . . . . $ 22,302 $ 21,856 $ 23,433
Revenues dedicated to foreign tax liability . . . . . . . 10,578 10,866 9,822
------- ------- -------
Operating revenues . . . . . . . . . . . . . . . . . . . 32,880 32,722 33,255
Interest income . . . . . . . . . . . . . . . . . . . . . 464 935 1,436
Other income . . . . . . . . . . . . . . . . . . . . . . . 681 187 345
------- ------- -------
34,025 33,844 35,036
------- ------- -------
Costs and Expenses:
Production costs . . . . . . . . . . . . . . . . . . . . . 5,841 5,301 6,421
Depreciation, depletion and amortization . . . . . . . . . 1,967 2,213 5,795
General and administrative . . . . . . . . . . . . . . . . 2,663 2,314 2,194
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 138 -- --
------- ------- -------
10,609 9,828 14,410
------- ------- -------
Income before income taxes and extraordinary loss . . . . . . 23,416 24,016 20,626
Provision for income taxes:
U.S. alternative minimum tax . . . . . . . . . . . . . . . 328 259 193
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . 10,578 10,866 9,822
------- ------- -------
Income before extraordinary loss . . . . . . . . . . . . . . 12,510 12,891 10,611
Extraordinary loss:
Early extinguishment of debt . . . . . . . . . . . . . . . (174) -- --
------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 12,336 $ 12,891 $ 10,611
======= ======= ========
Income Per Share:
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . . 17,000 16,432 16,214
======= ======= =======
Income before extraordinary loss . . . . . . . . . . . . $ 0.74 $ 0.78 $ 0.65
======= ======= ========
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.73 $ 0.78 $ 0.65
======= ======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 4
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS
December 31,
-------------------------
1994 1995
-------- --------
<S> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 26,536 $ 22,759
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 2,561 5,639
Receivable for payment of foreign taxes . . . . . . . . . . . . . . 10,657 11,026
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . 491 2,072
-------- --------
40,245 41,496
-------- --------
Property and Equipment, at cost:
Oil and gas properties (using full cost accounting) . . . . . . . . 18,624 40,842
Other property and equipment . . . . . . . . . . . . . . . . . . . . 1,909 983
-------- --------
20,533 41,825
Less: Accumulated depreciation, depletion and amortization . . . . . . 13,800 18,672
-------- --------
Net Property and Equipment . . . . . . . . . . . . . . . . . . . . 6,733 23,153
Deferred Receivable for payment of foreign taxes . . . . . . . . . . . 9,211 2,997
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 687
-------- --------
$ 56,441 $ 68,333
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,062 $ 562
Accrued foreign taxes . . . . . . . . . . . . . . . . . . . . . . . 10,657 11,026
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . 857 952
-------- --------
12,576 12,540
-------- --------
Long-Term Liabilities:
Deferred foreign taxes . . . . . . . . . . . . . . . . . . . . . . . 9,211 2,997
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 1,096 988
-------- --------
10,307 3,985
-------- --------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Preferred stock, par value $0.01 (authorized 5,000 shares, none
outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock, par value $0.01 (authorized 20,000 shares, 15,708
shares outstanding in 1994 and 16,190 in 1995) . . . . . . . . . . 170 170
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 39,311 45,170
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 2,929 12,281
Treasury stock, at cost (1,254 shares in 1994 and 772 in 1995) . . . (8,852) (5,813)
-------- --------
33,558 51,808
-------- --------
$ 56,441 $ 68,333
======== ========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
4
<PAGE> 5
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Retained Treasury Stock
------------------ Paid-in Earnings ------------------ Stockholders'
Shares Amount Capital (Deficit) Shares Amount Equity
--------- ------- ------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 . . 16,977 $ 170 $ 39,212 $(21,488) -- $ -- $ 17,894
Stock options exercised . . . 40 -- 68 -- -- -- 68
Shares cancelled . . . . . . (75) -- -- -- -- -- --
Net income . . . . . . . . . -- -- -- 12,336 -- -- 12,336
--------- ---- -------- ------- ------- -------- -------
BALANCE AT DECEMBER 31, 1993 . . 16,942 170 39,280 (9,152) -- -- 30,298
Shares purchased . . . . . . (1,254) -- -- -- 1,254 (8,852) (8,852)
Stock options exercised . . . 20 -- 31 -- -- -- 31
Dividends paid, $0.05 per
share . . . . . . . . . . -- -- -- (810) -- -- (810)
Net income . . . . . . . . . -- -- -- 12,891 -- -- 12,891
--------- ---- -------- ------- ------- -------- -------
BALANCE AT DECEMBER 31, 1994 . . 15,708 170 39,311 2,929 1,254 (8,852) 33,558
Shares issued . . . . . . . . 606 -- 5,533 -- (606) 4,467 10,000
Shares purchased . . . . . . (152) -- -- -- 152 (1,634) (1,634)
Accrual pursuant to
Director Plan . . . . . . -- -- 368 -- -- -- 368
Stock options exercised . . . 28 -- (42) -- (28) 206 164
Dividends paid, $0.08
per share . . . . . . . . -- -- -- (1,259) -- -- (1,259)
Net income . . . . . . . . . -- -- -- 10,611 -- -- 10,611
--------- ---- -------- ------- ------- -------- -------
BALANCE AT DECEMBER 31, 1995 . . 16,190 $ 170 $ 45,170 $ 12,281 772 $ (5,813) $ 51,808
========= ==== ======== ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 6
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1993 1994 1995
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from purchasers . . . . . . . . . . . . . . . $23,274 $21,862 $ 20,442
Cash paid to suppliers and employees . . . . . . . . . . . . (9,510) (8,405) (8,617)
Interest paid . . . . . . . . . . . . . . . . . . . . . . . (144) -- --
Income taxes paid . . . . . . . . . . . . . . . . . . . . . (583) (487) (515)
Interest and other cash receipts . . . . . . . . . . . . . . 821 847 1,462
------ ------ -------
