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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_]Confidential, for Use of the
Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Devon Energy Corporation
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange ActRule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
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[Devon Energy Corporation] [PennzEnergy Company]
July 15, 1999
PROPOSED MERGER--YOUR VOTE IS VERY IMPORTANT
Dear Stockholder:
On May 19, 1999, Devon Energy Corporation and PennzEnergy Company agreed to
merge. The merged company, which we refer to in this document as New Devon,
will rank solidly in the top ten of all U.S.-based independent oil and gas
producers in terms of market capitalization, total proved reserves and annual
production. We believe that New Devon will create substantially more
stockholder value than either Devon or PennzEnergy could achieve individually.
In the merger, Devon stockholders will receive one share of New Devon's
common stock for each share of Devon common stock that they own. PennzEnergy
stockholders will receive 0.4475 shares of New Devon's common stock for each
share of PennzEnergy common stock that they own. As a result, Devon's current
stockholders will own approximately 69 percent of New Devon, and PennzEnergy's
current stockholders will own approximately 31 percent. These percentages of
ownership for both companies will be reduced if New Devon completes a planned
public offering of additional shares of common stock as described in more
detail in this document.
The merger is expected to be tax-free to Devon and PennzEnergy stockholders
for U.S. federal income tax purposes, except for taxes on cash received by
PennzEnergy stockholders for fractional shares.
The merger requires the approval of the stockholders of both Devon and
PennzEnergy. Devon and PennzEnergy have each scheduled special meetings of
their stockholders on August 17, 1999, to vote on the merger.
Regardless of the number of shares you own or whether you plan to attend a
meeting, it is important that your shares be represented and voted. Voting
instructions are inside.
This document provides you with detailed information about the proposed
merger. We encourage you to read this document carefully.
Sincerely yours,
DEVON ENERGY CORPORATION PENNZENERGY COMPANY
/s/ J. Larry Nichols /s/ James L. Pate
J. Larry Nichols James L. Pate
President and Chief Executive Officer Chairman of the
Board
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon
the adequacy or accuracy of this joint proxy statement/prospectus. Any
representation to the contrary is a criminal offense.
This joint proxy statement/prospectus is dated July 15, 1999 and was first
mailed to stockholders on or about July 16, 1999.
Please see the section entitled "Risk Factors" beginning on page 13 for a
discussion of potential risks involved in the merger and related transactions.
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DEVON ENERGY CORPORATION
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 17, 1999
----------------
To the stockholders of
Devon Energy Corporation:
A special meeting of stockholders of Devon Energy Corporation will be held on
August 17, 1999, at 10:00 a.m. (Oklahoma City time) in the Green Country Room
on the second floor of the Westin Hotel, One North Broadway, Oklahoma City,
Oklahoma, for the following purposes:
1. To consider and vote upon a proposal to approve the amended and
restated merger agreement dated as of May 19, 1999, between Devon and
PennzEnergy Company, and the transactions contemplated by it;
2. To consider and vote upon a proposal to approve a stock option plan
amendment which will increase the number of shares available for grant
under that plan from three million to six million; and
3. To transact other business as may properly be presented at the special
meeting or any adjournments of the meeting.
Devon and PennzEnergy will not complete the merger unless our stockholders
approve the merger agreement. The merger does not require the approval of the
stock option plan amendment. If the merger is not completed, then the stock
option plan amendment will not be implemented.
Only stockholders of record at the close of business on July 6, 1999, are
entitled to notice of and to vote at the meeting and any adjournments of the
meeting. A list of stockholders entitled to vote at the meeting will be
available for inspection during normal business hours for the ten days before
the meeting at the offices of Devon and at the time and place of the meeting.
Please complete, date, sign and promptly return your proxy card so that your
shares may be voted in accordance with your wishes and so that the presence of
a quorum may be assured. Giving a proxy does not affect your right to vote in
person if you attend the meeting. You may revoke your proxy at any time before
it is exercised at the meeting.
By Order of the Board of Directors,
Marian J. Moon
Corporate Secretary
Oklahoma City, Oklahoma
July 15, 1999
Your Vote is Important!
