<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
(AMENDMENT NO. 32)
Pursuant to Section 14(d)(4) of the
Securities Exchange Act of 1934
PENNZOIL COMPANY
(Name of Subject Company)
PENNZOIL COMPANY
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $0.83 1/3 PER SHARE
(including the associated Preferred Stock Purchase Rights)
(Title of Class of Securities)
709903 10 8
(CUSIP Number of Class of Securities)
LINDA F. CONDIT
CORPORATE SECRETARY
PENNZOIL COMPANY
PENNZOIL PLACE, P.O. BOX 2967
HOUSTON, TEXAS 77252-2967
(713) 546-8910
(Name, address and telephone number of person authorized
to receive notice and communications on behalf of the person(s) filing
statement)
Copies to:
Moulton Goodrum, Jr. Charles F. Richards, Jr.
Baker & Botts, L.L.P. Richards, Layton & Finger
One Shell Plaza One Rodney Square
Houston, Texas 77002-4995 P.O. Box 551
(713) 229-1234 Wilmington, Delaware 19899-0551
(302) 658-6541
<PAGE> 2
This Amendment No. 32 (this "Amendment") amends and supplements the
Solicitation/Recommendation Statement on Schedule 14D-9, as amended, originally
filed on July 1, 1997 by Pennzoil Company, a Delaware corporation ("Pennzoil"
or the "Company"), relating to a tender offer commenced by Resources Newco,
Inc. ("Newco"), a wholly owned subsidiary of Union Pacific Resources Group Inc.
("UPR"), on June 23, 1997.
All capitalized terms used in this Amendment without definition have
the meanings attributed to them in the Schedule 14D-9.
The items of the Schedule 14D-9 set forth below are hereby amended and
supplemented as set forth below by adding the following:
ITEM 2. TENDER OFFER OF THE BIDDER
Item 2 of the Schedule 14D-9 is hereby amended and supplemented by
adding the following:
On October 7, 1997, Newco amended and supplemented its Offer to
Purchase dated June 23, 1997 (the "Original Offer to Purchase"). The tender
offer described in the Original Offer to Purchase (the "Original Offer")
constituted an offer to purchase up to 50.1% of the Shares outstanding on a
fully diluted basis for a purchase price of $84 per Share, net to the seller in
cash, without interest thereon. According to the Original Offer, Shares not
tendered and purchased pursuant to the Original Offer were to be converted by
means of a merger into shares of Common Stock, no par value, of UPR as
described in the Original Offer to Purchase.
Under the terms and conditions described in the Supplement dated
October 7, 1997 to the Original Offer to Purchase, Newco has amended and
supplemented the Original Offer to Purchase to provide that Newco is offering to
purchase all Shares (rather than 50.1% of the fully-diluted Shares), for a price
of $84, net to the seller in cash, without interest thereon. The Supplement
states that if the offer as so amended and supplemented (the "Revised UPR
Offer") is consummated, Newco intends to effect a merger with Pennzoil (the
"Revised Squeeze-Out Merger") in which all outstanding Shares not tendered in
the Revised UPR Offer would be converted into the right to receive $84.00 per
share, in cash, without interest.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
Item 4 of the Schedule 14D-9 is hereby amended and supplemented by
adding the following:
RECOMMENDATION OF THE BOARD OF DIRECTORS. On October 14, 1997, the
Board of Directors met to review the terms of and consider the Revised UPR
Offer. The Board also received and
-1-
<PAGE> 3
considered updates of recent operational and financial developments concerning
the Company, including updates to the Company's strategic plan.
THE BOARD HAS UNANIMOUSLY DETERMINED THAT THE REVISED UPR OFFER IS
INADEQUATE AND NOT IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE
COMPANY REJECT THE REVISED UPR OFFER AND NOT TENDER THEIR SHARES PURSUANT TO
THE REVISED UPR OFFER.
At the same meeting, the Board reaffirmed its determination that the
Company's and its stockholders' interests would be best served if the Company
remains an independent company.
Copies of a letter to the stockholders of the Company communicating
the Board's recommendation with respect to the Revised UPR Offer, and a press
release announcing the Board's determinations, are filed as Exhibits 89 and 90
hereto, respectively, and are incorporated herein by reference.
REASONS FOR RECOMMENDATION. The Board noted that with the exception
of reasons related specifically to the coercive two-tier, front-end loaded
structure of UPR's original proposal (which is eliminated by the Revised UPR
Offer), the reasons for the Board's rejection of the Original Offer continue to
apply. In reaching its determination and recommendation expressed above with
respect to the Revised UPR Offer, the Board considered a number of factors,
including, without limitation, the following:
(a) The Board's familiarity with, and management's review
of, the Company's business, financial condition, results of
operations, business strategy and future prospects, including in
particular the strategy and prospects reflected in the Company's
strategic plan, and with the nature of the businesses in which the
Company operates, and the Board's belief that the Revised UPR Offer
does not reflect the long-term values inherent in the Company. In
this connection, the Board particularly considered the progress made
in the last two years toward restructuring and repositioning Pennzoil
into a top-performing operating company, including the following
operational improvements:
(i) The Board's reduction in Pennzoil's annual
dividend rate from $3.00 to $1.00 per share in late 1995 is
providing Pennzoil with over $90 million per year to be
reinvested in long-term growth, and Pennzoil's successful
reduction of general and administrative expense since 1995 is
providing an additional $80 million per year to be so
invested.
-2-
<PAGE> 4
(ii) Pennzoil's successful program of
restructuring its North American oil and gas operations to
focus on core areas, reduce costs and increase return on
assets has resulted in (1) per barrel operating costs being
reduced from $5.93 in 1993 to $4.41 in 1996, with
additional reductions to about $4.00 being expected, and (2)
per barrel finding and development costs being reduced from
nearly $6.00 in 1993 to $3.87 in 1996.
(iii) Pennzoil's upgrading of its North American
core assets and aggressive cost-cutting initiatives have
resulted in 1996 net income of $134 million, or $2.88 per
share, compared to a loss of $305 million, or $6.60 per share,
in 1995 (which included a $265.5 million accounting charge);
in addition, recurring net income for the first half of 1997
is 118% higher than comparable results for the first half of
1996; Pennzoil has had seven consecutive quarters of
year-on-year recurring earnings improvement through the
second quarter of 1997.
(iv) Cash flows from operations (before working
capital changes) rose significantly in 1996, reaching $432
million, a $132 million increase over 1995, and cash flows for
the first half of 1997 continued to improve, reaching $279
million, compared to $221 million in the first half of 1996.
(v) Pennzoil reduced debt by $266 million from
the end of 1995 to the end of the first half of 1997.
(vi) Pennzoil has installed experienced new senior
management for its oil and gas operations that the Board
believes will be capable of successfully implementing the
initiatives for those operations included in the Company's
strategic plan.
As a part of its consideration of operational improvements, the
Board reviewed and took into account updates in financial and operating
performance and other developments since its determination with respect
to the Original Offer, including the release of second quarter 1997
financial results and a review of expected results for the third
quarter of 1997 and the year ending December 31, 1997.
The Board also considered pending and completed initiatives
included in the Company's strategic plan and received interim updates
concerning significant developments in particular areas that had
occurred since the Board's approval of a comprehensive update to the
plan in June 1997. The interim updates involved both positive and
negative revisions to reflect
-3-
<PAGE> 5
recent developments in the Company's oil and gas, manufacturing,
marketing and franchise businesses and the current outlook for oil and
gas prices.
(b) Presentations by the Company's management (made at
meetings of the Board in June and July 1997 and updated at the
September 11 and October 14, 1997 meetings) as to the Company's
prospects for future growth, profitability and share price
appreciation, as reflected in the Company's strategic plan.
(c) The Board's belief that the Company is just beginning
to realize for its stockholders the values that will be unlocked as a
result of the various strategic initiatives implemented over the past
several years and others in the process of implementation, and that
pursuit of the Company's strategic plan, including the refinements
that may result from management's ongoing review, will produce greater
long-term value for the stockholders than the Revised UPR Offer.
(d) The Board's belief that the marketplace and many of
Pennzoil's stockholders do not yet fully appreciate and recognize the
benefits already achieved, and still to be achieved, under the
Company's strategic plan.
(e) A presentation by Lehman Brothers Inc. ("Lehman
Brothers"), Evercore Group Inc. ("Evercore Group") and J.P. Morgan
Securities Inc. ("J.P. Morgan"), financial advisors to the Company,
concerning the Company, UPR and the financial aspects of the Revised
UPR Offer, and the opinions of Lehman Brothers, Evercore Group and
J.P. Morgan to the effect that, as of October 14, 1997, the
consideration offered to stockholders of the Company pursuant to the
Revised UPR Offer is inadequate from a financial point of view (such
opinions having been expressed after review of many of the factors
referred to herein and various financial criteria used in assessing
the Revised UPR Offer, and having been based on various assumptions
and subject to various limitations, which were reviewed for the Board
as part of the presentation of Lehman Brothers, Evercore Group and
J.P. Morgan). The full text of the opinions of Lehman Brothers,
Evercore Group and J.P. Morgan are included as Exhibits 91, 92 and 93
hereto and may be read in their entirety.
(f) The numerous conditions to which the Revised UPR
Offer is subject, including many conditions that are in the reasonable
discretion of Newco.
(g) The absence of any commitments for the financing that
would be necessary for UPR to consummate the purchase of Shares
pursuant to the Revised UPR Offer.
-4-
<PAGE> 6
(h) Information obtained from UPR in the course of
litigation discovery, including (i) UPR's representation to the
Internal Revenue Service in 1996 that its drill site inventory was not
sufficient to keep's UPR's "overall production and reserves from
declining significantly in the near future" and that UPR needed to
make strategic acquisitions of 750 million barrels of oil equivalent
in the years 1997 through 2001 in order to maintain its goal of 10%
production growth per year, (ii) internal UPR documents indicating
UPR's recognition that Pennzoil's stock price was likely to improve
because of favorable developments and that the timing of UPR's
Original Offer involved an effort to "blur the market's perception" of
the reasons for that improvement, (iii) estimates by UPR's own
financial advisers in early 1997 that include valuations for Pennzoil
higher than that reflected in the Revised UPR Offer and (iv)
statements by UPR that it has additional valuations of Pennzoil in
excess of $84 per share that it has withheld from Pennzoil and the
public and that a court has ordered UPR to produce.
(i) The Board's consideration of statements by UPR that
it is better able to exploit Pennzoil's assets than Pennzoil is able
to do on its own and the Board's judgment that (i) UPR's drilling
strategy is more suited for its own less diversified reserve position,
which involves heavy exposure to the Austin Chalk, where steep
decline curves necessitate an extremely rapid drilling strategy and
(ii) the Company's own management is fully capable of developing and
implementing the best strategy for exploiting Pennzoil's existing
assets, growing Pennzoil's production and reserve base and delivering
the value inherent in Pennzoil to Pennzoil shareholders.
(j) The Board's belief that the Revised UPR Offer poses a
threat to the Company's stockholders in that UPR is seeking to usurp
for itself the future growth in revenues, net income and cash flow and
stock price appreciation that are only beginning to result from the
Company's completed cost-cutting efforts and operational improvements
and the Company's pending and completed strategic initiatives included
in the Company's strategic plan.
(k) The concern that the purchase of Shares pursuant to
the Revised UPR Offer would involve illegal trading on the basis of
material inside information concerning Pennzoil that was improperly
obtained by UPR's financial adviser in the course of litigation
discovery.
(l) The disruptive effect of the Revised UPR Offer,
including UPR's announcement of its intent to dispose of significant
assets of Pennzoil and that it is engaging in discussions with others
regarding the sale of such assets, on the Company's existing and
prospective business relationships.
-5-
<PAGE> 7
(m) The advantages of the existing ability of Pennzoil to
engage in acquisition transactions that might be structured as a
tax-free pooling of interests or to effect certain transactions that
would restructure the businesses of Pennzoil on a tax-free basis, such
as a spin-off of one or more businesses.
(n) The Board's consideration of a statement by the
chairman of UPR that, while not part of the tender offer, if Pennzoil
would begin negotiations with UPR, UPR would consider a transaction
structure that would provide Pennzoil shareholders with the
opportunity to benefit from a future increase in value of Pennzoil's
international exploration and production assets, above the $600
million which UPR states that it has ascribed to those assets. The
statement by UPR's chairman did not cause the Board to change any of
its conclusions with respect to the Revised UPR Offer because (in
addition to the suggestion's being only a general concept that is not
part of the offer) the Board believes that the inadequacy of the
Revised UPR Offer is not limited to an undervaluation of Pennzoil's
international assets and realization of any incremental value under
such a structure would be dependent on decisions by UPR's management
and would at least to some degree involve risk associated with UPR
taken as a whole. In any event, the Board believes that this is not
the time to sell or negotiate for the sale of the Company.
(o) The Board's and management's commitment to protecting
the best interests of the stockholders of the Company and enhancing
the value of the Company.
The foregoing discussion of the information and factors considered and
given weight by the Board is not intended to be exhaustive. In view of the
variety of factors considered in its evaluation, the Board did not find it
practicable to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determinations and recommendation.
In addition, individual members of the Board may have given different weights
to different factors.
The Revised UPR Offer is conditioned upon, among other things, the
Rights having been redeemed by the Board or Newco being satisfied in its
reasonable discretion that the Rights have been invalidated or are otherwise
inapplicable to the Revised UPR Offer and (subject to waiver by Newco under
certain conditions) the Revised Squeeze-Out Merger. In light of its decision
discussed above, the Board has reaffirmed its determination not to take any
action to redeem the Rights in response to the Revised UPR Offer.
The Revised UPR Offer is also conditioned upon (subject to waiver by
Newco under certain conditions) the acquisition of Shares pursuant to the
Revised UPR Offer and the Revised Squeeze-Out Merger having been approved
pursuant to Section 203 of the Delaware General Corporation Law ("Section 203")
or the provisions of Section 203 being otherwise inapplicable to the acquisition
of Shares pursuant to the Revised UPR Offer and the Revised Squeeze-Out Merger.
In light of its decision discussed
-6-
<PAGE> 8
above, the Board has reaffirmed its determination not to take any action that
would render Section 203 so inapplicable.
The Revised UPR Offer is further conditioned upon (subject to waiver
by Newco under certain conditions) the acquisition of Shares pursuant to the
Revised UPR Offer and the Revised Squeeze-Out Merger having been approved
pursuant to Article Sixth of the Restated Certificate of Incorporation of the
Company ("Article Sixth"). In light of its decision discussed above, the Board
has reaffirmed its determination not to take any action that would render
Article Sixth so inapplicable.