Net cash provided by operating activities . . . . . . . . 13,858 13,817 12,772
------ ------ -------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . (2,651) (2,932) (23,554)
Proceeds from sales of property and equipment . . . . . . . 120 34 --
Supplemental purchase price payment . . . . . . . . . . . . 4,000 -- --
------ ------ -------
Net cash provided by (used in) investing activities . . . 1,469 (2,898) (23,554)
------ ------ ------
Cash flows from financing activities:
Sale of treasury stock . . . . . . . . . . . . . . . . . . . -- -- 10,000
Purchase of treasury stock . . . . . . . . . . . . . . . . . -- (8,852) (1,634)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . -- (810) (1,259)
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . -- -- (266)
Repayments of long-term debt . . . . . . . . . . . . . . . . (1,704) -- --
Proceeds from stock options exercised . . . . . . . . . . . 139 31 164
------ ------ -------
Net cash provided by (used in) financing activities . . . (1,565) (9,631) 7,005
------ ------ -------
Net increase (decrease) in cash and cash equivalents . . . . . 13,762 1,288 (3,777)
Cash and cash equivalents, beginning of year . . . . . . . . . 11,486 25,248 26,536
------ ------ -------
Cash and cash equivalents, end of year . . . . . . . . $25,248 $26,536 $ 22,759
====== ====== =======
Reconciliation of net income to net cash provided
by operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $12,336 $12,891 $ 10,611
------ ------ -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . . . . 1,967 2,213 5,795
Capitalized general and administrative expense . . . . . (372) (604) (1,055)
Loss on early extinguishment of debt . . . . . . . . . . 174 -- --
Gain on sale of properties . . . . . . . . . . . . . . . (97) -- --
(Increase) decrease in accounts receivable related to
operating activities . . . . . . . . . . . . . . . . . 866 (350) (3,078)
Increase (decrease) in accounts payable related to
operating activities . . . . . . . . . . . . . . . . . (89) (156) 330
Increase (decrease) in accrued liabilities related to
operating activities . . . . . . . . . . . . . . . . . (541) 283 95
Other noncash items . . . . . . . . . . . . . . . . . . . (386) (460) 74
------ ------ -------
Total adjustments . . . . . . . . . . . . . . . . . . 1,522 926 2,161
------ ------ -------
Net cash provided by operating activities . . . . . $13,858 $13,817 $ 12,772
====== ====== =======
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE> 7
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is an independent oil and gas company operating in Egypt.
Company operations include exploring, developing and operating crude oil and
natural gas properties in Egypt.
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Oil and Gas Operations - The Company uses the full cost method of
accounting for oil and gas operations. Under the full cost method, all costs
associated with the acquisition, exploration and development of oil and gas
reserves, including nonproductive costs, are capitalized as incurred. Internal
overhead which is directly identified with acquisition, exploration and
development activities is capitalized. The Company capitalized $0.4 million,
$0.6 million and $1.1 million of internal overhead for the years ended December
31, 1993, 1994 and 1995, respectively.
The capitalized costs of oil and gas properties are accumulated in
cost centers on a country-by-country basis and are amortized using the
unit-of-production method based on proved reserves. Estimated future
development costs are included in the amortization base. Depreciation,
depletion and amortization expense per equivalent oil barrel for Egypt was
$0.66, $0.87 and $2.51 for the years ended December 31, 1993, 1994 and 1995,
respectively. Capitalized costs and estimated future development costs
associated with unevaluated properties are excluded from amortization until the
quantity of proved reserves attributable to the property has been determined or
impairment has occurred. At December 31, 1993 and 1994, the Company excluded
$1 million of capitalized costs related to the Qarun Concession from
amortization. At December 31, 1995 the Company excluded $0.9 million of
capitalized costs related to the Khalda Offset acreage from amortization.
These costs will be included in the amortization base as prospects within the
Khalda Offset acreage are evaluated.
Dispositions of oil and gas properties are recorded as adjustments to
capitalized costs, with no gain or loss recognized unless such adjustments
would significantly alter the relationship between capitalized costs and proved
reserves. Accordingly, the gain on the sale of a portion of the Company's
interest in the Khalda Concession in 1989 and the subsequent supplemental
payments in 1992 and 1993 were recorded as reductions of capitalized costs with
no gain recognized.
The unamortized cost of oil and gas properties less related deferred
income tax may not exceed an amount equal to the net present value discounted
at 10% of proved oil and gas reserves plus the lower of cost or estimated fair
market value of unevaluated properties. To the extent the Company's
unamortized cost of oil and gas properties exceeded this ceiling amount, a
provision for additional depreciation, depletion and amortization would be
required.
7
<PAGE> 8
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Production Entitlements - Pursuant to the entitlement method, the
Company recognizes revenue from its Egyptian concessions in the period it is
entitled to such production. Production costs are expensed as incurred. At
period-end any revenue to which the Company is entitled but has not received is
recorded as an account receivable; revenue the Company has received but is not
entitled to is recorded in current liabilities as deferred revenue. As of
December 31, 1994 and 1995 the Company had recorded an account receivable of
$0.4 million representing approximately 23,000 barrels of crude oil and $0.5
million representing approximately 29,000 barrels of crude oil, respectively.