Please read the accompanying
Joint Proxy Statement/Prospectus
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TABLE OF CONTENTS
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Page
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Questions and Answers..................................................... 1
Summary................................................................... 3
Summary Unaudited Pro Forma Financial and Other Information............. 8
Devon's Summary Selected Financial Data................................. 11
PennzEnergy's Summary Selected Financial Data........................... 12
Risk Factors.............................................................. 13
Risks Relating to the Merger............................................ 13
Risks Relating to an Investment in New Devon............................ 14
New Devon After the Merger................................................ 17
Comparative Per Share Data................................................ 18
Comparative Market Price Data............................................. 19
Unaudited Pro Forma Financial Information................................. 20
Notes to Unaudited Pro Forma Financial Information........................ 24
The Stockholder Meetings and Proxy Solicitations.......................... 29
Devon................................................................... 29
PennzEnergy............................................................. 31
The Merger................................................................ 34
Background of the Merger................................................ 34
Reasons for the Merger.................................................. 35
Opinions of Financial Advisors.......................................... 38
Opinion of PaineWebber Incorporated.................................... 38
Opinion of J. P. Morgan Securities Inc................................. 43
Interests of Certain Persons in the Merger.............................. 48
The Merger Agreement...................................................... 49
General................................................................. 49
Closing of the Merger; Effective Time of the Merger; Surviving
Corporations........................................................... 49
Consideration to be Received in the Merger.............................. 49
Exchange of Shares; Fractional Shares................................... 50
Conditions to the Merger................................................ 51
Representations and Warranties.......................................... 52
Certain Covenants....................................................... 53
Indemnification and Insurance........................................... 55
Other Acquisition Proposals............................................. 55
Termination............................................................. 56
Termination Fees and Expenses........................................... 56
Merger Costs............................................................ 57
Other Expenses.......................................................... 57
Amendment; Extension and Waiver......................................... 58
Stock Exchange Listing.................................................. 58
The Stock Option Agreements............................................... 59
General................................................................. 59
Terms of the Options.................................................... 59
Repurchase at the Option of the Grantee................................. 59
Registration Rights..................................................... 60
Limitation of Profit.................................................... 60
Effect of Stock Option Agreements....................................... 60
Properties of New Devon................................................... 62
Primary Operating Areas-North America................................... 62
Primary Operating Areas-International................................... 64
Developed and Undeveloped Acreage....................................... 65
Directors and Executive Officers of New Devon............................. 66
New Devon Capital Stock................................................... 68
General................................................................. 68
Common Stock............................................................ 68
Trust Convertible Preferred Securities.................................. 68
Preferred Stock......................................................... 68
</TABLE>
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Special Voting Stock................................................... 69
Antitakeover and Other Provisions...................................... 69
Material United States Federal Income Tax Considerations................. 70
General................................................................ 70
Opinions of Counsel.................................................... 70
Tax Consequences of the Merger......................................... 70
Information Reporting and Backup Withholding........................... 72
Comparison of the Rights of Holders of Devon and PennzEnergy Common Stock
to Those of New Devon Common Stock...................................... 73
Authorized Capital Stock............................................... 73
Vote Required for Extraordinary Transactions........................... 73
Amendment to Governing Documents....................................... 75
Dissenters' Rights..................................................... 75
Classified Board of Directors.......................................... 76
Number of Directors.................................................... 77
Removal of Directors; Filling Vacancies................................ 77
Stockholder Action by Written Consent; Special Meetings................ 78
Fiduciary Duties of Directors.......................................... 79
Indemnification of Officers and Directors.............................. 80
Director Liability..................................................... 81
Antitakeover Provisions and Interested Stockholder Transactions........ 81
Stockholder Rights Plan................................................ 83
Voting of the Special Voting Stock..................................... 84
Notice of Stockholder Proposals and Director Nominations............... 84
Proposed Stock Option Plan Amendment..................................... 85
General................................................................ 85
Background............................................................. 85
Administration......................................................... 85
Eligibility for Participation.......................................... 85
Types of Awards........................................................ 85
Other Components of the Devon Stock Option Plan........................ 86
Stock Option Awards to Employees....................................... 86
Stock Option Awards to Nonemployee Directors........................... 86
Adjustments............................................................ 86
Change of Control...................................................... 86
Termination and Amendment.............................................. 86
Federal Tax Treatment.................................................. 87
Withholding Taxes...................................................... 87
Auditors, Transfer Agent and Registrar................................... 87
Legal Matters............................................................ 87
Experts.................................................................. 88
Future Stockholder Proposals............................................. 88
Where You Can Find More Information...................................... 89
Cautionary Statement Concerning Forward-Looking Statements............... 91
Commonly Used Oil and Gas Terms.......................................... 92
Annex A--Amended and Restated Agreement and Plan of Merger............... A-1
Annex B--Opinion of PaineWebber Incorporated............................. B-1
Annex C--Opinion of J. P. Morgan Securities Inc.......................... C-1
Annex D--Amended and Restated Stock Option Agreement between Devon and
PennzEnergy............................................................. D-1
Annex E--Amended and Restated Stock Option Agreement between PennzEnergy
and Devon............................................................... E-1
</TABLE>
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QUESTIONS AND ANSWERS
Q: What is being proposed?
A: Devon and PennzEnergy are proposing to merge the two companies. The
resulting publicly traded company will be called Devon Energy Corporation.
Q. What is New Devon?
A. In this joint proxy statement/prospectus, we refer to the publicly traded
company resulting from the merger involving Devon and PennzEnergy as "New
Devon." Current stockholders of Devon and PennzEnergy will become
stockholders of New Devon.
Q. Why are the companies merging?
A. The boards of directors of Devon and PennzEnergy believe that the merger is
in the best interest of stockholders. New Devon should benefit from:
. a larger and more diversified asset base;
. increased financial strength and flexibility;
. an estimated $50 to $60 million in annual cost savings;
. improved capital efficiencies; and
. greater human and technological resources.
See pages 35 through 38 for a more complete discussion of the reasons for
the merger.
Q. What will I receive as a result of the merger?
A. Devon common stockholders will receive one share of New Devon common stock
for each share of Devon common stock they own. PennzEnergy common
stockholders will receive 0.4475 shares of New Devon common stock for each
share of PennzEnergy common stock that they own.