The Revised UPR Offer is also conditioned upon either (1) Newco's
designees having been elected to the Board so that after such election, such
designees constitute a majority of the Board or (2) the Company having entered
into a mutually satisfactory definitive merger agreement with UPR and Newco to
provide for the acquisition of the Company pursuant to the Revised UPR Offer and
the Revised Squeeze-Out Merger. In light of its decision referred to above, the
Board has determined not to take any action with respect to the election of
designees of Newco to the Board or to attempt to negotiate any merger agreement
with UPR or Newco.
PENNZOIL'S STRATEGIC PLAN. Pennzoil began implementation of a new
strategic planning process in 1994. The strategic plan developed then has been
updated from time to time in order to reflect historical results, to take into
account changes in economic assumptions and to reflect new projects and
initiatives and changes in projects and initiatives previously included. A
comprehensive update to the strategic plan was adopted by the Board during a
three-day meeting in June 1997, and the plan has been updated by management
since then to reflect developments and new information relating to particular
areas. The primary purpose of the strategic plan is to provide an analytical
tool for use in charting the Company's strategic direction through systematic
identification and economic evaluation of strategic initiatives and projects
and thereby create shareholder value by focusing management's attention on
opportunities to improve and expand Pennzoil's basic businesses. The
strategic plan is designed as a means for identifying projects and investments
which will provide a return in excess of Pennzoil's weighted average cost of
capital and allows management to determine whether the Company is working on
enough initiatives of sufficient estimated value to create upward pressure on
Pennzoil's stock price as those initiatives proceed. The plan is not intended to
be, and is not, a valuation of the Company.
The strategic plan includes a number of projects and initiatives that
are designed to further Pennzoil's goals of becoming a global producer of oil
and gas, a low-cost, efficient refiner of petroleum products, and a worldwide
marketer of Pennzoil motor oil and other premium automotive products. Among
the major projects and initiatives in the Strategic Plan are: (i) Pennzoil's
4.8% carried interest (i.e., all of the Company's future expenses are paid by
the other parties until project payout) in the Azeri-Chirag-Gunashli unit in
the Caspian Sea offshore Azerbaijan, with estimated
-7-
<PAGE> 9
recoverable reserves of at least 4.7 billion barrels of oil and an "upside"
potential of 6 to 7 billion barrels of oil; (ii) five high-potential
exploration concessions in Egypt, a 75% working interest in Block 8 offshore
Qatar (which is adjacent to and surrounds a prolific oil field), two contracts
to operate fields offshore Lake Maracaibo in Venezuela, as well as the Karabakh
exploratory prospect offshore Azerbaijan which is now being evaluated as a
natural gas development project; (iii) an exploration alliance with Enterprise
Oil plc, which is expected to greatly expand and accelerate the Company's Gulf
of Mexico exploration activity at little cost to Pennzoil; (iv) an aggressive
marketing campaign to increase motor oil market share (Pennzoil brand motor oil
is, and has been for 11 consecutive years, the number one selling motor oil in
the United States, and commands a market share of 21%) and to expand
internationally, as well as to increase sales of non-motor oil products and
develop new products that can be leveraged under the powerful Pennzoil brand
name; and (v) continued rapid growth of Jiffy Lube International, Inc.,
Pennzoil's franchise operation segment (which is the largest fast oil change
service provider in the United States), including the completion of
approximately 200 stores in Sears automotive centers by the end of 1997. The
plan also envisions growth through strategic acquisitions in the oil and gas
and marketing business units. Recently completed major initiatives include (i)
Excel Paralubes, a lube-base oil plant partnership with Conoco, Inc. which is
expected to make the Company one of the lowest cost producers of base oils in
the world and the second largest producer of base oils in the United States;
(ii) an upgrade to the Company's Shreveport refinery, adding a catalytic
cracker and an alkylation unit to increase higher value fuels production; and
(iii) the formation of Penreco, a partnership combining portions of the
specialty petroleum products businesses of Pennzoil with those of Conoco, Inc.
The results that Pennzoil has achieved and will achieve pursuant to
its strategic plan have been and will continue to be affected by a variety of
factors. Thus, Pennzoil's results are affected by, among other things:
general economic, financial and business conditions; commodity prices for
natural gas and crude oil; the effect of weather on natural gas demand and
consumption; competition for drilling rights; the costs of exploration for and
development of petroleum reserves; exploration risks; political risks affecting
exploration and development; the availability of opportunities to acquire oil
and gas and marketing assets and the cost at which such assets may be acquired;
changes in demand for motor oil; competition in the motor oil and fast oil
change businesses; margins and supply and demand in the base oil and speciality
products businesses; the success and costs of advertising and promotional
efforts; the ability to finance projects and initiatives on acceptable economic
terms; mechanical failure in refining operations; unanticipated environmental
liabilities; changes in and compliance with governmental regulations; changes
in tax laws; and the costs and effects of legal proceedings.
Pennzoil's strategic plan is a comprehensive document that contains a
great deal of confidential business planning information, the disclosure of
which would be harmful to Pennzoil and its shareholders. For example,
disclosure of the assumptions contained in the strategic plan
-8-
<PAGE> 10
(such as natural gas and oil price assumptions and current and projected
margins for motor oil, base oils, specialty products and the quick lube
business) would give Pennzoil's competitors (such as UPR), customers' and
suppliers' insight into Pennzoil's business planning (such as the Company's view
of future market conditions), and also provide them with Pennzoil's planning
estimates of its future costs and margins, pricing strategies and volumes.
Disclosure of this information would put Pennzoil at a competitive
disadvantage, because Pennzoil's competitors could use it to optimize their own
profits and market share at Pennzoil's expense, while Pennzoil would not have
the benefit of similar information from its competitors. In addition, if
Pennzoil's customers and suppliers knew Pennzoil's current and projected
margins, they could use that information in negotiations with Pennzoil to try
to obtain better prices, thereby reducing Pennzoil's profits. The strategic
plan also details Pennzoil's oil and gas exploration and exploitation plans and
strategies, reveals Pennzoil's strategies for competing in the refined oil
products manufacturing and marketing businesses, and reflects Pennzoil's
business plans and strategies for the highly competitive fast change automotive
motor oil business. Because disclosure of this information would assist
Pennzoil's competitors to the detriment of Pennzoil and its shareholders,
Pennzoil does not make public the contents of its highly confidential strategic
plan. Pennzoil's policy of maintaining the confidentiality of its strategic
plan is consistent with industry norms.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
Item 5 of Schedule 14D-9 is hereby amended and supplemented by adding
the following:
The Company has retained Abernathy MacGregor Group as a public
relations advisor in connection with the previous UPR Proposal and the Revised
UPR Offer.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
Item 8 of Schedule 14D-9 is hereby amended and supplemented by adding
the following:
On October 14, 1997, Pennzoil asked the Court for leave to file an
amended counterclaim and third-party action in the litigation between Pennzoil
and UPR pending in the United States District Court for the Northern District of
Texas, Fort Worth Division. The third-party action is against Smith Barney Inc.
("Smith Barney"). The new claims seek preliminary and permanent injunctive
relief barring UPR and Newco from trading in Pennzoil securities (including the
purchase of shares pursuant to the Revised UPR Offer) because they are in
possession of material non-public information regarding Pennzoil. The suit
alleges that the non-public information was obtained by Smith Barney (UPR's
financial advisor in connection with the Revised UPR Offer) in the course of
litigation and is subject to a stipulation and court order prohibiting the use
of highly confidential information for the purpose of providing financial advice
to any party or otherwise for any purpose other than the litigation. In
reliance on the stipulation and
-9-
<PAGE> 11
order, Pennzoil produced numerous highly confidential documents, including
documents dealing with Pennzoil's long-term strategic plan. According to the
suit, Smith Barney has acknowledged being provided with highly confidential
documents produced in the litigation by Pennzoil in reliance on the stipulation
and order, while at the same time Smith Barney continues to provide UPR with
business and financial advice in connection with the Revised UPR Offer.
Pennzoil alleges that UPR and Smith Barney cannot trade in Pennzoil
securities by reason of possession of material inside information and that they
are prohibited by the stipulation and order from making public disclosure of
the information, which includes confidential business strategies and other
commercially sensitive information.
Pennzoil has asked the United States District Court to set the case
for trial in February 1998.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
*89. Letter to stockholders of the Company dated October 14, 1997.
90. Text of press release dated October 14, 1997 issued by the Company.
*91. Opinion of Lehman Brothers dated October 14, 1997 delivered to the Company.
*92. Opinion of Evercore Group dated October 14, 1997 delivered to the Company.
*93. Opinion of J. P. Morgan dated October 14, 1997 delivered to the Company.
94. Text of press release of the Company dated October 14, 1997.
95. Third Amended Counterclaim and Original Third-Party Action filed by Pennzoil Company
(dated October 14, 1997, United States District Court for the Northern District of Texas,
Fort Worth Division).
</TABLE>
___________
* Included in material sent to shareholders.
-10-
<PAGE> 12
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
PENNZOIL COMPANY
Dated: October 14, 1997 By: /s/ James L. Pate
-----------------------------------
James L. Pate
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
*89. Letter to stockholders of the Company dated October 14, 1997.
90. Text of press release dated October 14, 1997 issued by the Company.
*91. Opinion of Lehman Brothers dated October 14, 1997 delivered to the Company.
*92. Opinion of Evercore Group dated October 14, 1997 delivered to the Company.
*93. Opinion of J. P. Morgan dated October 14, 1997 delivered to the Company.
94. Text of press release of the Company dated October 14, 1997.
95. Third Amended Counterclaim and Original Third-Party Action filed by Pennzoil Company
(dated October 14, 1997, United States District Court for the Northern District of Texas,
Fort Worth Division).
</TABLE>
___________
* Included in material sent to shareholders.
<PAGE> 1
[PENNZOIL LETTERHEAD]
Dear Shareholder:
On October 7, 1997, Union Pacific Resources Group Inc. (UPR)
revised the tender offer it commenced three and a half months ago by changing
it to an offer to acquire all of Pennzoil's shares for $84 per share in cash.
Under UPR's proposal, shares not acquired in the tender offer would be cashed
out in a subsequent merger for the same $84 cash consideration.
ALTHOUGH THE REVISION TO UPR'S OFFER ELIMINATES THE COERCIVE
TWO-TIER, FRONT-END LOADED STRUCTURE OF ITS ORIGINAL PROPOSAL, THE REVISED
OFFER REMAINS, IN THE VIEW OF YOUR BOARD OF DIRECTORS, INADEQUATE AND NOT IN
THE BEST INTERESTS OF PENNZOIL AND ITS SHAREHOLDERS. ACCORDINGLY, YOUR BOARD
OF DIRECTORS RECOMMENDS THAT YOU REJECT UPR'S REVISED PROPOSAL AND NOT TENDER
YOUR SHARES PURSUANT TO UPR'S OFFER.
Your Board of Directors believes that the revised UPR offer
does not reflect the long-term values inherent in Pennzoil and that the
interests of Pennzoil and its shareholders will best be served if Pennzoil
remains an independent company and continues pursuit of its own strategic
initiatives and projects.
Moreover, your Board of Directors believes that the revised
UPR offer poses a threat to Pennzoil's shareholders in that UPR is seeking to
usurp for itself the future growth in revenues, net income and cash flow and
stock price appreciation that are only beginning to result from Pennzoil's
completed cost-cutting efforts and operational improvement and Pennzoil's
pending and completed strategic initiatives included in Pennzoil's strategic
plan.
In arriving at its determination regarding UPR's revised
offer, the Board of Directors gave careful consideration to the factors
described in the accompanying amendment to Pennzoil's Schedule 14D-9. THE
BOARD ALSO REVIEWED UPDATED OPINIONS OF LEHMAN BROTHERS INC., EVERCORE GROUP
INC. AND J.P. MORGAN SECURITIES INC., PENNZOIL'S FINANCIAL ADVISERS, THAT THE
CONSIDERATION TO BE RECEIVED BY PENNZOIL'S SHAREHOLDERS PURSUANT TO UPR'S
REVISED OFFER IS INADEQUATE FROM A FINANCIAL POINT OF VIEW. We urge you to
read the enclosed amendment to the Schedule 14D-9 in its entirety.
Pennzoil's consistently strong recent performance is solid
evidence of Pennzoil's turnaround. Pennzoil's record of progress and continued
improvement is unambiguous. Pennzoil has had seven consecutive quarters of
year-on-year recurring earnings improvement through the second quarter of 1997,
with recurring earnings up 118% to $2.04 per share in the first half of 1997.
Earnings are on track to continue this trend through the third quarter as well.
Pennzoil's cash flow has increased significantly, from $6.49 per share in 1995
to $9.31 per share in 1996, and is expected to exceed $12.00 per share in 1997.
Pennzoil's recently completed refinery projects are already generating an
expected $1 per share of cash flow in 1997 and even more is anticipated in 1998
and beyond. Pennzoil has cut G&A by $80 million since 1995, and reduced per
barrel operating costs at the oil and gas segment by 17% since 1994.
<PAGE> 2
Pennzoil delivered a total return of 42% to its
shareholders--outperforming the E&P sector and more than doubling UPR's total
return to shareholders--from October 1995 through June 20, 1997 (the last day of
trading before the initiation of UPR's hostile tender offer). Stocks in the E&P
sector have risen significantly since June 1997, when UPR's offer was first
announced. Thus, even though Pennzoil outperformed the E&P sector from October
1995 to June 1997, if you assume only that Pennzoil performed in line with the
E&P sector since June, Pennzoil's stock would have increased by 20% or more,
constituting a significant portion of the so-called "premium" being offered by
UPR.
Pennzoil has built a high-potential, worldwide oil and gas
portfolio in prolific hydrocarbon producing basins, like the U.S. Gulf of
Mexico, Qatar, the Caspian Sea, Egypt, Venezuela and Australia. The enormous
value of this portfolio--a portfolio that will substantially increase the
company's proved reserves and create significant shareholder value--is just
beginning to be tapped. This portfolio includes: in the Caspian Sea, a 4.8%
carried interest in the giant Azeri-Chirag-Gunashli project, where there are
estimated recoverable reserves of at least 4.7 billion barrels of oil, as well
as a 30% interest in the Karabakh project; in Egypt, five prospective
concessions covering 9.2 million acres in hydrocarbon charged basins; in Qatar,
Block 8, where drilling is underway on the second of four exploration wells; in
Venezuela, three producing blocks in one of the most exciting oil producing
regions in the world; in Australia, a promising exploration project being
drilled in the Whicher Range, south of Perth, where Pennzoil has a 44% working
interest; and in the U.S. Gulf of Mexico, over 150 blocks in one of the most
prolific areas in the U.S. to explore for and produce crude oil and natural gas,
and where Pennzoil continues to be one of the most active drillers.