Taxes on Income - The Company recognizes deferred tax liabilities and
assets for the expected future tax consequences, if any, of temporary
differences between the tax and financial reporting bases of the Company's
assets and liabilities.
The Company operates in two tax jurisdictions, the U.S. and Egypt.
All of the Company's Egyptian operations are conducted through wholly-owned
U.S. subsidiaries, and all income generated by the Egyptian operations is also
included in the Company's consolidated U.S. taxable income. In accordance with
the provisions of Egyptian concession agreements, EGPC's share of revenues
includes Egyptian income taxes and government royalties attributable to the
Company, which are paid directly by EGPC. Payment of these Egyptian income
taxes by EGPC creates for the Company both U.S. taxable income and foreign tax
credits (or deductions, at the option of the Company) which can be utilized to
reduce U.S. income taxes, if any, on earnings from the Company's foreign
operations.
The Company records its share of the Egyptian income tax expense and
revenue dedicated to foreign tax liabilities for the tax payment to be made on
its behalf by EGPC. The Company records an Egyptian deferred income tax
liability, and an identical deferred receivable, related to its share of
temporary differences in reporting Egyptian taxable income by the Company
during the current and prior years.
Cash and Cash Equivalents - For the Statement of Cash Flows, the
Company considers unrestricted cash on hand and all highly liquid debt
instruments purchased with a maturity of generally three months or less to be
cash equivalents.
Foreign Currency Transactions - Nearly all transactions of the Company
and its wholly-owned subsidiaries are made in U.S. dollars. As a result,
foreign currency exchange gains and losses, if any, are recognized in the
period incurred. Total foreign exchange gains and losses are immaterial.
Stock Option Plans - The Company accounts for its stock option plans
using the intrinsic value method in accordance with Accounting Principles
Opinion No. 25. In October 1995 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." The Company will adopt the pro
forma disclosure requirements of SFAS No. 123 in 1996.
8
<PAGE> 9
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- QUARTERLY RESULTS OF OPERATIONS:
The unaudited results of operations for the quarterly periods of 1994
and 1995 are summarized below, in thousands, except per share amounts, oil
prices and average daily gross production.
<TABLE>
<CAPTION>
1994
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Oil and gas revenues . . . . . . . . . . . . . . . . $ 4,474 $ 5,786 $ 5,925 $ 5,671 $21,856
Revenues dedicated to foreign tax liability . . . . . 2,222 2,767 2,977 2,900 10,866
Other revenues . . . . . . . . . . . . . . . . . . . 241 245 287 349 1,122
------- ------ ------ ------ ------
6,937 8,798 9,189 8,920 33,844
------- ------ ------ ------ ------
Production costs . . . . . . . . . . . . . . . . . . 1,102 1,656 1,519 1,024 5,301
Other costs and expenses . . . . . . . . . . . . . . 1,120 943 953 1,511 4,527
------- ------ ------ ------ ------
2,222 2,599 2,472 2,535 9,828
------- ------ ------ ------ ------
Income before income taxes . . . . . . . . . . . . . 4,715 6,199 6,717 6,385 24,016
Provision for income taxes . . . . . . . . . . . . . 2,274 2,837 3,047 2,967 11,125
------- ------ ------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . $ 2,441 $ 3,362 $ 3,670 $ 3,418 $12,891
======= ====== ======= ====== ======
Net income, per share . . . . . . . . . . . . . . . . $ 0.14 $ 0.20 $ 0.23 $ 0.21 $ 0.78
======= ====== ======= ====== ======
Average daily gross oil production--Khalda . . . . . 31,244 32,917 34,008 32,724 32,731
Average oil price--Egypt . . . . . . . . . . . . . $ 14.08 $ 15.91 $ 16.24 $ 16.47 $ 15.72
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Oil and gas revenues . . . . . . . . . . . . . . . . $ 5,486 $ 5,891 $ 5,418 $ 6,638 $23,433
Revenues dedicated to foreign tax liability . . . . . 2,831 2,988 2,514 1,489 9,822
Other revenues . . . . . . . . . . . . . . . . . . . 370 436 589 386 1,781
------- ------ ------ ------ ------
8,687 9,315 8,521 8,513 35,036
------- ------ ------ ------ ------
Production costs . . . . . . . . . . . . . . . . . . 1,377 1,654 1,465 1,925 6,421
Other costs and expenses . . . . . . . . . . . . . . 1,342 1,621 2,852 2,174 7,989
------- ------ ------ ------ ------
2,719 3,275 4,317 4,099 14,410
------- ------ ------ ------ ------
Income before income taxes . . . . . . . . . . . . . 5,968 6,040 4,204 4,414 20,626
Provision for income taxes . . . . . . . . . . . . . 2,884 3,038 2,560 1,533 10,015
------- ------ ------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . $ 3,084 $ 3,002 $ 1,644 $ 2,881 $10,611
======= ====== ======= ====== ======
Net income, per share . . . . . . . . . . . . . . . . $ 0.19 $ 0.19 $ 0.10 $ 0.17 $ 0.65
======= ====== ======= ====== ======
Average daily gross oil production--Khalda . . . . . 31,372 30,415 31,260 30,746 30,947
Average oil price--Egypt . . . . . . . . . . . . . $ 16.83 $ 17.79 $ 15.86 $ 17.06 $ 16.88
</TABLE>
NOTE 3 -- CAPITAL STOCK AND OPTIONS:
Capital Stock - Two-for-one splits of the number of shares of Common
Stock outstanding were effective in January and September 1995. All references
in the accompanying financial statements and notes to the number of common
shares and per share amounts have been restated to reflect the splits.