Q. What happens to my future dividends?
A. Devon pays a regular quarterly dividend of $0.05 per share on its common
stock. Declaration of dividends by New Devon will be at the sole discretion
of the New Devon board of directors. However, we expect that New Devon will
pay the same regular quarterly dividend per share after the merger as Devon
currently pays, subject to approval and declaration by New Devon's board of
directors. PennzEnergy currently pays a regular quarterly dividend of
$0.0625 per share. For comparison purposes, since PennzEnergy shareholders
will receive 0.4475 shares of New Devon common stock for each share of
PennzEnergy common stock that they own, the equivalent quarterly dividend
rate per PennzEnergy share would be $0.0224.
Q. What do the boards of directors recommend?
A. The boards of directors of Devon and PennzEnergy recommend that
stockholders vote FOR approval of the merger.
Q. What do I need to do now?
A. After carefully considering the enclosed information, please indicate how
you want to vote and sign and return your proxy card or voting instruction
card in the enclosed envelope as soon as possible. Your shares will then be
voted at the special meeting in accordance with your instructions.
Q. If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A. No. You must instruct your broker how to vote your shares or else your
broker will not vote your shares.
Q. What happens if I don't vote my shares?
A. The failure to vote at the special meeting will have the same effect as
voting against the merger.
Q. Should I send in my certificates now?
A. No. After the merger is approved, you will receive instructions on how to
exchange your stock certificates for stock certificates of New Devon.
Q. When do you expect the merger to be completed?
A. We expect the merger to be completed within one or two business days after
receiving stockholder approvals at the special meetings.
Q. Who can help answer additional questions that I may have?
A. Devon Energy Corporation:
Investor Relations
(405) 552-4570
[email protected]
PennzEnergy Company:
Investor Relations
(713) 546-6648
[email protected]
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2
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SUMMARY
This summary highlights selected information from this document. It may not
contain all of the information that is important to you. To better understand
the merger and related transactions and for a more complete description of the
legal terms, you should carefully read this entire document and the documents
to which we have referred you. See "Where You Can Find More Information" on
page 89.
The Companies
Devon Energy Corporation
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102-8260
(405) 235-3611
Devon is an independent energy company that engages primarily in oil and gas
exploration, development and production, and in the acquisition of producing
properties. Devon's oil and gas properties are concentrated in six operating
areas in the United States and Canada. Devon is one of the top 15 public
independent oil and gas companies in both the United States and Canada, as
measured by oil and gas reserves. Its U.S. operations are primarily conducted
in the Permian Basin, the San Juan Basin, the Rocky Mountains and the Mid-
continent. Its Canadian operations are primarily in the province of Alberta.
Devon's common stock is traded on the American Stock Exchange under the symbol
"DVN." In addition, a class of exchangeable shares is traded on The Toronto
Stock Exchange under the symbol "NSX." These shares, issued by Devon's
subsidiary, Northstar Energy Corporation, are exchangeable at any time, on a
one-for-one basis, for Devon common stock.
PennzEnergy Company
P.O. Box 4616
Houston, Texas 77210-4616
(713) 546-6000
PennzEnergy is an independent oil and gas company engaged in the acquisition,
exploration, exploitation and development of prospective and proved oil and gas
properties, and the production and sale of crude oil, condensate, natural gas
and natural gas liquids. PennzEnergy's domestic operations are currently
focused in the Gulf of Mexico, onshore Gulf Coast, east and west Texas, and New
Mexico. Its international operations are currently located in Australia,
Azerbaijan, Brazil, Egypt, Qatar and Venezuela. PennzEnergy's common stock is
primarily traded on the New York Stock Exchange under the symbol "PZE."
Devon Delaware Corporation (to be renamed "Devon Energy Corporation")
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102-8260
(405) 235-3611
Devon Delaware Corporation, which we refer to as New Devon, is a newly formed
Delaware corporation that has not conducted any activities other than those
related to the merger. As a result of the merger, (1) Devon will become a
wholly owned subsidiary of New Devon and (2) PennzEnergy will merge with and
into New Devon. Current stockholders of Devon and PennzEnergy will become
stockholders of New Devon.
The Merger
What Devon stockholders will receive in the merger (see page 49)
Devon common stockholders will receive one share of New Devon common stock
for each share of Devon common stock that they own. The exchangeable shares
will become exchangeable for New Devon common stock on the same one-for-one
basis. Current holders of Devon common stock and exchangeable shares will own
approximately 69% of New Devon's stock. This percentage will be reduced if New
Devon completes a planned public offering of new shares of common stock as
described on page 7.
What PennzEnergy stockholders will receive in the merger (see page 49)
PennzEnergy common stockholders will receive 0.4475 shares of New Devon
common stock for
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each share of PennzEnergy common stock that they own. Current PennzEnergy
stockholders will own approximately 31% of the common stock of New Devon. The
percentage will be reduced if New Devon completes a planned public offering of
new shares of common stock as described on page 7. PennzEnergy stockholders
will not receive fractional shares. Instead, PennzEnergy stockholders will
receive cash for the market value of any fractional shares. Each holder of
PennzEnergy's 6.49% cumulative preferred stock, series A will receive an equal
number of shares of New Devon's 6.49% cumulative preferred stock, series A.