As you may have read, litigation discovery has revealed
estimates by UPR's own financial advisers that show valuations for Pennzoil
considerably in excess of $84 per share. As you may not yet know, UPR has
admitted to withholding from Pennzoil and the public additional UPR valuations
of Pennzoil in excess of $84 per share, which a court has ordered UPR to
produce. Moreover, UPR's own documents state that Pennzoil has undergone a
"turnaround" and has "outperformed" other E&P companies since early 1996 and
correctly predicted that there is "more likely good news than bad news" for
Pennzoil.
UPR claims that it can achieve better results from Pennzoil's
properties by applying its own drilling model to them. We believe UPR's
"drilling machine" strategy is a strategy borne out of necessity by reason of
UPR's overexposure to the Austin Chalk, where steep decline curves demand an
extremely rapid drilling strategy. Pennzoil, with its diverse operations
onshore, offshore and in international areas, has experienced management far
more familiar with Pennzoil's properties than UPR, and fully capable of
developing and implementing the best strategy for exploiting Pennzoil's existing
assets, growing Pennzoil's production and reserve base and delivering the value
inherent in Pennzoil to Pennzoil shareholders.
In its considerations, the Board of Directors also noted that,
although UPR's offer is not by its terms subject to any financing contingency,
UPR does not have any commitments for the financing that would be necessary for
it to purchase shares pursuant to its revised offer, and therefore
<PAGE> 3
its willingness and ability to finance this significant all-cash transaction is
still in doubt. UPR's refusal to pay the fees necessary to secure financing
raises questions about the seriousness of its offer.
We remain committed to staying on the course Pennzoil has set
for itself. That course is not consistent with allowing UPR, in an effort to
solve its own problems, to capture the tremendous inherent and upside value of
Pennzoil stock for an inadequate price. We urge you not to tender your shares
to UPR. If you have already tendered, we urge you to withdraw your shares.
October 14, 1997
On behalf of the Board of Directors,
/s/ JAMES L. PATE
James L. Pate
Chairman, President and Chief Executive Officer
<PAGE> 1
EXHIBIT 90
[PENNZOIL LETTERHEAD]
FOR IMMEDIATE RELEASE
Contacts:
Robert Harper Joele Frank/Brian Faw
Corporate Communications Abernathy MacGregor Group
713/546-8536 212/371-5999
PENNZOIL BOARD REJECTS UPR'S REVISED TENDER OFFER
Houston, TX, October 14, 1997 -- The Board of Directors of Pennzoil Company
(NYSE: PZL) today unanimously voted to recommend that Pennzoil shareholders
reject Union Pacific Resources Group Inc.'s (NYSE: UPR) revised hostile tender
offer.
James L. Pate, Chairman and Chief Executive Officer of Pennzoil, said, "After a
thorough review, Pennzoil's Board unanimously concluded that UPR's offer is
inadequate and not in the best interests of Pennzoil and its shareholders. Our
track record over the last two years demonstrates that Pennzoil's turnaround is
well underway, as UPR itself has acknowledged. UPR's attempt to acquire
Pennzoil at this low valuation would rob Pennzoil shareholders of the full
benefits to which they are entitled from the programs and projects already in
place."
In its recommendation to Pennzoil shareholders, the Board cited, among other
things:
o The opinions of Pennzoil's financial advisors, Lehman Brothers Inc., Evercore
Group Inc., and J.P. Morgan Securities Inc., that the revised UPR proposal is
inadequate. The Board believes that the offer does not reflect the fair value
of Pennzoil, and that Pennzoil's continued pursuit of the projects and
programs now underway will produce far greater value for Pennzoil
shareholders than UPR's proposal.
o Pennzoil's consistently strong recent performance is solid evidence of
Pennzoil's turnaround. Pennzoil's record of progress and continued
improvement is unambiguous. Pennzoil has had seven consecutive quarters of
year-on-year recurring earnings improvement through the second quarter of
1997, with recurring earnings up 118% to $2.04 per share, in the first half
of 1997. Earnings are on track to continue this trend through the third
quarter, as well. Pennzoil's cash flow has increased significantly, from
$6.49 per share in 1995, to $9.31 per share in 1996, and is expected to
exceed $12.00 per share in 1997.
-more-
<PAGE> 2
-2-
o Pennzoil delivered a total return of 42% to its stockholders --
outperforming the E&P sector and more than doubling UPR's total return to
stockholders -- from October, 1995 through June 20, 1997 (the last day of
trading before the initiation of UPR's hostile tender offer). Pennzoil's
stock rose 5.5%, while UPR's was down more than 9.1%, from the beginning of
1997 through June 20.
o Stocks in the E&P sector have risen significantly since June, 1997, when the
UPR tender offer was announced. Even though Pennzoil outperformed the E&P
sector from October, 1995 to June, 1997, assuming that, since June, Pennzoil
had only performed in line with the E&P sector, its stock would have
increased by 20% or more, constituting a significant portion of the so-called
"premium" being offered by UPR.
o Pennzoil's recently completed refinery projects are already generating an
expected $1 per share of cash flow in 1997 and even more is anticipated in
1998 and beyond. Pennzoil has cut G&A by $80 million since 1995, and reduced
per barrel operating costs at the oil and gas segment by 17% since 1994.
o UPR's confidential planning documents show that it was well aware of the
likelihood that Pennzoil's stock would be rising to reflect its improved
performance. Indeed, UPR chose to advance its planned tender offer by several
months to take advantage of this anticipated increase.
o Pennzoil has built a high potential, worldwide oil and gas portfolio in
prolific hydrocarbon producing basins, like the U.S. Gulf of Mexico, Qatar,
the Caspian Sea, Egypt, Venezuela and Australia. The enormous value of this
portfolio -- a portfolio that will substantially increase the company's
proved reserves and create significant shareholder value -- is just beginning
to be tapped. This portfolio includes: in the Caspian Sea, a 4.8% carried
interest in the giant Azeri-Chirag-Gunashli project, where there are
estimated recoverable reserves of at least 4.7 billion barrels of oil, as
well as a 30% interest in the Karabakh project; in Egypt, five prospective
concessions covering 9.2 million acres in hydrocarbon charged basins; in
Qatar, Block 8, where drilling is underway on the second of four exploration
wells; in Venezuela, three producing blocks in one of the most exciting oil
producing regions in the world; in Australia, a promising exploration project
has begun drilling in the Whicher Range, south of Perth, where Pennzoil has a
44% working interest; and in the U.S. Gulf of Mexico, Pennzoil continues to
be one of the most active drillers in one of the most prolific areas in the
U.S. to explore for and produce crude oil and natural gas.
o Based on these and other factors, Pennzoil's Board concluded that the $84 per
share offer was inadequate, and well below a realistic valuation of Pennzoil.
UPR's internal documents reveal that Smith Barney, UPR's financial adviser,
similarly arrived at valuations for Pennzoil well above $84 per share.
-more-
<PAGE> 3
-3-
o UPR's claim that it would share Pennzoil's successful international E&P
operations with Pennzoil shareholders as part of some undefined security is a
true "red-herring," lacks substance and detail, and is impossible to
evaluate.
o UPR has not obtained the financing for its proposed acquisition of Pennzoil,
and therefore its willingness and ability to finance this significant
all-cash transaction is still in doubt. UPR's refusal to pay the fees that
are necessary to secure financing raises questions about the seriousness of
its offer.
Pennzoil Company explores for and produces crude oil and natural gas,
manufacturers and markets premium quality lubricants, including America's top
selling motor oil, and is the parent company of Jiffy Lube International, the
world's largest franchiser of fast oil change centers.
###
<PAGE> 1
EXHIBIT 91
[LEHMAN BROTHERS LETTERHEAD]
October 14, 1997
Board of Directors
Pennzoil Company
Pennzoil Place
P.O. Box 2967
Houston, Texas 77252
Members of the Board:
We understand that Resources Newco, Inc., a wholly owned subsidiary of
Union Pacific Resources Group Inc. (together, the "Bidder"), has made a tender
offer to the shareholders of Pennzoil Company (the "Company") to purchase all
outstanding shares of common stock (the "Shares") of the Company, together with
the associated preferred stock purchase rights (the "Rights") issued pursuant
to the Rights Agreement dated as of October 28, 1994, between the Company and
Chemical Bank, as Rights Agent, at a price of $84.00 per Share (and associated
Right), net to the seller in cash, without interest thereon (the
"Consideration"), upon the terms and subject to the conditions set forth in the
Supplement (the "Supplement"), dated October 7, 1997, to the Offer to Purchase
dated June 23, 1997 and in the related Letter of Transmittal (which, together
with any amendments or supplements thereto, collectively constitute the
"Offer"). The Supplement states that if the Offer is consummated, the Bidder
intends to effect a merger with the Company in which all outstanding Shares not
tendered into the Offer will be converted into $84.00 in cash, without
interest. The terms and conditions of the Offer are set forth in more detail in
Amendment No. 27, dated October 7, 1997, to the Schedule 14D-1 originally filed
by the Bidder with the Securities and Exchange Commission on June 23, 1997
(together, with any amendments or supplements thereto, the "Schedule 14D-1").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the adequacy, from a financial point of view, to the
shareholders of the Company of the Consideration offered to them by the Bidder
pursuant to the Offer.
In arriving at our opinion, we reviewed and analyzed: (1) the Supplement,
the Schedule 14D-1 and the specific terms and conditions of the Offer, (2) such
publicly available information concerning the Company which we believe to be
relevant to our analysis, (3) financial and operating information with respect
to the business, operations and prospects of the Company furnished to us by the
Company, including, without limitation, certain projections of future financial
performance of the Company prepared by the management of the Company, (4) a
trading history of the Company's common stock and a comparison of that trading
history with the trading histories of other companies that we deemed relevant,
(5) a comparison of the historical financial results and present financial
condition of the Company with those of other companies that we deemed relevant
and (6) a comparison of the financial terms of the Offer with the financial
terms
<PAGE> 2
LEHMAN BROTHERS
Board of Directors
Pennzoil Company
October 14, 1997
Page 2
of certain other transactions that we deemed relevant. In addition, we have had
discussions with the management of the Company concerning its business,
operations, assets, financial condition and prospects and have undertaken such
other studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of the
Company, upon advice of the Company we have assumed that such projections have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company, and we have relied upon such projections
to arriving at our opinion. In arriving at our opinion, we have not conducted a
physical inspection of the properties and facilities of the Company and have not
made or obtained any evaluations or appraisals of the assets or liabilities of
the Company. Our opinion necessarily is based upon market, economic and other
conditions as they exist on, and can be evaluated as of, the date of this
letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Consideration offered by
the Bidder to the shareholders of the Company pursuant to the Offer is
inadequate to such shareholders.
We have, in the past, provided certain financial advisory and financing
services to the Company and are acting as financial advisor to the Company in
connection with the Offer. In addition, the Company has agreed to indemnify us
for certain liabilities that may arise out of the rendering of this opinion. In
the ordinary course of our business, we may actively trade in the securities
of the Company and the Bidder for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company. This opinion is not intended to be and does not constitute a
recommendation to any shareholder of the Company as to whether to accept the
Consideration offered to the shareholders in the Offer.
Very truly yours,
LEHMAN BROTHERS
<PAGE> 1
EXHIBIT 92
[EVERCORE GROUP INC. LETTERHEAD]
October 14, 1997
Board of Directors
Pennzoil Company
Pennzoil Place
P.O. Box 2967
Houston, TX 77252
Gentlemen:
We understand that on October 7, 1997 Resources Newco, Inc. (the
"Purchaser"), a wholly owned subsidiary of Union Pacific Resources Group Inc.
("UPR", and together with the Purchaser, the "Bidder"), amended its tender
offer under which it is now offering to purchase all outstanding shares of
common stock, par value $0.83 1/3 per share (the "Shares"), of Pennzoil Company
("Pennzoil" or the "Company"), together with the associated preferred stock
purchase rights (the "Rights") issued pursuant to the Rights Agreement dated as
of October 28, 1994, between Pennzoil and Chemical Bank, as Rights Agent, at a
price of $84.00 per Share (and associated Right), net to the seller in cash,
without interest thereon (the "Consideration"), upon the terms and subject to
the conditions set forth in the Offer to Purchase dated June 23, 1997 (the
"Offer to Purchase"), as heretofore amended, the Supplement to the Offer to
Purchase dated October 7, 1997, and in the revised Letter of Transmittal
(which, together with any amendments or supplements thereto, collectively
constitute the "Offer"). If the Offer were consummated, UPR intends to effect a
merger with Pennzoil in which all outstanding Shares would be converted into
the right to receive $84.00 in cash. The terms and conditions of the Offer are
more fully set forth in the Schedule 14D-1 (the "Schedule 14D-1") originally
filed by Purchaser and UPR with the Securities and Exchange Commission on
June 23, 1997, together with any amendments or supplements thereto, and the
Supplement dated October 7, 1997.
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the adequacy, from a financial point of view, to
the shareholders of the Company of the Consideration offered to them by the
Bidder pursuant to the Offer.
<PAGE> 2
October 14, 1997
Page 2
For purposes of the opinion set forth herein, we have:
(i) reviewed the Offer to Purchase, the Schedule 14D-1, the amendments
and supplements to the Schedule 14D-1 (including the Supplement
dated October 7, 1997), and certain related documents;
(ii) analyzed certain publicly available financial statements and other
information of the Company;
(iii) analyzed certain internal financial statements and other financial
and operating data concerning the Company prepared by the management
of the Company;
(vi) analyzed certain financial projections for the Company prepared by
the management of the Company;
(v) discussed the past and current operations and financial condition
and the prospects of the Company with senior executives of the
Company;
(vi) reviewed the reported prices and trading activity for the Company
Shares;
(vii) compared the financial performance of the Company and the prices and
trading activity of the Company Shares to similar publicly available
information for publicly-traded companies having lines of business
similar to those of the Company;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(ix) performed such other analyses and examinations and considered such
other factors as we have in our sole judgment deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company. We have not made any independent valuation or appraisal of the assets
or liabilities of the Company, nor have we been furnished with any such
appraisals. In addition, you have not authorized us to solicit, and we have not
solicited, any indications of interest from any third party with respect to the
purchase of all or a part of the Company's
<PAGE> 3
October 14, 1997
Page 3
business. Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof.
Evercore Group Inc. has acted as financial advisor to the Board of
Directors of the Company in connection with this transaction and has received a
fee for its services.