A total of 20,000,000 shares of $0.01 par value Common Stock are
authorized. As of December 31, 1995 there were 16,961,920 shares of Common
Stock issued, of which 16,189,756
9
<PAGE> 10
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were outstanding, and 1,914,000 shares of Common Stock were reserved for
issuance upon exercise of the options described below. As of December 31, 1994
there were 16,961,920 shares of Common Stock issued, of which 15,708,196 were
outstanding, and 1,342,000 shares of Common Stock were reserved for issuance
upon exercise of the options described below.
A total of 5,000,000 shares of $0.01 par value preferred stock are
authorized, none of which were outstanding at December 31, 1994 or 1995.
In November 1995 the Company sold 606,060 shares of its Common Stock
to the International Finance Corporation ("IFC"), an affiliate of the World
Bank, at the then current market price of $16.50 per share. The shares sold to
IFC were treasury shares previously acquired by the Company at an average price
of $7.37 per share.
In conjunction with the March 1994 secondary public offering by a
selling shareholder of 30% of the Company's Common Stock, the Company purchased
515,204 shares of its Common Stock at $6.74 per share. Also during 1994, the
Company purchased 738,520 shares of its Common Stock in open market
transactions at an average price of $7.29 per share. During 1995 the Company
purchased 152,500 shares of its Common Stock in open market transactions at an
average price of $10.71 per share. Shares purchased are held as treasury stock
unless and until reissued.
Stock Options - The 1990 Employee Stock Option Plan, as amended
("Employee Stock Option Plan") and the 1990 Nonemployee Director Stock Option
Plan, as amended ("Director Stock Option Plan"), were established April 9,
1990. The Employee Stock Option Plan authorizes the grant of options to
purchase Common Stock to employees of the Company. The exercise price of the
options granted may not be less than the fair market value on the date of the
grant. At December 31, 1994 and 1995 shares of Common Stock reserved for
issuance pursuant to the Employee Stock Option Plan totaled 1,074,000 and
1,670,000, respectively.
The Director Stock Option Plan authorizes the grant of options to
purchase 12,000 shares of Common Stock to each director of the Company, who is
not otherwise an employee of the Company, upon election to the Board of
Directors. The Plan also provides that each nonemployee director of the
Company be granted additional options covering a sufficient number of shares of
Common Stock, so that after such grant such nonemployee director would hold in
the aggregate, including all options previously granted to such nonemployee
director that remain unexercised, options covering at least 12,000 shares of
Common Stock. The exercise price of options granted is the closing price of
the shares of Common Stock on the date of the grant of such options. At
December 31, 1994 and 1995 shares of Common Stock reserved for issuance
pursuant to the Director Stock Option Plan totaled 268,000 and 244,000,
respectively.
10
<PAGE> 11
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information on the status of options is in the following table.
<TABLE>
<CAPTION>
Employee Plan Director Plan
--------------------------- -----------------------------
Option Price Option Price
Shares Per Share Shares Per Share
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
OUTSTANDING DECEMBER 31, 1993 . . . . . 42,000 $ 1.56 18,000 $ 1.56 - 8.75
Granted . . . . . . . . . . . . . . 740,000 $ 6.59 - 10.06 80,000 $ 6.13
Exercised . . . . . . . . . . . . . (8,000) $ 1.56 (12,000) $ 1.56
--------- --------
OUTSTANDING DECEMBER 31, 1994 . . . . . 774,000 $ 1.56 - 10.06 86,000 $ 6.13 - 8.75
Granted . . . . . . . . . . . . . . 300,000 $ 12.44 8,000 $ 14.44
Exercised . . . . . . . . . . . . . (4,000) $ 1.56 (24,000) $ 6.13 - 8.75
Cancelled . . . . . . . . . . . . . (7,000) $ 6.59 - 12.44 --
--------- --------
OUTSTANDING DECEMBER 31, 1995 . . . . . 1,063,000 $ 1.56 - 12.44 70,000 $ 6.13 - 14.44
========= ========
Exercisable at:
December 31, 1994 . . . . . . . . . 34,000 $ 1.56 2,000 $ 8.75
December 31, 1995 . . . . . . . . . 400,000 $ 1.56 - 10.06 20,000 $ 6.13
</TABLE>
Director Compensation Plan - During the third quarter of 1995 the
Board of Directors adopted a Nonemployee Director Compensation Plan (the
"Director Plan"). The Director Plan, which is subject to shareholder approval,
provides for the grant of 1,500 shares of Common Stock to each nonemployee
director for each year that individual serves as a director since May 11, 1993.
The Common Stock granted is vested ratably over each year of service and would
be issuable to a director upon termination as a director, except in the event
of removal for cause. A total of approximately $0.4 million was recorded in
both Paid-in Capital and General and Administrative Expense in the accompanying
1995 financial statements.
NOTE 4 -- INCOME TAXES:
At December 31, 1995 the Company had net operating loss carryforwards
of approximately $172 million, subject to the significant limitations described
below. These amounts could be carried forward and would expire in varying
amounts from 1997 through 2004 if not utilized. Due to the limitations imposed
by the Tax Reform Act of 1986, the Company does not expect to be able to
utilize more than approximately $80 million of its net operating loss
carryforwards. However, the Company expects to generate future foreign tax
credits, which will be derived from Egyptian tax payments paid on the Company's
behalf by EGPC, sufficient to more than offset the future U.S. income taxes,
excluding alternative minimum taxes, on its operations. The Company expects to
pay future income taxes, excluding Egyptian income taxes paid on its behalf by
EGPC, equal to approximately 2% of its pretax income which represents U.S.
alternative minimum taxes.