Directors and senior management of New Devon following the merger (see page 66
through 67)
The board of directors of New Devon will consist of fourteen directors: seven
members designated by Devon and seven designated by PennzEnergy.
J. Larry Nichols, the President, Chief Executive Officer and a director of
Devon, will be President, Chief Executive Officer and a director of New Devon.
James L. Pate, the Chairman of the Board of PennzEnergy, will be Chairman of
the Board of New Devon. Devon's executive staff will continue in their current
capacities with New Devon. New Devon may select members of PennzEnergy's
executive staff to augment New Devon's management team.
Voting
Votes required (see pages 29 and 31)
The affirmative vote of the holders of a majority of the outstanding shares
of Devon common stock and exchangeable shares, voting together, is required to
approve the merger agreement at the Devon meeting. The affirmative vote of the
holders of a majority of the votes cast at the meeting is required to approve
the Devon stock option plan amendment. The affirmative vote of the holders of a
majority of the outstanding shares of PennzEnergy common stock is required for
approval of the merger agreement at the PennzEnergy meeting.
Voting the exchangeable shares
Each exchangeable share is entitled to one vote at the Devon meeting through
a voting agreement. Under the voting agreement, the trustee exercises voting
rights on behalf of holders of the exchangeable shares. The trustee holds one
share of special voting stock of Devon. The special voting share is entitled to
one vote for each outstanding exchangeable share held by persons other than
Devon. The trustee will vote only as instructed by the holders of exchangeable
shares.
Our Recommendations to Stockholders
Devon (see page 29)
Devon's board of directors recommends that Devon stockholders vote FOR the
approval of the merger agreement and FOR the stock option plan amendment.
PennzEnergy (see page 31)
PennzEnergy's board of directors recommends that PennzEnergy stockholders
vote FOR the approval of the merger agreement.
Opinions of financial advisors (see pages 38 through 48)
In deciding to approve the merger, the board of directors of Devon considered
the opinion of PaineWebber Incorporated, its financial advisor, that, as of the
date of its opinion, the effective exchange ratio was fair, from a financial
point of view, to Devon's stockholders.
In deciding to approve the merger, the board of directors of PennzEnergy
considered the opinion of J.P. Morgan Securities Inc., its financial advisor,
that, as of the date of its opinion, the consideration to be received by
PennzEnergy's stockholders in the merger was fair to them from a financial
point of view.
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These opinions are attached as Annexes B and C to this joint proxy
statement/prospectus. We encourage you to read these opinions carefully, as
well as the descriptions of the analyses and assumptions on which the opinions
were based found on pages 38 through 48.
Interests of officers and directors in the merger that differ from your
interests (see page 48)
Some of the officers and directors of Devon and PennzEnergy have agreements,
stock options and other benefit plans that may provide them with interests in
the merger that are different from yours. The boards of both companies were
aware of these interests and considered them in approving the merger.
The Merger Agreement
The merger agreement is attached as Annex A to this document. We encourage
you to read the merger agreement because it is the legal document that governs
the merger. It contains information that may not be included elsewhere in this
document.
Conditions to the merger (see pages 51 through 52)
In order to complete the merger, a number of customary conditions must be
satisfied, including the following:
. the approval by both the Devon and the PennzEnergy stockholders;
. the absence of any law or court order prohibiting the merger and the
expiration of applicable regulatory waiting periods;
. the approval for listing on either the New York Stock Exchange or the
American Stock Exchange of the New Devon shares to be issued in the
merger;
. the continued accuracy of each company's representations and warranties,
and the compliance by each company with its agreements contained in the
merger agreement; and
. the receipt of legal opinions from counsel for each company as to the
tax-free qualification of the merger.
The board of directors of either Devon or PennzEnergy may choose to complete
the merger even though a condition to that company's obligation has not been
satisfied if a majority of the stockholders of both companies have approved the
merger and the law allows the boards to do so.
Termination of the merger agreement (see page 56)
Devon and PennzEnergy can jointly agree to terminate the merger agreement
without completing the merger, even after stockholder approval. In addition,
either company can terminate the merger agreement on its own without completing
the merger if any of the following occurs:
. the merger is not completed by December 31, 1999, other than due to a
breach of the merger agreement by the terminating party;
. the stockholders of either Devon or PennzEnergy fail to give the
required approvals;
. a court or other governmental authority permanently prohibits the
merger;
. prior to receipt of Devon and PennzEnergy stockholder approval, the
board of directors of the terminating company determines that proceeding
with the merger would be inconsistent with its fiduciary obligations
because of a superior offer from a third party, after providing the
other party prior notice and considering changes to the terms of the
merger agreement proposed by the other party;
. the other party has breached the merger agreement or any of its
representations and warranties in the merger agreement have become
untrue; or
. the board of directors of the other party withdraws or materially
changes its recommendation of the merger to its stockholders, or
recommends an alternative transaction to its stockholders.