This opinion is for the use and benefit of the Board of Directors of
the Company. This opinion is not intended to be and does not constitute a
recommendation to any shareholder of the Company as to whether to accept the
Consideration offered to the shareholders in the Offer.
Based upon and subject to the foregoing, we are of the opinion as of
the date hereof that, from a financial point of view, the Consideration offered
by the Bidder to the shareholders of the Company pursuant to the Offer is
inadequate to such shareholders.
Very truly yours,
EVERCORE GROUP INC.
<PAGE> 1
EXHIBIT 93
[JP MORGAN LETTERHEAD]
October 14, 1997
The Board of Directors
Pennzoil Company
P.O. Box 2967
Houston, Texas 77252-2967
Attention: Mr. James L. Pate
Chairman and Chief Executive Officer
Ladies and Gentlemen:
On June 23, 1997, Union Pacific Resources Group Inc. ("UPR") and Resources
Newco, Inc., a wholly owned subsidiary of UPR ("Acquisition"), commenced a
tender offer for up to 50.1% of the outstanding shares, on a fully diluted
basis, of the Common Stock, par value $0.83 1/3 per share (the "Shares"),
together with the associated preferred share purchase rights (the "Rights"), of
Pennzoil Company (the "Company"), at a price of $84.00 per Share (and
associated Right), net to the seller in cash, upon the terms and subject to the
conditions set forth in the Offer to Purchase, dated June 23, 1997 (the "Offer
to Purchase"), and in the related letter of transmittal (which, together with
the Offer to Purchase, constitute the "Offer"). According to the Offer to
Purchase, UPR and Acquisition sought to negotiate with the Company a definitive
acquisition agreement pursuant to which, upon consummation of the Offer,
Acquisition or another direct or indirect subsidiary of UPR would effect a
merger or similar business combination with the Company upon the terms set
forth in the Offer (the "Proposed Merger" and, together with the Offer, the
"UPR Acquisition Proposal"), and the Company would become a wholly owned
subsidiary of UPR. In addition, according to the Offer to Purchase, at the
effective time of the Proposed Merger, each Share that was issued and
outstanding immediately prior to such effective time would be converted into
shares of common stock of UPR in the manner set forth in the Offer to Purchase.
On October 7, 1997, UPR and Acquisition amended the Offer to provide that it
would be for all of the Shares (and associated Rights) at a price of $84.00 per
Share (and associated Right), net to the seller in cash, upon the terms and
subject to the conditions set forth in the Offer to Purchase, as amended and
supplemented by the Supplement thereto, dated October 7, 1997 (the "Amended
Offer to Purchase"), and in the related revised letter of transmittal (which,
together with the Amended Offer to Purchase, constitute the "Amended Offer").
According to the Amended Offer to Purchase, if the Offer is consummated,
Acquisition or another direct or indirect subsidiary of UPR would effect a
merger or similar business combination with the Company upon the terms set
forth in the Amended Offer (the "Amended Proposed Merger"), and the Company
would become a wholly owned subsidiary of UPR. In addition, according to the
Amended Offer to Purchase, at the effective time of the Amended Proposed
Merger, each Share that is issued and outstanding immediately prior to such
effective time would be converted into the right to receive $84.00 per Share
(and associated Right), net to the seller in cash.
<PAGE> 2
JP MORGAN
Page 2
In arriving at our opinion, we have reviewed (i) the Amended Offer to Purchase
and the related Amendment No. 27 to Tender Offer Statement on Schedule 14D-1
filed with the Securities and Exchange Commission (the "Commission") on
October 7, 1997; (ii) certain publicly available information concerning the
business of the Company and of certain other companies engaged in businesses
comparable to those of the Company, and the reported market prices for certain
other companies' securities deemed comparable; (iii) publicly available terms of
certain transactions involving companies comparable to the Company and the
consideration received for such companies; (iv) current and historical market
prices of the common stock of the Company; (v) the audited financial statements
of the Company for the fiscal year ended December 31, 1996, and the unaudited
financial statements of the Company for the period ended June 30, 1997; (vi)
certain internal financial analyses and forecasts prepared by the Company and
its management, including the Company's most recent strategic plan, supporting
financial projections relating to the business, operations, and financial
condition and future prospects and operations of the Company; and (vii) the
terms of other business combinations that we deemed relevant.
In addition, we have held discussions with certain members of the management of
the Company with respect to certain financial aspects of the Amended UPR
Acquisition Proposal, and the past and current business operations of the
Company, the financial condition and future prospects and operations of the
Company, the effects of the Amended UPR Acquisition Proposal on the financial
condition and future prospects of the Company, and certain other matters we
believed necessary or appropriate to our analysis. We have reviewed such other
financial studies and analyses and considered such other information as we
deemed appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was
publicly available or was furnished to us by the Company or otherwise reviewed
by us and we have not assumed any responsibility or liability therefor. We have
not conducted any valuation or appraisal of any assets or liabilities, nor have
any such valuations or appraisals been provided to us. In relying on financial
analyses and forecasts provided to us, including the views of the Company
concerning the business, operational and strategic consequences of the Amended
Offer, we have assumed that they have been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management as to the expected future results of operations and financial
condition of the Company to which such analyses or forecasts relate. We have
relied as to all legal matters relevant to rendering our opinion upon the
advice of counsel.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We are expressing no opinion herein as to the price at
<PAGE> 3
Page 3
which the Shares will trade at any future time. In addition, we were not
authorized to and did not solicit any expressions of interest from any other
parties with respect to the sale of all or any part of the Company or any other
alternative transaction.
We are acting as financial advisor to the Company with respect to the Amended
Offer and will receive a fee from the Company for our services. In the ordinary
course of their businesses, our affiliates may actively trade the debt and
equity securities of the Company or UPR for their own account or for the
accounts of customers and, accordingly, they may at any time hold long or short
positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the consideration proposed to be paid to the holders of Shares
pursuant to the Amended Offer is inadequate, from a financial point of view, to
such holders.
This letter is provided for the benefit of the Board of Directors of the
Company in connection with and for the purposes of its evaluation of the
Amended Offer. This opinion does not constitute a recommendation to any
shareholder of the Company as to whether such shareholder should tender Shares
in the Amended Offer. This opinion may not be disclosed, referred to, or
communicated (in whole or in part) to any third party for any purpose
whatsoever except with our prior written consent in each instance. This opinion
may be reproduced in full in an Amendment to the Solicitation/Recommendation
Statement on Schedule 14D-9 to be filed by the Company with the Commission.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ FERRELL P. McCLEAN
-----------------------------
Name: Ferrell P. McClean
Title: Managing Director
<PAGE> 1
EXHIBIT 94
[Pennzoil Letterhead]
FOR IMMEDIATE RELEASE
Contacts:
Robert Harper Joele Frank/Brian Faw
Corporate Communications Abernathy MacGregor Group
713/546-8536 212/371-5999
PENNZOIL ASKS COURT TO HALT UPR'S TENDER OFFER
BASED ON MISUSE OF "INSIDER INFORMATION"
HOUSTON, TX, October 14, 1997 -- Pennzoil Company (NYSE: PZL) today filed suit
in the U.S. District Court in Fort Worth against Union Pacific Resources Group
Inc. (NYSE: UPR) and Smith Barney, Inc., seeking a permanent injunction against
UPR's pending tender offer.
The suit alleges that UPR is improperly conducting the tender offer in
violation of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934,
while in the possession of material inside information regarding Pennzoil. The
information was obtained by Smith Barney and UPR in the course of litigation
pursuant to a definitive agreement and court order which restricts the use of
highly confidential information to trial counsel for litigation purposes only,
and expressly prohibits the use of such information for business or financial
purposes.
The suit alleges that UPR may not proceed with its tender offer since it is
bound both contractually and by court order not to disclose the highly
confidential inside information which it has improperly had the benefit of in
revising its tender offer.
Pennzoil has learned that Smith Barney has reviewed certain of Pennzoil's most
highly confidential documents while at the same time the firm continues to
offer business and financial advice to UPR in connection with its tender offer
attempt. Thus, UPR cannot go forward with its tender offer since it cannot
trade while in the possession of inside information and it cannot disclose the
information because of the court order and contractual agreement that prevents
it from doing so.
Pennzoil has asked the U.S. District Court to set the case for a trial date in
early 1998. The complaint requests that the Court permanently enjoin UPR's
hostile takeover based upon this "insider" misuse of highly confidential
information and consequent violation of the federal securities laws.
Pennzoil Company explores for and produces crude oil and natural gas,
manufactures and markets premium quality lubricants, including America's top
selling motor oil, and is the parent company of Jiffy Lube International, the
world's largest franchiser of fast oil change centers.
###
<PAGE> 1
EXHIBIT 95
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
FORT WORTH DIVISION
UNION PACIFIC RESOURCES GROUP )
INC., and RESOURCES NEWCO, INC., )
)
Plaintiffs, )
)
v. ) CIVIL ACTION NO. 497-CV 509-Y
)
PENNZOIL COMPANY, )
)
Defendant, )
)
v. )
)
SMITH BARNEY, INC., )
)
Third-Party Defendant. )
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM
TO THE HONORABLE UNITED STATES DISTRICT JUDGE:
Pursuant to Federal Rule of Civil Procedure 13, Counter-plaintiff
Pennzoil Company ("Pennzoil") files this Third Amended Counterclaim against
Union Pacific Resources Group Inc. ("Resources") and Resources Newco, Inc.
("Newco" and together with "Resources," "UPR") and Original Third-Party Action
against Smith Barney, Inc. ("Smith Barney").
I.
NATURE OF THIS ACTION
1. This Third Amended Counterclaim and Original Third-Party
Action is being brought pursuant to Sections 10(b) and 14(e) of the Securities
Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. Section 78n(e), the
applicable rules and regulations of the Securities and Exchange Commission (the
"SEC") promulgated thereunder (including SEC Rule 10b-5), and
<PAGE> 2
applicable principles of state law. Pennzoil seeks preliminary and permanent
injunctive relief barring Defendants Resources and Newco from trading in
Pennzoil stock because they are in possession of material inside, non-public
information regarding Pennzoil and because trading on that information would
violate applicable principles of federal securities law. Furthermore, allowing
UPR to trade on confidential Pennzoil information would violate a contractual
Stipulation UPR and Pennzoil entered into (and to which Smith Barney
contractually agreed to be bound by signing an Undertaking) pursuant to which
highly confidential information was provided to Resources and Newco and would
breach fiduciary obligations owed by Resources and Newco to Pennzoil and its
shareholders as a result of their acceptance and use of such confidential
information. Additionally, Pennzoil seeks preliminary and permanent injunctive
relief requiring Resources and Newco to correct false and misleading statements
made by them in connection with the hostile tender offer UPR announced on June
23, 1997, as amended (the "Tender Offer"). By signing the Stipulation and
Undertaking, UPR and Smith Barney agreed not to disclose publicly Pennzoil's
confidential information or to use that information for any purpose other than
in connection with this litigation. UPR is thus contractually barred from
making public disclosure and cannot purchase (or sell) Pennzoil shares,
pursuant to the Tender Offer or otherwise, so long as the Pennzoil information
Smith Barney has reviewed is commercially sensitive.
2. As more fully described below, UPR announced its Tender Offer
on June 23, 1997. At the same time, UPR filed a Schedule 14D-1 with the
Securities Exchange Commission ("SEC") in Washington, D.C. and mailed copies of
that Schedule 14D-1 to Pennzoil's shareholders. UPR has amended its original
Schedule 14D-1 numerous times, both to include information regarding
communications made subsequent to June 23, 1997 and to disclose certain
material information
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 2
<PAGE> 3
that UPR misleadingly omitted from the Schedule 14D-1 when it was originally
filed. Unless indicated otherwise, references in this Third Amended
Counterclaim to the Schedule 14D-1 will refer both to the original Schedule
14D-1 and to all amendments.
3. Also on June 23, 1997, UPR commenced this lawsuit, seeking a
broad declaration that everything contained in its Schedule 14D-1 was true,
complete, and not misleading and that UPR had fully complied with its
obligations under state and federal securities laws. At the same time, UPR
commenced litigation in the Delaware Court of Chancery (the "Chancery Court")
challenging Pennzoil's anticipated rejection of UPR's offer, and also in
federal court in Louisiana challenging the constitutionality of a Louisiana
takeover statute. In connection with the various lawsuits, and in order to
facilitate merits discovery, UPR and Pennzoil entered into an Agreed
Stipulation and Order Governing the Protection and Exchange of Documents and
Confidential Information (the "Stipulation"). The purpose and intent of this
agreement was to provide for sensitive business and financial information to be
made available to trial counsel for the parties. The Stipulation thus protected
the sensitive business information of both UPR and Pennzoil. Under the
Stipulation, UPR and Pennzoil agreed that non-public information regarding
Pennzoil would not be disclosed to UPR, and vice versa. In order to invoke the
protections of the Stipulation, either party could, in good faith, designate
material inside information and commercially sensitive documents as "highly
confidential." Under the agreement, information designated "highly
confidential" was to be provided to the attorneys for the other party solely
for use in the litigation. Disclosure to the parties themselves (except for
specifically designated in-house counsel) or their financial or business
advisors or agents was expressly prohibited. As outlined below, UPR has
violated the agreement. Smith Barney, UPR's financial advisor in
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 3
<PAGE> 4
connection with the Tender Offer, executed an Undertaking agreeing to be bound
by the Stipulation, and has been provided access to Pennzoil's highly
confidential, non-public information since at least mid-July. Despite having
seen highly confidential, non-public information regarding Pennzoil, Smith
Barney has continued to provide financial advice to UPR in connection with the
Tender Offer in direct breach of the Stipulation. With the financial advice and
strategic assistance of Smith Barney, UPR recently announced a change in its
offer, pursuant to which UPR has offered to pay cash for all shares of
Pennzoil. UPR has vaguely suggested that if Pennzoil were to capitulate to UPR,
UPR would "consider" issuing an undefined security to Pennzoil's shareholders
the value of which would be tied to the pursuit of and success in developing
Pennzoil's international business. UPR has also announced that it expects to
finance part of the purchase price by selling unidentified Pennzoil business
segments, a strategy known in the industry as a "bust-up" merger. This revised,
bust-up offer was made at a time when UPR and its financial advisors were in
possession of material inside information. UPR's knowledge and use of inside
information regarding Pennzoil to make this revised offer violates both the
express contract between the parties and federal securities laws.