In accordance with the Tax Reform Act of 1986, usage of net operating
loss carryforwards is subject to limitations in future years if certain
ownership changes occur. Such ownership changes have occurred. During the
period following the ownership change, the limitation is the sum of (i) an
annual amount (estimated to be approximately $4 million) determined by the
value of the Company immediately before the ownership change, adjusted to
reflect the increase in value resulting from the cancellation of indebtedness
resulting from the reorganization, multiplied by a statutorily determined
interest rate; and (ii) the amount of built-in gains realized during the
five-year period following the ownership change. The Company's built-in gain
is the amount by which the fair market value of its assets exceeded tax basis
at the time of the ownership change. The net operating loss carryforward and
the amount
11
<PAGE> 12
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
available for utilization are subject to review and possible adjustment by the
Internal Revenue Service.
Pretax financial reporting income for the years shown was taxable
under the following jurisdictions:
<TABLE>
<CAPTION>
1993 1994 1995
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
U.S. . . . . . . . . . . . . . . $(1,445) $(1,520) $(2,456)
Egypt . . . . . . . . . . . . . 24,861 25,536 23,082
------ ------ ------
Total . . . . . . . . . . . . $23,416 $24,016 $20,626
====== ====== ======
</TABLE>
Income from the Company's Egyptian operations is also taxable in the U.S., but
is not included in the amounts stated above for the U.S. The 1993, 1994 and
1995 financial reporting income for Egypt includes the revenue dedicated to
payment of foreign taxes of approximately $10.6 million, $10.9 million and $9.8
million, respectively.
The provision for income taxes for the years shown was comprised of
the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Current tax expense:
U.S. alternative minimum tax . . . . . $ 328 $ 259 $ 193
Foreign--Egyptian . . . . . . . . . . . 12,990 10,560 16,036
Deferred tax expense (benefit):
Foreign--Egyptian . . . . . . . . . . . (2,412) 306 (6,214)
------ ------ -------
Total provision . . . . . . . . . . . . . $ 10,906 $ 11,125 $ 10,015
======= ======== ========
</TABLE>
The provision for income taxes for the years shown differs from the
amount of income tax determined by applying the U.S. statutory federal income
tax rate to pretax income as a result of the following differences:
<TABLE>
<CAPTION>
1993 1994 1995
--------- -------- --------
<S> <C> <C> <C>
Statutory U.S. tax rate . . . . . . . . . . . . . . . . . . . . 35.00% 35.00% 35.00%
Increase (decrease) in rate resulting from:
Egyptian tax on Egyptian earnings . . . . . . . . . . . . . 45.17% 45.24% 47.62%
Realization of net operating loss carryforward benefits . . (33.60%) (33.92%) (34.06%)
----- ----- -----
Effective tax rate . . . . . . . . . . . . . . . . . . . 46.57% 46.32% 48.56%
===== ===== =====
</TABLE>
12
<PAGE> 13
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred U.S. and Egyptian tax assets (liabilities) are comprised of
the following at the dates shown:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1994 1995
---------------------- ---------------------
U.S. Egyptian U.S. Egyptian
--------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
Depreciation, depletion and amortization . . . $ 1,774 $ (4,520) $ 3,138 $ (2,738)
Other capitalized expenses . . . . . . . . . . 169 -- 677 --
Net operating loss carryforwards . . . . . . . 63,394 -- 60,225 --
AMT carryover . . . . . . . . . . . . . . . . 2,709 -- 2,893 --
Concession agreement . . . . . . . . . . . . . -- (4,691) -- (259)
-------- ------- ------- -------
Gross deferred tax assets (liabilities) . . 68,046 (9,211) 66,933 (2,997)
Deferred tax asset valuation allowance . . . . (68,046) -- (66,933) --
-------- ------- ------- -------
Net deferred tax assets (liabilities) . . $ -- $ (9,211) $ -- $ (2,997)
======== ======= ======= =======
</TABLE>
The change in the valuation allowance during 1994 and 1995 was a
decrease of $5 million and $1.1 million, respectively, resulting primarily from
the realization of net operating loss carryforwards. No benefit for the
remaining U.S. net operating loss carryforwards or the other U.S. deferred tax
assets has been recognized in the accompanying financial statements, as the
Company believes, based on its current operations, its current proved reserves
and existing income tax laws and regulations, no incremental future tax
benefits will be derived.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
Substantially all of the Company's operations and reserves are located
in Egypt and, therefore, are subject to certain risks relating to economic and
political stability in Egypt and the surrounding region. The Company is
exposed to certain risks due to its concentration of Egyptian operations, which
include possible changes in Egyptian laws, particularly relating to foreign
investments and taxation, renegotiation or modification of existing contracts
and expropriation. Adverse developments in Egypt and future changes in
Egyptian governmental regulations and policies could have a material adverse
effect on the Company. The Company does not insure against loss of production
or political risks. The carrying amount of identifiable assets (excluding
cash and cash equivalents in U.S. banks and intercompany balances) of the
Company's foreign operations at December 31, 1994 and 1995 totaled $29.4
million and $46.8 million (including approximately $19.9 million and $14
million related to receivables for payment of foreign taxes which are offset by
an equal amount of foreign tax liabilities), respectively.
Egypt retains the right of requisition of production from Egyptian
concessions and cancellation of the concession agreements upon the occurrence
of specific events, including a national emergency due to war, imminent
expectation of war or internal causes, unauthorized assignment of interests in
the concession, the concession holder being adjudicated bankrupt by a court of
competent jurisdiction and intentional extraction of any mineral not authorized
by the concession agreement. Requisition or cancellation of the Company's
concession agreements as a result of the foregoing or for any other reasons
would have a material adverse effect on the Company.