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Termination fees and expenses (see pages 56 through 57)
If the merger agreement is terminated by either party under specific
circumstances involving a proposed business transaction with a third party, the
party that would enter into the other transaction will be required to pay the
other party to the merger agreement a termination fee of up to $22 million plus
expenses.
No solicitation
Devon and PennzEnergy have each generally agreed not to initiate any
discussions with another party regarding a business combination while the
merger is pending or to engage in any such discussions unless required by
fiduciary obligations.
The Stock Option Agreements
Terms of options (see pages 59 through 61)
In connection with the merger agreement, Devon and PennzEnergy each granted
the other an option to purchase 14.9% of its common stock. The per share
exercise price for the option granted by Devon to PennzEnergy is $32.375. The
per share exercise price for the option granted by PennzEnergy to Devon is
$14.488. These exercise prices were based on the closing market price of Devon
common stock and 0.4475 times the closing price of Devon common stock on May
18, 1999, the day prior to the approval of the stock option agreements by the
Devon and PennzEnergy boards of directors. The options are exercisable under
the circumstances described on page 59. The total profit under either stock
option agreement may not exceed $23 million, which includes amounts received on
repurchase or sale of option shares and any termination fees paid.
Options could have the effect of deterring competing bidders
The stock option agreements were intended to increase the likelihood that
Devon and PennzEnergy will complete the merger. The stock option agreements
have the effect of making an acquisition of either company by a third party
more costly and likely preventing a competing acquirer for either company from
accounting for the acquisition by using the pooling-of-interests accounting
method. Accordingly, the stock option agreements, together with the termination
fees, may have the effect of discouraging a third party from proposing a
competing transaction, including one that might be more favorable to
stockholders than the merger.
Other Information
Accounting treatment
The merger will be accounted for as a purchase of PennzEnergy by Devon under
the "purchase" method of accounting.
Antitrust approval required to complete the merger
The merger is subject to antitrust laws. We are making the required filings
with the Department of Justice and the Federal Trade Commission. We are not
permitted to complete the merger until the applicable waiting periods have
expired or terminated. We expect that the applicable waiting periods will
expire on or about August 15, 1999.
Comparative per share market price information (see page 19)
Devon's common stock is listed on the American Stock Exchange, and the
primary stock exchange listing for PennzEnergy common stock is the New York
Stock Exchange. On May 19, 1999, the last full trading day on the exchanges
prior to the public announcement of the proposed merger, Devon common stock
closed at $31.50 per share and PennzEnergy common stock closed at $14.625 per
share. On July 14, 1999, Devon common stock closed at $38.1875 per share and
PennzEnergy common stock closed at $17.3125 per share.
Material federal income tax considerations (see pages 70 through 72)
We have structured the merger so that, in general, you will not recognize any
gain or loss for federal income tax purposes as a result of the merger, except
for taxes payable by PennzEnergy stockholders as a result of receiving cash
instead of fractional shares.
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Tax matters are complicated, and the tax consequences of the merger to you
will depend on the facts of your own situation. You should seek tax advice for
a full understanding of the particular tax consequences of the merger to you.
Listing of New Devon's common stock
New Devon has approval, subject to notice of issuance, to list its shares on
the American Stock Exchange.
New Devon plans a public offering of additional common stock
New Devon plans to raise between $300 and $500 million through a public
offering of newly issued shares of New Devon common stock shortly after the
merger is completed. However, depending upon market conditions and other
factors, Devon may make the offering prior to the merger. If the offering is
made prior to the merger, Devon plans to raise between $300 and $350 million.
It is also possible that Devon or New Devon may offer equity securities other
than common stock. Neither Devon nor New Devon can provide assurances that they
will successfully complete a public offering. The public offering is not a
condition to the merger. If Devon completes the public offering before the
merger, then each newly issued Devon share would be converted into one share of
New Devon in the merger. All further references in this document to this
proposed offering of securities will be made assuming it will occur after the
merger is completed.
This document does not constitute an offer to sell or a solicitation of an
offer to buy these newly issued shares. The new shares will be offered only
through a separate prospectus.
For definitions of oil and gas terms used in this document, see "Commonly
Used Oil and Gas Terms" on page 92.
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Summary Unaudited Pro Forma Financial and Other Information
The following unaudited pro forma financial information has been prepared to
assist in your analysis of the financial effects of the merger. This pro forma
information is based on the historical financial statements of Devon and
PennzEnergy.
The information was prepared based on the following:
. New Devon will utilize the full cost method of accounting for its oil
and gas activities.
. The merger will be accounted for as a purchase of PennzEnergy by New
Devon.
. New Devon plans to raise between $300 and $500 million in a public
offering of additional shares of New Devon common stock. The proceeds
from the planned offering would be used to fund capital expenditures and
repay long-term debt. The pro forma financial statements do not reflect
any effects of the planned offering.
. Expected annual cost savings of $50 to $60 million have not been
reflected as an adjustment to the historical data. These cost savings
are expected to result from the consolidation of the corporate
headquarters of Devon and PennzEnergy and the elimination of duplicate
staff and expenses.