4. Furthermore, UPR has made numerous misleading statements in
connection with its Tender Offer and has failed to disclose material facts
necessary to make the statements it has made not misleading. For example, the
June 23, 1997 Schedule 14D-1 failed to tell Pennzoil's shareholders (1) that
UPR announced its Offer on June 23, 1997 because it wanted to "blur the
market's perception" regarding Pennzoil stock so that UPR could purchase the
stock for less than its actual value; (2) that UPR's management viewed UPR's
chances of winning the suit filed in Chancery Court as "nil" and that the suit
was brought solely to "put pressure" on Pennzoil's
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 4
<PAGE> 5
Board and to shop for a favorable forum for litigation of Pennzoil's claims
against UPR; (3) that UPR was potentially liable to Union Pacific Corporation
("UPC"), UPR's former parent company, on a $2.5 billion tax indemnity agreement
that might be triggered by the takeover of Pennzoil; (4) the extent to which
consummation of the Tender Offer would affect UPR's earnings (and, thus, its
future stock price and borrowing capacity); or (5) that UPR's future prospects
without completion of the proposed merger are dismal, with UPR's management
characterizing the steep anticipated production declines from UPR's own
properties as the "Valley of Despair."
5. When it first announced its Tender Offer, UPR began a media
campaign in which it communicated almost daily with Pennzoil's shareholders,
telling them that they had to "beat the deadline" and urging them to tender
their shares early. This campaign was characterized by a series of grossly
misleading advertisements in which UPR falsely stated that Pennzoil had no
meaningful Strategic Plan, that Pennzoil's management had failed to build
shareholder value, and that Pennzoil was incapable of delivering value equal to
UPR's offer. As outlined in UPR's internal documents, however, UPR believed
that Pennzoil's management has "turned the company around," that Pennzoil's
stock price has substantially outperformed the market in 1997 (unlike UPR,
whose stock has under-performed the market), and that Pennzoil was worth more
in June of 1997 than the $84 per share being offered by UPR.
6. UPR's announcement of its revised, purportedly "all cash"
offer does not eliminate the disputes regarding the original two-tier offer UPR
made on June 23, 1997. Rather, UPR has kicked off a new campaign to mislead
Pennzoil's shareholders and the marketplace. For example, UPR has asserted in
new advertisements that Pennzoil has suffered "seven years of failure." UPR's
internal documents show that UPR has monitored Pennzoil's success in the
marketplace.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 5
<PAGE> 6
UPR's own documents reveal that Pennzoil's shares rose over 20% between January
1, 1997 and the announcement of UPR's tender offer, out-pacing the market
substantially. By contrast UPR's shares had only risen 3%, significantly under-
performing the market. Since the offer was announced, Pennzoil's success has
continued unabated, while UPR's shares have continued to languish. And while
UPR claims that there is no financing contingency in its offer, UPR has
admitted that it has not yet obtained a firm financing commitment to pay for
the offer. UPR's Schedule 14D-1 remains materially misleading because, among
other things, UPR has not disclosed that its ability to obtain financing will
be materially affected by its own questionable future prospects, that UPR's
ability to finance the transaction may be affected by UPR's contingent
liability to UPR, that UPR lacks the ability to both aggressively develop
Pennzoil's domestic properties and continue its expansive drilling on its own
acreage, that UPR's inability to obtain a financing commitment affects the
likelihood that it will be able to close on its offer, or that Smith Barney's
improper receipt of inside information regarding Pennzoil affects UPR's efforts
to obtain financing (since it would violate the Stipulation and expose UPR and
any lender to liability if material inside information is used to obtain
financing for UPR's revised proposal). Furthermore, UPR's suggestion that it
would consider issuing a security to Pennzoil's shareholders is misleading
because UPR lacks the desire, the financial resources, and the expertise to
pursue actively international prospects.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 6
<PAGE> 7
II.
JURISDICTION AND VENUE
7. This Court has jurisdiction over the subject matter of the
action against UPR and Smith Barney pursuant to Section 27 of the Exchange Act,
15 U.S.C. Section 78aa, because the action arises under Sections 10 and 14 of
the Exchange Act and the rules and regulations promulgated thereunder by the
SEC. This Court also has jurisdiction over the subject matter of the action
against UPR and Smith Barney by virtue of the federal question posed by UPR's
and Smith Barney's violation of this Court's Order approving the Stipulation.
28 U.S.C. Section 1331. This Court also has jurisdiction under principles of
supplemental jurisdiction, 28 U.S.C. Section 1367.
8. Venue is proper in this District pursuant to Section 27 of the
Exchange Act because Resources, Newco and Smith Barney transact business in
Texas. Acts and transactions constituting violations of the Exchange Act and
the Stipulation occurred in Texas and elsewhere.
9. This Court has personal jurisdiction over the Defendants
pursuant to Section 27 of the Exchange Act and by virtue of Smith Barney's
contractual agreement to the personal jurisdiction of this Court.
III.
THE PARTIES
10. Plaintiff Pennzoil is an energy company engaged primarily in
oil and gas exploration and production, in the processing, refining and
marketing of oil, motor oil and refined products, and in franchise operations
in the fast oil change business. Pennzoil's principal executive offices are
located at Pennzoil Place, Houston, Texas. Pennzoil has approximately 46.9
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 7
<PAGE> 8
million shares of common stock outstanding which are traded on the New York
Stock Exchange. Pennzoil's common stock is held by over 18,000 stockholders of
record.
11. Pennzoil conducts its operations in three principal business
segments. Pennzoil's oil and gas segment engages in the acquisition,
exploration, exploitation, and development of prospective and proved oil and
gas properties; the production and sale of crude oil, condensate, and natural
gas liquids; and the production, treatment, and sale of natural gas. Pennzoil's
motor oil and refined products business segment is a worldwide marketer of
premium automotive and other branded products, including particularly Pennzoil
brand motor oil, which has been the number one selling motor oil in the United
States for 11 consecutive years and currently commands a market share of about
21%. Pennzoil's franchise operations segment includes the well-known and
valuable Jiffy Lube fast oil change system and brand name. As discussed below,
Pennzoil is in the early stages of implementing a long-term business plan which
already has produced positive results in each of its business segments and
which Pennzoil believes will produce even more positive gains for its
stockholders in the coming years.
12. Defendant Resources is a Utah corporation whose principal
executive offices are located at 801 Cherry Street, Fort Worth, Texas.
Resources was formerly a wholly-owned subsidiary of UPC, which owns the Union
Pacific Railroad Company. In October 1995, Resources sold 42.5 million shares
of its common stock in an initial public offering (the "Offering"). In
connection with the Offering, UPC announced its intention to distribute its
remaining ownership interest in Resources to UPC's shareholders in the form of
a tax-free distribution (the "Distribution"). The Distribution was authorized
by UPC's board of directors on September 12, 1996, and effected on October 15,
1996.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 8
<PAGE> 9
13. Defendant Newco is a Delaware corporation whose executive
offices are located at 801 Cherry Street, Fort Worth, Texas. Newco, a wholly
owned subsidiary of Resources, was formed by Resources to facilitate its
attempted hostile takeover of Pennzoil.
14. Third-Party Defendant Smith Barney, Inc. ("Smith Barney") is a
Delaware Corporation with its principal office in this state located at 200
Crescent Court, Dallas, Texas 75201 in Dallas County and may be served with
process through its registered agent, C.T. Corporation System, 350 North St.
Paul Street, Dallas, Texas 75201.
UPR'S ORIGINAL TENDER OFFER
15. On June 23, 1997, UPR announced that it was commencing an
unsolicited tender offer for 50.1% of the outstanding shares of Pennzoil stock
on a fully diluted basis. UPR's stated intention was to obtain control of
Pennzoil via the Tender Offer and then to force a merger between the companies.
As originally structured, the offer was a classic, coercive two-tier offer--UPR
offered cash for half of Pennzoil's stock, but stated that it intended to offer
only shares of uncertain value to Pennzoil's shareholders for the balance of
their stock. The consideration offered by UPR was subject to a "pricing collar"
that would have reduced substantially the consideration Pennzoil shareholders
received in the transaction if the price of UPR's stock fell below $25 per
share. This structure was adopted for the clear purpose of coercing Pennzoil's
shareholders into tendering.
16. This suit was originally filed by UPR on the same day the
tender offer was announced as a preemptive declaratory judgment action. In its
Original Complaint, UPR asked the Court to declare that every statement
contained in the Schedule 14D-1 filing UPR made on June 23, 1997 was true,
complete, and not misleading. At the time suit was filed, Pennzoil had
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 9
<PAGE> 10
not even seen UPR's Schedule 14D-1, and thus did not know whether UPR had
complied with federal securities laws in filing its Schedule 14D-1. Apparently
uncomfortable with actually defending the misleading statements it made in its
Schedule 14D-1, UPR has recently filed a motion trying to abandon these claims
rather than allow discovery into the truth of UPR's public representations.
17. After reading UPR's Schedule 14D-1, the reasons underlying
UPR's fear that it might be sued over the statements made in and disclosures
omitted from that filing became apparent. The Schedule 14D-1 originally filed
by UPR plainly failed to comply with federal securities laws. For example, UPR
falsely suggested in the Schedule 14D-1 that Pennzoil's management supported a
merger with UPR when UPR knew that Pennzoil had not indicated approval of UPR's
offer and had, in fact, rejected an offer only weeks before the hostile tender
offer was announced. The Schedule 14D-1 also failed to disclose a $2.5 billion
contingent liability UPR assumed under a tax indemnity agreement entered into
with UPC, UPR's former parent company. UPR did not disclose in its Schedule
14D-1 that it had projected that Pennzoil stock was going to rise substantially
in the near future and that its offer was intended and designed to "blur the
market's perception" regarding the reasons for that increase and, thereby,
mislead the investing public regarding the value of Pennzoil's stock. Likewise,
UPR failed to disclose that its own financial experts had valued Pennzoil on a
break-up basis far in excess of the $84 per share bid nominally placed by UPR
on its offer, notwithstanding UPR's contrary public statements regarding the
value of Pennzoil's stock. Similarly, while UPR did disclose that its offer was
contingent upon its success in a pending suit in Chancery Court, it failed to
disclose its internal assessment that its chances of prevailing in that suit
were "nil." UPR did not disclose that it needs
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 10
<PAGE> 11
to purchase Pennzoil to avoid the Valley of Despair, concealing its internal
assessment it must acquire 750 million barrels of oil equivalent to meet its
needs, making a strategic acquisition such as the Tender Offer a "must" for
UPR. Finally, UPR's Schedule 14D-1 misleadingly failed to disclose fully the
effect purchase accounting would have on UPR's earnings, which affect
significantly both UPR's stock value and its ability to finance ongoing
operations or stock acquisitions.
18. On September 8, 1997, Pennzoil succeeded in forcing UPR to
make public disclosure of some of the material facts UPR had omitted from its
Schedule 14D-1. UPR did not at that time make the actual documents available to
the public. Instead, by the 20th amendment to its Schedule 14D-1, UPR disclosed
selected portions of certain critical documents. Understandably fearful of the
market's reaction to the compelling evidence of UPR's outright duplicity
contained in the documents it quoted, UPR withheld the actual documents and
tried to bury its disclosures in a sea of disclaimers, while at the same time
running a renewed advertising campaign to deflect attention from its
admissions. At an injunction hearing held on September 10, UPR finally
capitulated and agreed to make six critical documents public in their entirety,
something it should have done at the very outset of its offer.
19. On October 6, 1997, UPR finally tacitly acknowledged that the
two-tier structure of its offer was coercive and improper. On that date, UPR
announced that it was converting its offer to an "all cash" transaction,
stating that it would pay $84 per share in the second-step merger contemplated
by UPR. UPR's disclosures relating to its revised offer, however, remain
inadequate and misleading. For example, UPR represented in its announcement
that there is no financing contingency to its offer. But UPR does not have a
firm financing commitment to pay
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 11
<PAGE> 12
for the shares to be acquired in the second-step merger. UPR has publicly
stated that it intends to finance the offer through private borrowing and
refinance through issuance of equity and asset sales. It does not, however,
disclose matters that create substantial questions regarding UPR's ability to
complete an all-cash offer on the terms announced. UPR's bankers have
expressed concern regarding UPR's failure to disclose the "Valley of Despair"
in connection with prior financing. UPR continues to conceal from the public
the graphs, charts, and other data that would show whether UPR's projected
decline curves prepared in May, June, or July of 1997 continued to reflect
anticipated steep decline curves characteristic of the "Valley of Despair."
While UPR claims that it has cured the "Valley of Despair" problem, it has yet
to disclose--either publicly or through discovery--where it found the 750
million barrels of oil equivalent (or 4.5 trillion cubic feet of gas) that it
told the IRS was required to solve the problem. UPR has failed to disclose
fully the effect purchase accounting principles will have on its earnings,
which will affect its ability to obtain financing either debt or equity to pay
for Pennzoil's stock. And while UPR has disclosed some internal valuations, it
continues to hide from public view other valuations it made of Pennzoil.
20. Furthermore, while UPR has implicitly acknowledged that
Pennzoil's international prospects are of greater value than UPR has provided
in its offer, UPR's suggestion that it might someday consider issuing an
undefined security in connection with a negotiated transaction is grossly
misleading.(1) In an effort to induce Pennzoil shareholders to tender their
shares, UPR has
- ---------------
(1) In this regard, it is important for the Court to be aware of the fact that
UPR has emphasized this issue in an effort to influence Pennzoil's
shareholders, albeit without making anything close to an actual commitment.
UPR reiterated this statement both in a meeting with market analysts on October
6, 1997, and in an advertisement it ran on October 8, 1997.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 12
<PAGE> 13
suggested that it might issue a security to Pennzoil shareholders, the value of
which would be tied to development of Pennzoil's international initiatives. UPR
has failed to disclose, however, that it has an abysmal record historically in
pursuing international development, that it has abandoned pursuit of
international transactions because it lacked the expertise to compete, and that
if it manages to finance its all-cash offer it will lack the financial
resources to pursue and develop international initiatives. Disclosure of these
and other facts are necessary to make UPR's illusory suggestion that it would
pursue Pennzoil's international initiatives, and that Pennzoil shareholders
might benefit thereby, not misleading. Full and complete disclosure of the
financial matters outlined above--the "Valley of Despair," the tax indemnity
problem, the purchase accounting issues, and UPR's declining domestic reserve
base--is therefore required under the Williams Act.