A portion of the Company's operating revenues represents the sale of
crude oil produced from Egyptian concessions and allocated to the Company for
reimbursement of operating, development and exploration costs. These costs are
subject to review and approval by EGPC.
13
<PAGE> 14
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management does not expect the amount of costs rejected for reimbursement by
EGPC to have a material adverse effect on the Company's financial position or
results of operations.
Various lawsuits are pending against the Company. Management is of
the opinion, based on advice of independent legal counsel, that the ultimate
outcome of all pending litigation is highly unlikely to have a material effect
on the financial position or results of operations of the Company.
The Company is committed, under certain circumstances, to pay $1.8
million pursuant to various employment contracts with certain key employees.
NOTE 6 -- SALES TO MAJOR CUSTOMERS:
Sales to EGPC accounted for 96%, 99% and 100% of the Company's
consolidated oil and gas revenues in 1993, 1994 and 1995, respectively.
NOTE 7 -- SUBSEQUENT EVENTS:
In January 1996 the Company completed the initial stages of project
financing for the Qarun Concession development and borrowed the first $12.5
million installment of what will ultimately become a $50 million loan facility.
This financing was arranged by the International Finance Corporation, an
affiliate of the World Bank. The loan will be secured by the stock and assets
of the Company's wholly-owned subsidiary, Phoenix Resources Company of Qarun,
and prior to the completion of the development project the loan will be
guaranteed by the Company. Interest payments will commence June 15, 1996 and
will be payable semi-annually at a rate equal to the London Inter-Bank Offered
Rate plus 2- 3/8% to 3%. Semi-annual principal payments commence June 15, 1998
and continue through 2002.
During February 1996 the Company purchased 100,000 shares of its
Common Stock in open market transactions at a price of $19.00 per share. All
such shares are held as treasury stock.
14
<PAGE> 15
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
The information in this section is based on engineering estimates of
oil and gas reserves, using the methods and assumptions prescribed by the SEC
for such calculations. Assumed sales prices of hydrocarbons were, as required,
those prices in effect at the respective dates indicated, with no effect given
to price changes which have occurred since those dates or to potential
increases or decreases in prices. The estimation of oil and gas reserves is
not an exact science. Estimates of economically recoverable oil and gas
reserves and of the future net revenues from those reserves depend on a number
of assumptions, all of which may, and frequently do, vary materially from
actual results.
EGPC is required to pay, on behalf of the Company, all Egyptian
government royalties and the Company's Egyptian income taxes from its share of
production. The reserve information presented in the following tables includes
reserves attributable to such tax payments on behalf of the Company by EGPC and
the related deductions for Egyptian income taxes and, accordingly, the reserve
information shown for 1993 and 1994 has been restated from amounts previously
reported.
The value of proved natural gas quantities shown in the table below
has been reduced to account for the currently limited access to natural gas
markets.
Net proved reserves of crude oil and natural gas of the Company were
estimated as of December 31, 1993, 1994 and 1995 by independent petroleum
engineers, Netherland, Sewell & Associates, Inc., of Dallas, Texas.
<TABLE>
<CAPTION>
VALUES OF RESERVES (UNAUDITED)
Future Net Revenues (In thousands)
------------------------------------------------------------------------
Total Present Value
(Undiscounted) (Discounted at 10%)
At December 31, At December 31,
---------------------------------- ------------------------------------
1993 1994 1995 1993 1994 1995
-------- -------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Proved Developed
Producing:
United States . . . . $ 971 $ -- $ -- $ 849 $ -- $ --
Egypt . . . . . . . . 49,978 52,168 63,579 38,402 41,769 52,361
------- ------- ------- ------- ------- -------
Subtotal . . . . . . 50,949 52,168 63,579 39,251 41,769 52,361
------- ------- ------- ------- ------- -------
Proved Developed
Nonproducing:
Egypt . . . . . . . . 17,112 18,930 27,915 10,519 10,748 17,487
------- ------- ------- ------- ------- -------
Proved Undeveloped:
Egypt . . . . . . . . 27,973 77,602 111,840 5,012 27,522 59,511
------- ------- ------- ------- ------- -------
Total Proved Reserves:
United States . . . . 971 -- -- 849 -- --
Egypt . . . . . . . . 95,063 148,700 203,334 53,933 80,039 129,359
------- ------- ------- ------- ------- -------
TOTAL PROVED RESERVES . . . $ 96,034 $ 148,700 $ 203,334 $ 54,782 $ 80,039 $ 129,359
======= ======= ======= ======= ======= ========
Assumed Egyptian
Oil Price . . . . . . $ 13.47 $ 15.73 $ 17.97 $ 13.47 $ 15.73 $ 17.97
</TABLE>
15
<PAGE> 16
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
RESERVE QUANTITY INFORMATION (UNAUDITED)
Oil and gas quantities for Egypt include reserves attributable to the
Company's rights to recover past and future costs, which quantities vary with
price assumptions and cost estimates. In accordance with SEC requirements, the
assumed Egyptian oil price for estimates made as of December 31, 1993, 1994 and
1995 was $13.47, $15.73 and $17.97, respectively. Oil includes oil and gas
condensate and is stated in thousands of barrels; gas is stated in millions of
cubic feet and includes all gas produced, whether or not sold.