. The unaudited pro forma statements of operations do not include the
effects of a reduction of the carrying value of oil and gas properties
because the reduction is directly related to the merger. As of March 31,
1999, the pro forma reduction would have been $657.0 million ($407.4
million after tax). The unaudited pro forma balance sheet does include
the effect of this reduction.
The March 31, 1999, pro forma reduction was based on a posted West Texas
Intermediate oil price of $15.25 per barrel and a Texas Gulf Coast index
gas price of $1.80 per Mcf. As of June 30, 1999, both West Texas
Intermediate oil and Texas Gulf Coast index gas prices had increased to
$16.50 per barrel and $2.14 per Mcf, respectively. Using these prices,
the pro forma reduction of the carrying value of oil and gas properties
would be reduced to less than $200 million (less than $150 million after
tax). The actual reduction, if any, that will be recorded by New Devon
will depend on the oil and gas prices in effect at the end of the
quarter in which the merger is actually closed.
No pro forma adjustments have been made with respect to the following unusual
items. These items are reflected in the historical results of Devon or
PennzEnergy, as applicable, and should be considered when making period-to-
period comparisons:
. In 1998, PennzEnergy realized pretax gains on the sale and exchange of
Chevron Corporation common stock of $230.1 million. The summary
unaudited pro forma operations data does not include the related $207.0
million after-tax extraordinary loss resulting from the early
extinguishment of debt.
. In 1998, PennzEnergy incurred $24.3 million of nonrecurring general and
administrative expenses in connection with the spin-off of Pennzoil-
Quaker State Company on December 30, 1998.
. In 1998, Devon incurred $13.1 million of nonrecurring expenses related
to the merger with Northstar.
. In 1998, Devon reduced the carrying value of its oil and gas properties
by $126.9 million ($88.0 million after-tax) due to the full cost ceiling
limitation.
The unaudited pro forma information is presented for illustrative purposes
only. If the merger had occurred in the past, New Devon's financial position or
operating results might have been different from those presented in the
unaudited pro forma information. You should not rely on the unaudited pro forma
information as an indication of the financial position or operating results
that New Devon would have achieved if the merger had occurred on March 31,
1999, or January 1, 1998. You also should not rely on the unaudited pro forma
information as an indication of the future results that New Devon will achieve
after the merger.
8
<PAGE>
<TABLE>
<CAPTION>
New Devon Pro
Forma as of
March 31, 1999
--------------
(In Thousands,
Except Per
Share Data)
<S> <C>
Balance Sheet Data:
Investment in common stock of Chevron Corporation (see note 3
on page 26).................................................. $ 629,453
Total assets.................................................. 4,092,118
Debentures exchangeable into shares of Chevron Corporation
common stock (see note 3 on page 26)......................... 757,721
Other long-term debt.......................................... 1,422,793
Convertible preferred securities of subsidiary trust.......... 149,500
Stockholders' equity.......................................... 997,750
Book value per share.......................................... 14.27
</TABLE>
<TABLE>
<CAPTION>
New Devon Pro Forma
-------------------------
Year Three Months
Ended Ended
December 31, March 31,
1998 1999
------------ ------------
(In Thousands,
Except Per Share Data)
<S> <C> <C>
Operations Data:
Operating Results
Oil sales......................................... $ 302,918 $ 64,914
Gas sales......................................... 553,938 122,979
NGL sales......................................... 63,703 12,813
Other revenue..................................... 295,803 9,390
---------- ---------
Total revenue................................... 1,216,362 210,096
---------- ---------
Lease operating expenses.......................... 294,739 66,336
Production taxes.................................. 28,148 5,937
Depreciation, depletion and amortization.......... 444,650 97,752
General and administrative expenses............... 139,378 28,291
Northstar combination expenses.................... 13,149 --
Interest expense.................................. 176,659 36,545
Deferred effect of changes in foreign currency
exchange rate on subsidiary's long-term debt..... 16,104 (3,161)
Distributions on preferred securities of
subsidiary trust................................. 9,717 2,429
Reduction of carrying value of oil and gas
properties....................................... 126,900 --
---------- ---------
Total costs and expenses........................ 1,249,444 234,129
---------- ---------
Loss before income taxes.......................... (33,082) (24,033)
Income tax expense (benefit):
Current......................................... 10,324 1,914
Deferred........................................ (3,340) (11,032)
---------- ---------
Total income tax expense....................... 6,984 (9,118)
---------- ---------
Net loss.......................................... (40,066) (14,915)
Preferred stock dividends......................... 5,625 2,434
---------- ---------
Net loss applicable to common shareholders........ $ (45,691) $ (17,349)
========== =========
Net loss per share--basic and diluted............. (0.66) (0.25)
Cash dividends per share.......................... 0.17 0.05