UPR'S MISLEADING REPRESENTATIONS REGARDING
THE DISCUSSIONS BETWEEN PENNZOIL AND UNION PACIFIC
21. In its Original Complaint, Pennzoil outlined why the statement
made by UPR in its Schedule 14D-1 and in its public advertisements and letters
to Pennzoil's shareholders were inaccurate and misleading. UPR's original
misleading statements regarding the 1995 discussion between Pennzoil and UPR
have never been corrected, and continue to infect UPR's offer and the
consideration of that offer by Pennzoil's shareholders. Indeed, despite
repeated efforts by Pennzoil to point out to UPR the errors in its
representations, UPR continues to imply misleadingly that UPR's tender offer
was suggested by Pennzoil.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 13
<PAGE> 14
22. In order to manufacture the illusion that Pennzoil supported
the merger, UPR cites discussions between Pennzoil and UPC that occurred
approximately two years before UPR's hostile tender offer was announced. UPR's
statements regarding those discussions are materially misleading because UPR
has failed to disclose facts required to make clear the significant differences
between the transactions Pennzoil was exploring in 1995 and the hostile tender
offer UPR has proposed. The historical facts UPR has failed to disclose show
that the transaction Pennzoil was pursuing in 1995 was different, both because
Pennzoil's needs in 1995 were different and because the parties' ability to
structure a tax efficient transaction was different.
23. Beginning in 1995, Pennzoil took aggressive steps to improve
its income and cash flow, reduce debt, dispose of non-core oil and natural gas
reserves and acquire other reserves to strengthen the core areas, and otherwise
bolster its oil and natural gas reserves.
24. In January 1995, when Pennzoil's restructuring initiatives
were in their earliest stages and Resources was a wholly owned subsidiary of
UPC, representatives of Pennzoil contacted representatives of UPC to discuss a
possible tax-efficient acquisition by Pennzoil of Resources or its assets. At
that time, such an acquisition at a favorable price would have facilitated
Pennzoil's restructuring initiatives, and the discussions between the parties
were in the context of Pennzoil's specific business objectives at the time. For
example, Pennzoil needed additional cash flow to maintain its then $3.00 per
share dividend and hoped to use cash flow from Resources' assets to provide the
necessary funds. Resources also could have provided Pennzoil with additional
core reserves to replace the non-core reserves which the Company was then
selling off. A transaction involving Resources also would have assisted
Pennzoil in achieving its goal of quickly reducing costs by creating economics
of scale.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 14
<PAGE> 15
25. Transactions proposed by Pennzoil for consideration in January
1995 included a stock-swap "merger of equals" following a tax-free spin-off of
Resources by UPC. Under this alternative, the merger agreement would have been
signed prior to the spin-off. Another alternative transaction would have
involved a cash purchase of producing properties of Resources subject to a
large production payment. At no time during these discussions did Pennzoil
consider or discuss entering into any transaction in which Pennzoil would be
the acquired company or which otherwise would result in a change of control of
Pennzoil.
26. After these discussions with Resources, Pennzoil continued to
pursue aggressively its restructuring initiatives, and has made substantial
progress on a number of fronts. As a result of Pennzoil's strategic
initiatives, Pennzoil has seen at least seven consecutive quarters in which its
earnings have exceeded the previous years' earnings. As a result, Pennzoil's
stock price has risen dramatically and would have continued to rise even
without UPR's offer, as UPR acknowledges internally.
27. The Schedule 14D-1 disseminated by UPR in connection with the
Tender Offer contains material misrepresentations and omissions regarding the
background of the Tender Offer, and particularly regarding the parties' prior
negotiations. The Schedule 14D-1 inaccurately characterizes the 1995
discussions between representatives of Pennzoil and UPC in order to create the
misleading impression that Mr. Pate suggested -- and actually supported -- the
transaction proposed by UPR. To foster this misleading impression, the Schedule
14D-1 quotes -- wholly out of context and without providing the additional
information necessary to make the statements made in the Schedule 14D-1 not
misleading in light of the circumstances in which they are made --
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 15
<PAGE> 16
certain statements made by Mr. Pate in January 1995 indicating that a
combination of Pennzoil and Resources would "provide the best possible fit."
28. The Schedule 14D-1 fails to disclose that Mr. Pate's
statements were made in the context of Pennzoil's then-proposed tax-efficient
acquisition of Resources or its assets from UPC. Mr. Pate made it clear in 1995
that any transaction between Pennzoil and UPC involving Resources depended
largely on the tax benefits available to UPC and Pennzoil in the context of a
pre-spin-off agreement. The circumstances that existed in 1995 -- when
Resources was a wholly owned subsidiary of UPC -- permitted great freedom in
structuring a tax-efficient transaction. Those circumstances no longer exist.
Nowhere are these facts disclosed by UPR to Pennzoil's stockholders, who are
led to believe that the transaction proposed by Mr. Pate in 1995 is essentially
the same as the transaction proposed by UPR today, and that the circumstances
in which Mr. Pate's proposal was made have not changed.
29. The Schedule 14D-1 further fails to disclose that: (i) in
1995, Pennzoil was interested in a transaction involving Resources or its
assets because Resources' assets would assist Pennzoil in its restructuring
initiatives; and (ii) in 1997, Pennzoil has accomplished many of its initial
restructuring objectives, and the Company's current business plans and
strategic goals are very different from its plans and goals in 1995. Thus, the
Schedule 14D-1 fails to inform Pennzoil's stockholders that the economic
rationale underlying Pennzoil's desire to acquire Resources or its assets in
1995 no longer exists.
30. The Schedule 14D-1 states affirmatively that, "in October,
1996, UPR began a review of various possible strategic initiatives." (14D-1 at
21). The Schedule 14D-1 fails to connect the discussion between representatives
of Pennzoil and representatives of UPC and UPR
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 16
<PAGE> 17
in 1995 which related to a possible combination. Thus, the Schedule 14D-1
misleads the stockholders of Pennzoil into the false belief that Resources'
interest in Pennzoil arose only within the last four months. In fact, UPR had
concluded long before that due to the steep decline curves characteristic of
UPR's core properties, UPR could not meet its stated goal of 10% production
growth per annum by drilling on its own properties. UPR had concluded
internally over a year before the Tender Offer was announced that smaller
"tactical" acquisitions would be insufficient to meet its need for additional
drill sites and that it would need to make a "strategic" acquisition of a
company the size of Pennzoil by the end of 1997--and yet another such
transaction by the year 2000--to meet its growth projections. Indeed, UPR
stated that it would take over 160 "tactical" acquisitions to offset the Valley
of Despair.
31. To bolster the misleading illusion that Pennzoil's management
supported UPR's offer, UPR also made false statements and material omissions
concerning Mr. Pate and certain of his actions and statements. For example,
Schedule 14D-9 on page 22 states that, "Mr. Pate agreed to visit Ft. Worth ..."
This statement is completely false. Likewise, the 14D-9 states at page 22 that
"Mr. Pate also stated that he believed that Pennzoil's Common Stock could be
trading in a range between $80 and $100 per share in the next four to five
years...." This statement is also completely false and, because it concerns the
value of Pennzoil stock, is materially misleading.
THE SCHEDULE 14D-1 MISLEADS PENNZOIL'S SHAREHOLDERS REGARDING
UPR'S DISMAL BUSINESS PROSPECTS
32. UPR has also made misstatements and omitted material
information regarding its own business prospects. In a June 3, 1996 letter to
the Internal Revenue Service ("IRS"), UPR
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 17
<PAGE> 18
admitted that its management internally referred to the trend of steep declines
in production from its existing properties as the "Valley of Despair," and
further stated that UPR's goal of 10% reserve growth per year in the face of
such declines was referred to as "walking up the down escalator." As a specific
example of their rapidly declining reserve base, UPR pointed out to the IRS
that "[d]ue to the steep decline of the production curve, Austin Chalk reserves
are projected to drop at an average of 34% per year, and East Texas reserves by
an average of 12% per year during the same period." UPR concluded that there
was "significant uncertainty as to how much further the Austin Chalk production
can be economically extended" since the "vast majority" of UPR's gas infill
locations had been drilled.
33. UPR also failed to disclose that it had not a single employee
that was an expert on international exploration and production activities,
notwithstanding Pennzoil's significant portfolio of international exploration
and production projects. Specifically, in a November 1995 memo which UPR
disclosed to the IRS, UPR admitted:
[T]he reality is that UPRG does not have any real
international E&P experts on staff. The company needs to
rapidly increase its collective knowledge of international
E&P.
While UPR trumpets in the Schedule 14D-1 its purported "expertise in advanced
drilling and completion technologies," it omits to disclose its complete lack
of international exploration and production expertise to Pennzoil's
stockholders, notwithstanding the importance of Pennzoil's initiatives in
Azerbaijan, Qatar, Egypt, Venezuela and Australia.
34. The facts UPR has failed to disclose regarding its "Valley of
Despair" are plainly material. First, UPR has stated to the IRS that it must
acquire a company bigger than Pennzoil and another company the same size in
order to meet its promises to its own shareholders. UPR
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 18
<PAGE> 19
is thus a forced buyer--it must acquire Pennzoil or admit publicly that it will
not meet its production goals. Prior to the recent amendment to its offer, UPR
continually urged Pennzoil's shareholders to put pressure on Pennzoil's Board
of Directors to accept UPR's offer, even though Pennzoil's Board believed the
original offer inadequate. By amending its offer, UPR has implicitly
acknowledged that Pennzoil's assessment of the inadequacy of UPR's offer was
correct. The day following announcement of its new, amended offer, UPR has once
again begun a public relations campaign suggesting that Pennzoil shareholders
tender their shares to pressure Pennzoil's Board. In assessing UPR's
advertising campaign, Pennzoil's shareholders are entitled to know that UPR is
in dire financial straits, that it must complete the Tender Offer, that it is
trying to buy Pennzoil on the cheap and that it cannot finance the transaction
because of its dismal business prospects.
35. UPR's admissions to the IRS regarding the "Valley of Despair"
outline the magnitude of UPR's problems and the degree to which it requires a
transaction such as the proposed takeover of Pennzoil. In the Sixth Supplement
to Request for Revenue Ruling, UPR stated that it faced decline curves of up to
34% in core development areas, especially in the key Austin Chalk acreage that
is the centerpiece of UPR's production efforts. UPR explained that its other
production areas, such as its holdings in the Rockies, were "marginal" and
could not offset the steep decline curves creating the "Valley of Despair." UPR
unequivocally represented to the IRS that it needed to acquire 750 million
barrels of oil equivalent via strategic acquisitions to meet its growth
projections. While UPR has publicly stated that it has solved its "Valley of
Despair" problem, it has refused to produce key evidence relating to those
statements. UPR continues to hide from the public, from Pennzoil, and from the
Courts the long-range Plan UPR adopted in
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 19
<PAGE> 20
June of 1997. Nor has UPR produced projected decline curves prepared in May,
June, and July 1997. Information regarding production from UPR's Austin Chalk
acreage has been withheld, even as UPR proclaims that it will be able to
produce ever larger amounts from the Chalk indefinitely.
36. As outlined above, information regarding UPR's deteriorating
financial condition remains highly material to the offer. UPR does not have a
firm financing commitment. Thus, Pennzoil's shareholders could find themselves
captive to UPR by virtue of the Tender Offer yet unable to realize the promised
second-step merger because of UPR's inability to finance that stage of its
merger.(2) Among other reasons, since UPR has not yet obtained firm financing,
its financial condition is material to the shareholders' consideration of its
offer.
UPR HAS FAILED TO DISCLOSE FULLY THE ADVERSE CONSEQUENCES
PROPER APPLICATION OF PURCHASE ACCOUNTING PRINCIPLES WOULD HAVE
ON UPR FOLLOWING CONSUMMATION OF THE PROPOSED MERGER
37. UPR's Schedule 14D-1 fails to disclose any information
concerning the extent of the adverse accounting consequences of UPR's proposed
transaction. If UPR were to acquire Pennzoil, the transaction would be subject
to "purchase accounting," under which UPR would be required to offset or reduce
future earnings with depreciation, amortization and other adjustments as a
result of the proposed transaction. This reduction of earnings per share as a
result of additional depreciation and amortization and other adjustments is
commonly referred to as
- ---------------
(2) This Court certainly understands the perils inherent in being a minority
shareholder in a company that is controlled by a single majority shareholder,
especially when that majority shareholder faces significant financial problems.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 20
<PAGE> 21
"dilution." UPR's conversion of its offer to a bust-up, "all cash" transaction
may exacerbate the effect this will have on UPR's future earnings.
38. In public statements outside of the Schedule 14D-1, UPR has
given incomplete, confusing, and conflicting statements about the effect of the
proposed transaction on UPR's future earnings, earnings per share and dilution.
In a conference call to analysts on June 23, 1997, after the commencement of
the Tender Offer, Mr. Messman stated that:
"values are not determined on a basis of earnings per share,
but despite that, we believe we can eliminate the dilution,
which is significant, within two years..."
In the same call, Dick Eales, Executive Vice President of UPR, stated that:
"Our estimates for 1998 ... will result in higher cash flow
and higher earnings before the purchase accounting than the
street now estimates."
Mr. Messman later stated that:
"[w]e haven't finished making the allocations yet of purchase
price."
Following Mr. Messman's comment, Mr. Eales stated that:
"There are various ways to allocate purchase price ... we've
looked at that in various ways and we haven't pinned that
down."
Finally, Mr. Messman stated:
"We expect that we'll be the ... dilution and earnings per
share.... We think in two years we'll be practically even with
where we are today and then by the third year we'll be off and
running into increasing where we are today."
39. Under purchase accounting, if the proposed transaction were
completed, UPR would have to record the transaction at its fair value. In
recording such fair value, UPR would have to increase the recorded value of
Pennzoil's assets by (i) the excess of (a) the purchase price
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 21
<PAGE> 22
for Pennzoil common stock in the proposed transaction over (b) the book value
of Pennzoil's equity (the "Excess Cost"), and (ii) the amount of future tax
liability attributable to the assets acquired as a result of the form of the
transaction (the "Deferred Taxes"). In the transaction as proposed by UPR, the
Excess Cost would be about $3.2 billion, and the Deferred Taxes would be about
$1.1 billion. Accounting rules require the sum of $4.3 billion to be amortized
or depreciated by UPR (i.e., deducted from income) ratably over the estimated
useful lives of the assets acquired. Assuming an average useful life of seven
years for the acquired assets (which approximates the average life of
Pennzoil's proved oil and gas properties), the incremental reduction in
earnings for UPR as a result of the required depreciation or amortization would
total approximately $615 million annually on a pre-tax basis.
40. Furthermore, UPR has stated that it intends to finance its
proposed acquisition largely with new debt. The additional negative impact on
UPR's earnings by virtue of this interest obligation would be millions of
dollars annually (the "Additional Interest"). Thus, the after tax annual
negative impact resulting from the Excess Cost, the Deferred Taxes and the
Additional Interest adjustments represents the amount of additional earnings
UPR would have to generate annually above and beyond earnings that would
otherwise be generated from the combined assets of UPR and Pennzoil in order to
avoid dilution. UPR has improperly limited its discussion of the effect
purchase accounting will have on its earnings to the "base year" projections.