<TABLE>
<CAPTION>
U.S. EGYPT TOTAL
-------------- ---------------- -----------------
OIL GAS OIL GAS OIL GAS
------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Proved Reserves:
----------------
Beginning balance . . . . . . . . 38 235 13,353 24,022 13,391 24,257
Revisions of previous estimates . 42 45 1,769 6,484 1,811 6,529
Extensions, discoveries and
other additions . . . . . . . . -- -- 911 8,252 911 8,252
Production . . . . . . . . . . . (25) (171) (1,819) (1,442) (1,844) (1,613)
------ ------ ------ ------ ------ ------
Ending balance . . . . . . . . 55 109 14,214 37,316 14,269 37,425
====== ====== ====== ====== ====== ======
Proved Developed Reserves:
--------------------------
Beginning balance . . . . . . . . 38 235 8,906 3,935 8,944 4,170
====== ====== ====== ====== ====== ======
Ending balance . . . . . . . . . 55 109 11,157 5,771 11,212 5,880
====== ====== ====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1994
Proved Reserves:
----------------
Beginning balance . . . . . . . . 55 109 14,214 37,316 14,269 37,425
Revisions of previous estimates . (43) (89) (979) (3,914) (1,022) (4,003)
Extensions, discoveries and
other additions . . . . . . . . -- -- 8,785 1,057 8,785 1,057
Production . . . . . . . . . . . (4) (18) (1,981) (1,793) (1,985) (1,811)
Sales of reserves in place . . . (8) (2) -- -- (8) (2)
----- ---- ------ ------- ------ ------
Ending balance . . . . . . . . -- -- 20,039 32,666 20,039 32,666
====== ====== ====== ====== ====== ======
Proved Developed Reserves:
-------------------------
Beginning balance . . . . . . . . 55 109 11,157 5,771 11,212 5,880
====== ====== ====== ====== ====== ======
Ending balance . . . . . . . . . -- -- 8,998 4,110 8,998 4,110
====== ====== ====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1995
Proved Reserves:
----------------
Beginning balance . . . . . . . . -- -- 20,039 32,666 20,039 32,666
Revisions of previous estimates . -- -- (1,025) (9,771) (1,025) (9,771)
Extensions, discoveries and
other additions . . . . . . . . -- -- 8,699 4,810 8,699 4,810
Production . . . . . . . . . . . -- -- (1,995) (1,796) (1,995) (1,796)
------ ------ ------ ------ ------ ------
Ending balance . . . . . . . . -- -- 25,718 25,909 25,718 25,909
====== ====== ====== ====== ====== ======
Proved Developed Reserves:
-------------------------
Beginning balance . . . . . . . . -- -- 8,998 4,110 8,998 4,110
====== ====== ====== ====== ====== ======
Ending balance . . . . . . . . . -- -- 9,555 6,317 9,555 6,317
====== ====== ====== ====== ====== ======
</TABLE>
16
<PAGE> 17
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(In thousands)
<TABLE>
<CAPTION>
EGYPT
-------
<S> <C>
DECEMBER 31, 1994
Proved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,620
Unproved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,004
------
18,624
Accumulated DD&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,984
------
Net capitalized costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,640
======
DECEMBER 31, 1995
Proved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,948
Unproved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 894
------
40,842
Accumulated DD&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,746
------
Net capitalized costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,096
======
</TABLE>
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES
(In thousands)
<TABLE>
<CAPTION>
U.S. EGYPT TOTAL
------ ------ -------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Exploration costs . . . . . . . . . . . . . . . . . . . . . . $ 59 $ 2,941 $ 3,000
Development costs . . . . . . . . . . . . . . . . . . . . . . 35 (13) 22
YEAR ENDED DECEMBER 31, 1994
Exploration costs . . . . . . . . . . . . . . . . . . . . . . $ -- $ 4,059 $ 4,059
Development costs . . . . . . . . . . . . . . . . . . . . . . -- 244 244
YEAR ENDED DECEMBER 31, 1995
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . $ -- $ 408 $ 408
Exploration costs . . . . . . . . . . . . . . . . . . . . . . -- 12,861 12,861
Development costs . . . . . . . . . . . . . . . . . . . . . . -- 8,949 8,949
</TABLE>
17
<PAGE> 18
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED)
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves was calculated based on prices and economic
conditions in effect at each respective year-end. The standardized measure of
discounted future net cash flows should not necessarily be equated with the
fair market value of the Company's oil and gas reserves.