Weighted average common shares outstanding........ 69,729 69,900
Cash Flow Data
Net cash provided by operating activities......... $ 388,992 $ 67,088
Net cash used in investing activities............. (222,959) (136,895)
Net cash provided (used) by financing activities.. (143,300) 60,472
Modified EBITDA................................... 740,948 109,532
Cash margin....................................... 544,248 68,644
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
New Devon Pro Forma
--------------------------------
Three Months
Year Ended Ended
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Production, Price and Other Data
Production:
Oil (MBbls)................................ 26,128 6,168
Gas (MMcf)................................. 303,693 76,502
NGL (MBbls)................................ 7,128 1,690
MBoe ...................................... 83,872 20,609
Average prices:
Oil (per Bbl).............................. $ 11.59 $10.52
Gas (per Mcf).............................. 1.82 1.61
NGL (per Bbl).............................. 8.94 7.58
Per Boe.................................... 10.98 9.74
Costs per Boe:
Operating costs............................ 3.85 3.51
Depreciation, depletion and amortization of
oil and gas properties.................... 5.24 4.68
General and administrative expenses........ 1.66 1.37
</TABLE>
<TABLE>
<CAPTION>
New Devon
Pro Forma
as of
December 31, 1998
-----------------
<S> <C>
Property Data
Proved reserves:
Oil (MBbls)............................................... 272,688
Gas (MMcf)................................................ 2,050,528
NGL (MBbls)............................................... 45,654
Total (MBoe).............................................. 660,096
SEC 10% present value (thousands)......................... $2,087,666
Standardized measure of discounted future net cash flows
(thousands).............................................. 1,816,542
</TABLE>
10
<PAGE>
DEVON'S SUMMARY SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(Unaudited)
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Operating Results
Oil, gas and NGL
revenues............. $ 256,765 $ 452,104 $ 369,660 $ 98,308 $ 85,393
Other revenues........ 34,570 47,555 17,848 2,129 1,873
---------- ---------- ---------- ---------- ----------
Total revenues.... 291,335 499,659 387,508 100,437 87,266
Net earnings (loss)... 67,603 (299,991) (60,285) 14,225 5,980
Net earnings (loss)
per share:
Basic............... 2.06 (6.38) (1.25) 0.29 0.12
Diluted............. 1.99 (6.38) (1.25) 0.29 0.12
Cash dividends per
common share......... 0.15 0.14 0.15 0.03 0.05
<CAPTION>
December 31, March 31,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets.......... $1,183,290 $1,248,986 $1,226,356 $1,329,626 $1,267,505
Long-term debt........ 83,000 305,337 405,271 312,420 422,293
Convertible preferred
securities of
subsidiary trust..... 149,500 149,500 149,500 149,500 149,500
Stockholders' equity.. 678,772 596,546 522,963 610,423 529,798
</TABLE>
11
<PAGE>
PENNZENERGY'S SUMMARY SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
--------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(Unaudited)
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Operating Results
Oil, gas and NGL revenues.... $745,462 $865,512 $550,899 $153,880 $115,313
Other revenues............... 115,417 112,045 286,468 18,484 11,163
-------- -------- -------- -------- --------
Total revenues from
continuing operations... 860,879 977,557 837,367 172,364 126,476
Income (loss) from:
Continuing operations...... 110,248 145,892 (45,466) 348 (28,745)
Discontinued operations.... 23,650 34,363 (3,246) 9,311 --
Extraordinary items........ -- (5,188) (206,963) -- --
Preferred stock dividends.. -- -- (5,625) -- (2,434)
-------- -------- -------- -------- --------
Total.................... 133,898 175,067 (261,300) 9,659 (31,179)
Basic earnings (loss) per
share:
Continuing operations...... 2.37 3.10 (1.07) 0.01 (0.65)
Discontinued operations.... 0.51 0.73 (0.07) 0.19 --
Extraordinary items........ -- (0.11) (4.34) -- --
-------- -------- -------- -------- --------
Total.................... 2.88 3.72 (5.48) 0.20 (0.65)
Diluted earnings (loss) per
share:
Continuing operations...... 2.35 3.04 (1.07) 0.01 (0.65)
Discontinued operations.... 0.51 0.72 (0.07) 0.19 --
Extraordinary items........ -- (0.11) (4.34) -- --
-------- -------- -------- -------- --------
Total.................... 2.86 3.65 (5.48) 0.20 (0.65)
Dividends per common share... 1.00 1.00 1.00 0.25 0.0625
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
---------- ---------- --------- ---------- ---------
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Net assets of
discontinued
operations............. $ 902,767 $1,076,942 $ -- $1,102,768 $ --
Total assets............ 3,656,522 3,983,206 2,417,086 4,000,450 2,431,148
Debt:
Exchangeable
debentures........... 900,397 889,027 739,258 888,858 739,810
Other long-term debt
including current
maturities........... 1,268,246 1,258,722 797,951 1,378,012 852,353
---------- ---------- --------- ---------- ---------
Total debt.............. 2,168,643 2,147,749 1,537,209 2,266,870 1,592,163
Total shareholders'
equity................. 969,075 1,138,539 391,089 1,141,736 384,812
</TABLE>
12
<PAGE>
RISK FACTORS
In deciding whether to approve the merger, you should consider the following
risks related to the merger and to your investment in New Devon following the
merger. You should carefully consider these risks along with the other
information contained in this document and the documents to which we have
referred you.