UPR is required to disclose the long-term nature of the earnings dilution it
will suffer. Furthermore, and contrary to UPR's public representations,
Pennzoil believes that UPR's earnings dilution will continue for more than five
years following the proposed merger.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 22
<PAGE> 23
41. The negative earnings and earnings per share impact of the
proposed transaction have not been disclosed by UPR in its Schedule 14D-1.
Pennzoil's stockholders are not informed that the accounting treatment of UPR's
proposed transaction may be materially unfavorable and may adversely affect
UPR's ability to obtain either debt or equity financing to pay for Pennzoil's
stock. Furthermore, disclosure of this information is required to show that
UPR's suggestion that Pennzoil's shareholders would benefit from future
development of Pennzoil's international prospects is misleading. In light of
the increased burden the all-cash structure will place on UPR's earnings, UPR
will have a significant incentive to decrease or eliminate investment in
international initiatives, where UPR lacks expertise and has shown no committed
historical interest.
UPR CONTINUES TO MISREPRESENT ITS VALUATIONS OF
PENNZOIL AND TO CONCEAL MATERIAL FACTS REGARDING ITS
DISCLOSURES FROM PENNZOIL, THE COURT, AND THE PUBLIC
42. UPR has also misled the markets regarding the value of
Pennzoil's stock. When UPR announced its Tender Offer on June 23, 1997, UPR
quickly went to the market to explain that UPR had both important information
not publicly available and greater expertise in valuing exploration and
production companies than the market had. In a telephone conference with market
analysts, UPR's Jack Messman emphasized that the market would have to rely on
UPR to value Pennzoil:
[T]hat's a key point for us and I want to emphasize so that we
make sure others remember the point; and that is, I said
earlier, if you look at just the financial statement and the
reserve reports and the street estimates for Pennzoil, you
could not properly evaluate it because [UPR has] gone in and
done a scientific evaluation to ascertain that the drill sites
are there and we will significantly ramp-up their drilling
activities after this deal is concluded . . . . So it would be
difficult for [the market] to use the values that are on the
street today and to make these decisions in terms of valuation
and fairness.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 23
<PAGE> 24
43. Having represented to the market that it was in possession of
"secret" information and had unique expertise in valuation of such companies,
UPR embarked on a campaign of disinformation designed and intended to mislead
the investing public regarding the value of Pennzoil's stock. In various
advertisements and letters to Pennzoil shareholders, which UPR incorporated
into its Schedule 14D-1, UPR made numerous misrepresentations regarding the
value both of its proposed transaction and of Pennzoil. Thus, in a July 1, 1997
UPR press release, UPR stated that it did not believe that Pennzoil's strategic
plan "could deliver anything close to the value" of its proposed transaction.
UPR has similarly publicly disclosed that:
o "Pennzoil, by itself, cannot create sufficient shareholder
value to compete with UPR's $84 per share bid and the
long-term shareholder value the combined company will
provide." June 27, 1997 letter from UPR to Pennzoil's Board of
Directors, reprinted in Schedule 14D-1 Amendment No. 3.
o "Since 1990, Pennzoil management has 'built' virtually zero
value in the company." July 1, 1997 UPR press release,
reprinted in Schedule 14D-1, Amendment No. 4.
o "Pennzoil shareholders can conclude justifiably that any
existing or new plan is likely to fail to deliver shareholder
value given the poor track record of management." Id.
UPR has further publicly stated that Pennzoil's position that the market has
undervalued Pennzoil stock was an 'insult' to Pennzoil's shareholders, id.,
implying that the market value prior to the Tender Offer was an accurate
reflection of Pennzoil's value.
44. UPR's public statements regarding the value of Pennzoil were
false and misleading in that UPR in fact internally believed that Pennzoil's
management had done a superb job and that Pennzoil's common stock was
undervalued substantially by the market. On April 3, 1997, Dick
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 24
<PAGE> 25
Eales, the Executive Vice President and Chief Financial Officer of UPR, advised
the UPR board of directors that "[W]e currently think Pennzoil stock is worth
as much as the high $70's or low $80's per share." In similar stark contrast to
UPR's public statements are its internal assessments of Pennzoil reflected in a
May 3, 1997 Project Mercury Briefing Report:
o "[T]here is considerable risk to waiting until November if a
hostile tender offer is required to motivate [Pennzoil's]
board. There is more likely good news than bad news for
[Pennzoil], and a rising stock price is ultimately their best
defense. An early strike would somewhat preserve the
perception of our large current premium. The existence of our
offer would blur the market's perception of any subsequent
increase in stock price, for which we would naturally take
credit."
o Pennzoil's management has done "a superb job of turning around
the company" and "has the company on the right path."
45. On September 10, 1997, UPR made public certain documents it
had previously provided only to Pennzoil. Despite this limited concession, UPR
continues to conceal additional valuation studies it has performed that--by its
own admission--show that Pennzoil stock has value materially higher than $84
per share and thus directly contradicts UPR's public statements. UPR has
refused to produce these documents to Pennzoil despite several Court orders
requiring it to do so.
46. On October 8, 1997, UPR ran yet another advertisement
suggesting that Pennzoil has failed to produce shareholder value--i.e., to
bring about an increase in Pennzoil's stock price--for "seven years." This
representation is an overt falsehood--as UPR's internal studies show,
Pennzoil's stock price has substantially outperformed the market over the last
year while UPR's stock has under-performed the market. Furthermore, UPR's Dick
Eales gave an interview to news services in which he stated that UPR's offer
was at the top of the range of values generated internally at UPR. Given UPR's
admission that it possesses valuations of Pennzoil in excess of
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 25
<PAGE> 26
$84 per share, UPR's statement of value is demonstrably false. Thus, Pennzoil's
shareholders are entitled to full disclosure of all internal valuations UPR has
made, including the valuations in excess of $84 per share that UPR has admitted
it possesses but which UPR is unwilling to produce to Pennzoil, despite the
discovery rulings of this Court requiring production of those documents.
47. Plainly, representations regarding a target company's value
and prospects are intrinsically material in the context of a hostile tender
offer, especially if the speaker professes to be in possession of material
non-public information and claims to be basing the opinion on expertise in the
target's business. UPR has suggested that it was not required to include its
internal valuations of Pennzoil in its Schedule 14D-1. But UPR plainly cannot
make the representations to the public that its offer is at "the top end" of
UPR's internal valuations while simultaneously possessing valuations far in
excess of $84 per share. UPR's decision to make public representations
inconsistent with their internal documents regarding the value of Pennzoil
impose on it a duty to reveal all material valuation information in its
possession, including UPR's internal valuation and analyses of Pennzoil's
business and assets.(3)
UPR HAS MADE MISLEADING STATEMENTS ABOUT
ITS PROSPECTS OF WINNING IN CHANCERY COURT
48. UPR has also made misleading statements regarding the
litigation it filed in connection with the Tender Offer. In its Schedule 14D-1,
UPR claimed that it brought suit against Pennzoil in the Court of Chancery (the
"Chancery Court lawsuit") because any refusal by the
- ---------------
(3) To the extent UPR has misused material inside information it obtained from
Pennzoil in discovery to make such valuations, UPR is not at liberty to
disclose Pennzoil's trade secrets and inside information. As outlined below,
Smith Barney, UPR's financial advisor, has improperly reviewed Pennzoil's
inside information, after which it advised UPR with respect to the revision of
UPR's tender offer to all cash and represented UPR in negotiations to sell
components of Pennzoil's business. Because it possesses confidential inside
information regarding Pennzoil, UPR cannot purchase or sell Pennzoil shares.
This issue is discussed more fully in paragraphs 54-60 below.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 26
<PAGE> 27
Pennzoil Board to redeem its stockholder rights plan (the "Rights Plan") and
approve UPR's proposed transaction "would constitute a breach of the Pennzoil
Board's fiduciary obligations to Pennzoil stockholders under Delaware law." UPR
similarly stated publicly that "Pennzoil is invoking every anti-takeover
defense in the book to insulate an entrenched management . . . . By doing so,
the Board is violating its fiduciary duty to Pennzoil shareholders." In the
Chancery Court lawsuit, UPR has alleged that "[t]he Director Defendants'
refusal to redeem the Rights Plan or render the Rights Plan inapplicable to the
Tender Offer and merger has no economic justification, serves no legitimate
purpose, is not a reasonable response to the Tender Offer . . . ." Schedule
14D-1, Amendment No. 1.
49. In direct contrast to its public statements regarding its
Chancery Court lawsuit, UPR held the internal view that it had no chance of
succeeding in the Chancery Court lawsuit. The Project Mercury Briefing Report
states:
o "The tender offer would be accompanied by litigation to remove
the shareholder Rights Plan and to declare Delaware 203
unconstitutional. The likelihood of winning is nil, but the
litigation applies pressure to [Pennzoil], and provides
defense against an unfriendly venue if UPR gets sued."
(Emphasis supplied). Thus, UPR privately believes that the Chancery Court
lawsuit has no chance of success but has failed to disclose that fact to
Pennzoil's stockholders in connection with their public proclamation that
Pennzoil's Board of Directors would be breaching their fiduciary duties and
acting in bad faith if they refused to disable the Rights Plan and other
structural defenses.
50. Although UPR has made the Project Mercury Briefing Report
public, it has disclaimed its own assessment in the Report that its prospects
of winning are "nil." It claims that
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 27
<PAGE> 28
this assessment was based on a misinterpretation of its counsel's advice, but
it has refused to disclose either to Pennzoil or to the public precisely what
its counsel said or on what the advice was based. Having made public disclosure
of part of its counsel's advice, UPR has waived any privilege relating to that
advice. Pennzoil's shareholders are entitled to full disclosure of UPR's
assessment of its Chancery Court litigation so that they can assess the
validity of UPR's selective disclosures regarding its assessment of that
action.
UPR'S MISLEADING OMISSIONS REGARDING ITS
CONTINGENT LIABILITY TO UNION PACIFIC CORPORATION
51. As set forth above, Resources was a wholly owned subsidiary of
UPC until October 1995, when Resources sold 42.5 million shares of its common
stock in the Offering. In connection with the Offering, UPC announced its
intention to distribute pro rata to its stockholders its remaining ownership
interest in Resources by means of the Distribution. The Distribution was
subject to certain conditions, including receipt by UPC of a ruling from the
IRS that the Distribution would be tax free to UPC and its shareholders (the
"Revenue Ruling"). In October 1995, UPC applied to the IRS for the Revenue
Ruling. Among other things, UPC represented to the IRS that Resources had "not
allowed any negotiations or discussions, or even any direct or indirect
contact, with any possible acquisition target companies regarding an
acquisition if [Resources'] stock might be used in the acquisition" and that,
consequently, "there have been no negotiations, agreements, or arrangements
with respect to any acquisitions that would involve [Resources] stock."
52. In connection with the Offering, Resources agreed to indemnify
UPC for liabilities resulting from or arising out of "(1) the inaccuracy of any
factual information provided by
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 28
<PAGE> 29
Resources in connection with the ruling requested from the Internal Revenue
Service on the tax-free nature of [the] Distribution or (2) any act or failure
to act without the consent, direction or advice of UPC by Resources or its
directors, officers, other employees or agents or other representatives,
whether such act or failure to act occurs before or after [the] Distribution."
In addition, the indemnity covers any liabilities the indemnified parties have
to UPC's stockholders attributable to the spin-off Distribution if the
Distribution is not tax-free as a result of an inaccuracy or act or failure to
act as described above. As Resources has admitted in its publicly filed
documents, in the event that Resources is required to indemnify UPC under the
Indemnification Agreement, "such an indemnity payment could be very significant
in amount." Recent admissions by UPR and UPC indicate that "very significant"
is an understatement--the potential liability by UPC's own admission is $2.5
billion.
53. UPR failed to disclose Resources' potential liability to UPC
under this multi-billion dollar indemnity agreement, even though UPR's offer as
originally structured would have involved the issuance of stock. At the time of
the Distribution, Resources made representations to the Internal Revenue
Service regarding its existing negotiations and plans that were different from
those disclosed in UPR's Schedule 14D-1. Thus, pursuit by UPR of the Tender
Offer as originally structured would have involved a risk that the Revenue
Ruling would be reconsidered, triggering UPR's obligations under the indemnity
agreement.
UPR'S AND SMITH BARNEY'S USE OF INSIDE INFORMATION
54. UPR's conduct since filing this suit has been equally
culpable. On July 10, 1997, the parties entered into a contractual Stipulation
governing the production of documents. See Exhibit "A," attached. Pursuant to
the Stipulation, Pennzoil agreed to produce to UPR numerous
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 29
<PAGE> 30
highly confidential documents dealing with the company's long-term Strategic
Plan, as well as other confidential and highly confidential financial and other
information.
55. The Stipulation expressly provided, inter alia, that highly
confidential information was to be made available only to UPR's counsel and to
experts hired by trial counsel for the purpose of the litigation only. Id. at
paragraph 5. Paragraph 6(A) of the Stipulation specifically and expressly bars
anyone who received Pennzoil's highly confidential information from using that
information to provide financial advice to any party. The Stipulation states,
in relevant part:
Confidential or Highly Confidential Discovery Material may be
provided to persons listed in Paragraphs 4(b) and 5(c) above
only . . . provided that such expert or consultant (i) is
using said Confidential or Highly Confidential Discovery
Material solely in connection with the Litigations; and (ii)
will not use any Highly Confidential Discovery Information for
the purpose of providing financial advice to any party. . .
The Undertaking, which any person who is to receive confidential or highly
confidential information must execute, similarly provides, "I hereby certify .
. . that I will not use any Highly Confidential Material for the purpose of
providing financial advice to any party." Recently, Smith Barney has provided
copies of eight such undertakings signed by Smith Barney agents and
representatives. By executing the Undertaking, Smith Barney contractually
agreed to the terms of the Stipulation.
56. The clear purpose of the Stipulation was to protect against the
possibility of UPR gaining access either directly or indirectly to material
inside information about Pennzoil. Such protection was necessary for UPR as
well as for Pennzoil. Under long-established principles of federal securities
laws, UPR is barred from buying or selling Pennzoil stock so long as it
possesses material inside information regarding Pennzoil.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 30
<PAGE> 31
57. UPR hired Defendant Smith Barney to provide strategic
financial advice to UPR's Board in connection with its hostile Tender Offer for
Pennzoil. Despite the clear prohibition on the use of Pennzoil's inside
information for the purposes of providing financial advice to any party, UPR's
counsel furnished Smith Barney with Pennzoil's highly confidential documents.