<TABLE>
<CAPTION>
U.S. EGYPT TOTAL
---------- --------- ----------
(In thousands)
<S> <C> <C>
DECEMBER 31, 1993
Future cash inflows . . . . . . . . . . . . . . . . . . . . . . $ 1,131 $ 227,891 $ 229,022
Future production and development costs . . . . . . . . . . . . (160) (76,491) (76,651)
Future Egyptian income tax expense . . . . . . . . . . . . . . -- (56,337) (56,337)
------- -------- ---------
Future net cash flows . . . . . . . . . . . . . . . . . . . 971 95,063 96,034
10% annual discount for estimated timing of net cash flow . . . (122) (41,130) (41,252)
------- -------- ---------
Standardized measure of discounted future net cash flows . . $ 849 $ 53,933 $ 54,782
======= ======== =========
DECEMBER 31, 1994
Future cash inflows . . . . . . . . . . . . . . . . . . . . . . $ -- $ 372,285 $ 372,285
Future production and development costs . . . . . . . . . . . . -- (134,192) (134,192)
Future Egyptian income tax expense . . . . . . . . . . . . . . -- (89,393) (89,393)
------- -------- ---------
Future net cash flows . . . . . . . . . . . . . . . . . . . -- 148,700 148,700
10% annual discount for estimated timing of net cash flow . . . -- (68,661) (68,661)
------- -------- ---------
Standardized measure of discounted future net cash flows . . $ -- $ 80,039 $ 80,039
======= ======== =========
DECEMBER 31, 1995
Future cash inflows . . . . . . . . . . . . . . . . . . . . . . $ -- $ 516,193 $ 516,193
Future production and development costs . . . . . . . . . . . . -- (180,725) (180,725)
Future Egyptian income tax expense . . . . . . . . . . . . . . -- (132,134) (132,134)
------- -------- --------
Future net cash flows . . . . . . . . . . . . . . . . . . . -- 203,334 203,334
10% annual discount for estimated timing of net cash flow . . . -- (73,975) (73,975)
------- --------- ---------
Standardized measure of discounted future net cash flows . . $ -- $ 129,359 $ 129,359
======= ======== =========
</TABLE>
Following are the principal sources of changes in the standardized
measure of discounted future net cash flows during the years shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
---------- --------- --------
(In thousands)
<S> <C> <C> <C>
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . $ 73,524 $ 54,782 $ 80,039
Sales and transfers, net of production costs . . . . . . . . . (16,461) (16,555) (17,012)
Net changes in sales prices, net of production costs . . . . . (21,181) 22,425 26,831
Extensions, discoveries and improved recovery,
net of future production and development costs . . . . . . . 5,015 22,048 48,250
Changes in estimated future development costs . . . . . . . . . (2,080) -- (16,971)
Accrued development costs incurred in the current year . . . . -- -- 4,142
Revisions of quantity estimates . . . . . . . . . . . . . . . . 10,447 (6,556) (7,831)
Accretion of discount . . . . . . . . . . . . . . . . . . . . . 7,353 5,393 8,004
Changes in production rates (timing) and other . . . . . . . . (1,835) (1,498) 3,907
------- ------- --------
Ending balance . . . . . . . . . . . . . . . . . . . . . . $ 54,782 $ 80,039 $ 129,359
======= ======= ========
</TABLE>
In the tables above, no U.S. income tax expense is provided due to the
utilization of net operating loss carryforwards, the availability of future
foreign tax credits and the insignificance of alternative minimum tax. Changes
in future Egyptian income taxes and the equal and offsetting amount of changes
in future cash inflows have been excluded.
18
<PAGE> 19
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)
RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES
(EXCLUDING CORPORATE OVERHEAD AND INTEREST)
(In thousands)
<TABLE>
<CAPTION>
U.S. EGYPT TOTAL
-------- -------- --------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Oil and gas revenues . . . . . . . . . . . . . . . . . . $ 839 $ 21,463 $ 22,302
Revenues dedicated to foreign tax liability . . . . . . -- 10,578 10,578
------- ------- -------
Operating revenues . . . . . . . . . . . . . . . . . . 839 32,041 32,880
Production costs . . . . . . . . . . . . . . . . . . . . (228) (5,613) (5,841)
Depreciation, depletion and amortization . . . . . . . . (533) (1,361) (1,894)
Egyptian tax provision . . . . . . . . . . . . . . . . . -- (10,578) (10,578)
------- ------- -------
Results of operations from producing activities . . . . $ 78 $ 14,489 $ 14,567
======= ======= ========
YEAR ENDED DECEMBER 31, 1994
Oil and gas revenues . . . . . . . . . . . . . . . . . . $ 108 $ 21,748 $ 21,856
Revenues dedicated to foreign tax liability . . . . . . -- 10,866 10,866
------- ------- -------
Operating revenues . . . . . . . . . . . . . . . . . . 108 32,614 32,722
Production costs . . . . . . . . . . . . . . . . . . . . (120) (5,181) (5,301)
Depreciation, depletion and amortization . . . . . . . . (212) (1,966) (2,178)
Egyptian tax provision . . . . . . . . . . . . . . . . . -- (10,866) (10,866)
------- ------- -------
Results of operations from producing activities . . . . $ (224) $ 14,601 $ 14,377
======= ======= ========
YEAR ENDED DECEMBER 31, 1995
Oil and gas revenues . . . . . . . . . . . . . . . . . . $ -- $ 23,433 $ 23,433
Revenues dedicated to foreign tax liability . . . . . . -- 9,822 9,822
------- ------- -------
Operating revenues . . . . . . . . . . . . . . . . . . -- 33,255 33,255
Production costs . . . . . . . . . . . . . . . . . . . . -- (6,421) (6,421)
Depreciation, depletion and amortization . . . . . . . . -- (5,768) (5,768)
Egyptian tax provision . . . . . . . . . . . . . . . . . -- (9,822) (9,822)
------- ------- -------
Results of operations from producing activities . . . . $ -- $ 11,244 $ 11,244
======= ======= =======
</TABLE>
In the tables above, no U.S. income tax expense is provided due to the
utilization of net operating loss carryforward, the availability of future
foreign tax credits and the insignificance of alternative minimum tax.
<PAGE> 20
SCHEDULE II
THE PHOENIX RESOURCE COMPANIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning at End
of Year Additions Deductions of Year
---------- --------- ---------- -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts .. $ 88 $ -- $ 88 $ --
Deferred tax asset valuation
allowance ...................... 76,574 -- 3,498 $ 73,076
YEAR ENDED DECEMBER 31, 1994
Deferred tax asset valuation
allowance ...................... $ 73,076 $ -- $ 5,030 $ 68,046
YEAR ENDED DECEMBER 31, 1995
Deferred tax asset valuation
allowance ..................... $ 68,046 $ -- $ 1,113 $ 66,933
</TABLE>
S-1