Smith Barney has recently admitted that UPR provided it with copies of the
reports made to Pennzoil's board of directors by Pennzoil's financial advisors,
Lehman Brothers, Evercore Partners and J.P. Morgan, analyzing UPR's Tender
Offer. Furthermore, Smith Barney refused to answer questions at its deposition
regarding whether Smith Barney had been provided access to Pennzoil's Strategic
Plan. This conduct strongly implies that UPR has also furnished Smith Barney
with access to Pennzoil's highly confidential Strategic Plan. This type of
information is, under the Exchange Act, ethical principles, the standards of
ordinary practice among financial advisors and importantly by the express
provision of the Stipulation, regarded as off-limits to financial advisors like
Smith Barney in the context of corporate takeovers.
58. Since Smith Barney received and reviewed Pennzoil's inside,
highly confidential information, UPR has, on the advice and with the financial
assistance of Smith Barney, changed its offer. UPR and Smith Barney have also
been negotiating the sale of parts of Pennzoil's business to Pennzoil's
competitors, have met with prospective lenders, and performed valuation
analyses, all with knowledge of the non-public, inside information UPR has
improperly obtained. By so doing, UPR and Smith Barney violated Sections 10 and
14 of the Exchange Act, industry norms, and their specific contractual
obligations. Pennzoil has repeatedly asked UPR and Smith Barney to honor their
obligations under the contract, but UPR and Smith Barney refuse to do so. UPR
and Smith Barney have brazenly breached the Stipulation's terms and have stated
their intent to continue to do so.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 31
<PAGE> 32
59. UPR has repeatedly taken the position that information such as
that contained in Pennzoil's Strategic Plan and in the other confidential
information Smith Barney has reviewed is among the most commercially sensitive
information a company like Pennzoil possesses. Disclosure of Pennzoil's
sensitive trade secrets and business strategies would cause irreparable
commercial injury to Pennzoil and its shareholders, providing Pennzoil's
competitors with a wealth of inside and highly sensitive information that could
and would be used to compete unfairly with Pennzoil.
60. Smith Barney and UPR have inflicted and will continue to inflict
substantial harm on Pennzoil, its shareholders and the market by using
Pennzoil's sensitive internal documents to aid UPR's hostile takeover bid.
Smith Barney has advised UPR in connection with the recent revision of its
Tender Offer while in possession of inside information; it has met with lenders
to discuss the value of Pennzoil's assets; and it apparently has met with
Pennzoil's competitors to negotiate the sale of various parts of Pennzoil's
businesses. In light of the magnitude of the injury inflicted and the
uncertainty of quantifying the loss of competitive advantage and opportunities
that disclosure and use by Smith Barney and UPR of Pennzoil's Strategic Plan
and other confidential information would entail, Pennzoil has no adequate
remedy at law. Accordingly, Pennzoil asks for a temporary injunction and a
permanent injunction barring UPR and Smith Barney from purchasing or selling
Pennzoil stock so long as the information it improperly received remains
commercially sensitive. In addition, Smith Barney should be enjoined from
consulting with or
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 32
<PAGE> 33
giving financial advice regarding Pennzoil or Pennzoil's business to any
competitor or prospective purchaser of Pennzoil securities or assets, including
UPR.
IV. CAUSES OF ACTION
COUNT I: VIOLATION OF SECTIONS 10(B) AND 14(E) OF THE
SECURITIES EXCHANGE ACT (AGAINST UPR AND SMITH
BARNEY)
61. Pennzoil realleges and incorporates by reference herein the
allegations set forth in paragraphs 1 through 60 above as if fully set forth
herein.
62. As set forth above, UPR, though its officers and/or agents
including Smith Barney, is in possession of material, non-public information
regarding Pennzoil and its business. Despite having such information, UPR seeks
to purchase all of the stock of Pennzoil, a publicly-traded company.
63. Smith Barney has provided financial and strategic advice and
assistance to UPR in connection with the Tender Offer, despite the possession
and knowledge of material inside information regarding Pennzoil.
64. In making its offer and in announcing its revised offer, UPR
has relied on the advice of Smith Barney, despite UPR's knowledge that Smith
Barney is privy to material inside information regarding Pennzoil.
65. By seeking to purchase Pennzoil's stock while in the
possession of material inside information, UPR, aided and abetted by Smith
Barney, is violating Sections 10(b) and 14(e) of the Securities Exchange Act.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 33
<PAGE> 34
66. UPR and Smith Barney are bound by the Stipulation to maintain
the confidentiality of Pennzoil's highly confidential information. Thus, they
cannot make the disclosures that would be required under the Securities
Exchange Act before being permitted to purchase lawfully Pennzoil shares in the
Tender Offer.
67. Pennzoil, its stockholders and the market are being
irreparably harmed by UPR's and Smith Barney's use of highly confidential
information. While in possession of material inside information regarding
Pennzoil, Smith Barney has advised UPR to offer $84 per share in cash for all
of Pennzoil's stock. This advice has been based upon, and influenced by,
material inside information regarding Pennzoil not available to the investing
public. UPR is prohibited by the Stipulation from revealing publicly, or
otherwise using to advise UPR on its offers, the inside information to which
Smith Barney and UPR have been privy, and is prohibited by federal securities
laws from trading on the basis of material inside information. Allowing the
Tender Offer to close would permit UPR to trade on the basis of material inside
information in violation of the Securities Exchange Act.
68. This harm can not be remedied. UPR's takeover, once
successful, would be difficult, if not impossible, to unravel. No action at law
for damages could provide Pennzoil with adequate relief from Smith Barney's
wrongful actions.
69. Because Pennzoil has no adequate remedy at law, it seeks equitable
relief in the form of a temporary injunction and a permanent injunction
prohibiting UPR from going forward with its Tender Offer so long as the
information provided to Smith Barney and UPR remains commercially sensitive.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 34
<PAGE> 35
70. Pennzoil also seeks a temporary injunction and permanent
injunction barring Smith Barney from trading in Pennzoil stock and from
providing financial advice to any party in the purchase or sale of Pennzoil
stock until such time as the information provided to Smith Barney regarding
Pennzoil is no longer commercially sensitive. UPR has stated in letters
(Exhibits "B" and "C," attached) that it intends to continue using Smith Barney
as its financial advisor for its attempt to take over Pennzoil, and it
reasonably appears that Smith Barney intends to continue to provide UPR with
such strategic financial advice, including with respect to the restructuring of
UPR's offer and negotiations with third parties as referred to above.
COUNT II. VIOLATIONS OF SECTION 14(E) OF THE SECURITIES EXCHANGE ACT
71. Pennzoil realleges and incorporates by reference herein the
allegations set forth in paragraphs 1 through 70 above as if fully set forth
herein.
72. UPR's Schedule 14D-1 makes untrue statements of material fact
and fails to state material facts that are necessary to make the statements
made in the Schedule 14D-1, in light of the circumstances in which they are
made, not misleading. As outlined above, UPR has made materially misleading
statements and has failed to disclose material information required to make the
statements it has made not misleading. Among other things, UPR has made
statements designed to foster the misleading impression that Pennzoil's
management favors the Tender Offer; UPR has failed to disclose the effect
purchase accounting will have on its future earnings; UPR has failed to
disclose its contingent $2.5 billion liability to UPC under the tax indemnity;
UPR has failed to disclose its historic failure and lack of expertise in the
international oil & gas market;
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 35
<PAGE> 36
and UPR has failed to disclose adequately the continuing problems it faces in
the future as a result of the steep decline curves projected for its
properties.
73. These false and misleading statements constitute violations of
Section 14(e) of the Exchange Act and of the SEC's rules and regulations
promulgated thereunder.
74. With knowledge of the falsity, and in furtherance of UPR's
fraudulent scheme, Smith Barney has conspired with UPR and with media
consultants hired by UPR to violate the Williams Act.
75. Pennzoil and its stockholders are being irreparably harmed by
the false and misleading statements and omissions made by UPR. The purpose of
the Williams Act is to ensure that shareholders in publicly-traded companies
will not be forced to make investment decisions during the pendency of a tender
offer without full and accurate disclosure of material information regarding
the offer and the offeror. UPR and Smith Barney have conspired to engage in a
campaign of disinformation in violation of the Williams Act, and are urging
Pennzoil shareholders to tender their shares, despite the fact that UPR has not
yet made disclosures required of it by law. Pennzoil and its shareholders will
continue to be irreparably harmed unless UPR and Smith Barney are preliminarily
and permanently enjoined (1) from making further false and misleading
statements and omissions in connection with the Tender Offer and (2) to make
corrective disclosures that cure all of the materially false and misleading
statements and omissions made to date. Pennzoil's stockholders have been, and
absent injunctive relief will continue to be, denied material information to
which they are lawfully entitled and which is essential to making an informed
decision on whether to tender their shares of Pennzoil stock to UPR.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 36
<PAGE> 37
76. In order to correct UPR's prior violations of the Williams
Act, and in order to prevent further violations by UPR of the Act, Pennzoil
prays for an order:
(a) preliminarily and permanently enjoining Union Pacific
Resources Group Inc. and Resources Newco, Inc., and
all persons acting in concert with them, from
acquiring shares of stock of Pennzoil, through any
purported tender offer or otherwise, until at least
30 days after dissemination of complete and accurate
securities filings;
(b) preliminarily and permanently enjoining Union Pacific
Resources Group Inc. and Resources Newco, Inc., and
anyone acting definitely or indefinitely in concert
with them, (1) from making false and misleading
statements and omissions in connection with the
Tender Offer and (2) to make corrective disclosures
that cure all of the materially false and misleading
statements and omissions made by Union Pacific
Resources Group Inc. and Resources Newco, Inc. in the
Schedule 14D-1;
(c) awarding Pennzoil its costs and attorneys fees in
connection with this action; and
(d) granting Pennzoil such other and further relief as
the Court may deem just and proper.
COUNT III: VIOLATION OF THE CONFIDENTIALITY AGREEMENT AND MISUSE
OF CONFIDENTIAL INFORMATION
77. Pennzoil realleges and incorporates by reference herein the
allegations set forth in paragraphs 1 through 76 above as if fully set forth
herein.
78. Under the parties' agreement, UPR expressly promised that
Pennzoil's highly confidential information would not be provided to or reviewed
by UPR's financial advisors. UPR further promised that the information would be
used solely for purposes of the litigation. Smith Barney, by signing the
Undertakings, agreed to be contractually bound by the Stipulation.
79. Smith Barney and UPR are flagrantly breaching the contractual
Stipulation and the Court's Order approving the Stipulation. Contrary to the
express terms of the Stipulation, Smith Barney has received and reviewed
Pennzoil's highly confidential information, including Pennzoil's
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 37
<PAGE> 38
Strategic Plan and other commercially sensitive documents. With knowledge of
the information contained in Pennzoil's highly confidential documents, Smith
Barney rendered advice to UPR in connection with its revised offer of $84 per
share all cash to Pennzoil's shareholders. UPR accepted and acted on Smith
Barney's advice with actual knowledge that Smith Barney was in possession of
Pennzoil's highly confidential information.
80. By their conduct, UPR and Smith Barney have breached the
parties' contract. Furthermore, by this conduct UPR and Smith Barney have
misappropriated Pennzoil's confidential information.
81. Pennzoil, its stockholders and the market are being
irreparably harmed by UPR's and Smith Barney's use of Pennzoil's highly
confidential information. While in possession of Pennzoil's commercially
sensitive and highly confidential information, Smith Barney has advised UPR in
connection with its offer of $84 per share in cash for all of Pennzoil's stock.
This advice was based in part upon, and influenced by, highly confidential
information regarding Pennzoil improperly provided to Smith Barney in blatant
disregard of UPR's and Smith Barney's contractual agreements and obligations
under the Stipulation.
82. This harm can not be remedied. UPR's takeover, once
successful, would be difficult, if not impossible, to unravel. No action at law
for damages could provide Pennzoil with adequate relief from UPR's and Smith
Barney's wrongful actions.
83. Because Pennzoil has no adequate remedy at law, it seeks equitable
relief in the form of a temporary injunction and a permanent injunction
prohibiting UPR from going forward with its Tender Offer or taking any other
action in an effort to acquire or obtain control of Pennzoil so long as the
information provided to Smith Barney and UPR remains commercially sensitive.
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 38
<PAGE> 39
84. Pennzoil also seeks a temporary injunction and permanent
injunction barring Smith Barney from trading in Pennzoil stock and from
providing financial advice to any party in the purchase or sale of Pennzoil
stock until such time as the information provided to Smith Barney regarding
Pennzoil is no longer commercially sensitive. UPR has stated in letters
(Exhibits "B" and "C," attached) that it intends to continue using Smith Barney
as its financial advisor for its attempt to take over Pennzoil, and it
reasonably appears that Smith Barney intends to continue to provide UPR with
such strategic financial advice, including with respect to the restructuring of
UPR's offer and negotiations with third parties as referred to above.
WHEREFORE, Pennzoil demands that upon hearing of the matters raised in
this Third Amended Counterclaim and Original Third Party Action, that it have
judgment against Union Pacific Resources Group Inc., Resources Newco, Inc. and
Smith Barney, Inc. as outlined herein along with its costs and attorneys fees,
and for such other and further relief to which it may show itself justly
entitled.
Respectfully submitted,
Robin C. Gibbs
State Bar No. 07853000
Gibbs & Bruns, L.L.P.
1100 Louisiana, Suite 5300
Houston, Texas 77002
Telephone No.: (713) 650-8805
Facsimile No.: (713) 750-0903
ATTORNEY-IN-CHARGE FOR
DEFENDANT PENNZOIL COMPANY
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 39
<PAGE> 40
<TABLE>
<S> <C>
OF COUNSEL:
David Keltner Phillip T. Bruns
Jose, Henry, Brantley, & Keltner Jeffrey C. Alexander
1300 Oil & Gas Building Jean C. Frizzell
309 W. 7th Street Gibbs & Bruns, L.L.P.
Fort Worth, TX 76102 1100 Louisiana, Suite 5300
Telephone No.: (817) 877-3303 Houston, Texas 77002
Facsimile No.: (817) 338-9109 Telephone No.: (713) 650-8805
Facsimile No.: (713) 750-0903
Charles Alan Wright
727 East Dean Keeton Street Charles F. Richards, Jr.
Austin, Texas 78705 Thomas A. Beck
Telephone No.: (512) 471-7188 Daniel A. Dreisbach
Facsimile No.: (512) 477-8149 Robert J. Stearn
J. Travis Laster
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
Telephone No.: (302) 658-6541
</TABLE>
ATTORNEYS FOR DEFENDANT PENNZOIL COMPANY
DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 40