Risks Relating to the Merger
We may not successfully integrate the operations of Devon and PennzEnergy or
achieve the benefits we are seeking
The success of the merger will partially depend upon the integration of the
current management and operations of Devon and PennzEnergy. The management team
of New Devon will not have experience with the combined businesses of Devon and
PennzEnergy. New Devon may not be able to integrate the operations of Devon and
PennzEnergy without the loss of key employees, customers or suppliers; loss of
revenues; increases in operating or other costs; or other difficulties. In
addition, New Devon may not be able to realize the operating efficiencies and
other benefits sought from the merger.
The value of consideration to stockholders in the merger could decrease,
depending on the trading price of Devon common stock
The number of shares of New Devon common stock that the Devon and PennzEnergy
stockholders will receive in the merger is fixed. The value of these shares
will depend on the trading price of Devon common stock. No public market
currently exists for New Devon common stock. For historical and current market
prices of Devon and PennzEnergy common stock, see "Comparative Market Price
Data" on page 19.
Significant charges and expenses will be incurred as a result of the merger
Devon and PennzEnergy expect to incur approximately $71.5 million of costs
related to the merger. These expenses will include investment banking expenses,
severance, legal and accounting fees, financial printing expenses and other
related charges. In addition, New Devon expects to incur an estimated $20 to
$30 million in costs to combine the two companies. New Devon may incur
additional unanticipated expenses in connection with the merger.
New Devon also may incur a noncash after-tax charge to earnings related to a
full cost ceiling limitation. Under the full cost method of accounting followed
by Devon and to be followed by New Devon, the net book value of oil and gas
properties, less related deferred income taxes, may not exceed a calculated
"ceiling." The ceiling is the estimated after-tax future net revenues from
proved oil and gas properties, discounted at 10% per year. The ceiling
limitation is applied separately by country. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes that are fixed and determinable by
existing contracts. The net book value, less deferred tax liabilities, is
compared to the ceiling on a quarterly basis. Any excess of the net book value,
less deferred taxes, is written off as an expense. An expense recorded in one
period may not be reversed in a subsequent period even though higher oil and
gas prices may have increased the ceiling applicable to the subsequent period.
As of March 31, 1999, New Devon's pro forma after-tax charge would have been
$407.4 million. This pro forma amount was based on a posted West Texas
Intermediate oil price of $15.25 per barrel and a Texas Gulf Coast index gas
price of $1.80 per Mcf. As of June 30, 1999, both West Texas Intermediate oil
and Texas Gulf Coast index gas prices had increased to $16.50 per barrel and
$2.14 per Mcf, respectively. Using these prices, the pro forma after-tax charge
to earnings would be reduced to less than $150 million. The actual charge, if
any, that will be recorded by New Devon will depend on the oil and gas prices
in effect at the end of the quarter in which the merger is actually closed.
13
<PAGE>
Devon and PennzEnergy stockholders' percentage ownership of New Devon could be
reduced by New Devon's proposed sale of additional shares of common stock after
completing the merger
New Devon plans to raise between $300 and $500 million in a public offering
of newly issued shares of New Devon common stock. New Devon would use the
proceeds of that offering to fund capital expenditures and repay long-term debt
of New Devon. The offering would reduce the percentage of New Devon stock owned
by the current Devon and PennzEnergy stockholders.
New Devon may incur a tax liability for a prior PennzEnergy transaction as a
result of the merger
If PennzEnergy's distribution to its stockholders of the stock of Pennzoil-
Quaker State Company in December 1998 were to be considered part of a plan or
series of related transactions that includes the merger, New Devon would
recognize gain under Section 355(e) of the Internal Revenue Code. PennzEnergy
and Devon believe the distribution and the merger should not be considered part
of such a plan or series of related transactions because, among other things,
prior to the distribution neither party contemplated a business combination
with the other and until April 1999 the parties had no discussions regarding a
business combination. However, any transaction within a four-year period
beginning two years before the distribution is presumed to be part of such a
plan. We cannot assure you that PennzEnergy will be able to overcome this
presumption. PennzEnergy currently estimates New Devon's potential tax
liability upon such a transaction at $16 million in additional tax for 1998 and
the elimination of approximately $183 million in net operating loss carryovers
through 1998.
Risks Relating to an Investment in New Devon
New Devon's business will expose Devon and PennzEnergy stockholders to
different risks than they currently have alone
All of Devon's properties are located onshore in the United States and
Canada, and its reserves and production are more weighted towards gas than
PennzEnergy's. Therefore, the PennzEnergy stockholders will be exposed to more
risks associated with gas prices and the concentration of properties in the
United States and Canada than they were prior to the merger. Some of
PennzEnergy's assets are outside of North America and a significant portion of
its production and reserves are located offshore in the Gulf of Mexico.
Additionally its reserves and production are more weighted towards oil than
Devon's. Therefore, the assets of New Devon will expose the former Devon
stockholders to more risks associated with oil prices and offshore Gulf of
Mexico and international operations than they were exposed to prior to the
merger. Production in the Gulf of Mexico generally declines at faster rates
than onshore production in North America.
In addition, offshore operations in the Gulf of Mexico are subject to
tropical weather disturbances. Some of these disturbances can be severe enough
to cause substantial damage to facilities and possibly interrupt production. In
accordance with customary industry practices, New Devon will maintain insurance
against some, but not all, of these risks. Losses could occur for uninsurable
or uninsured risks or in amounts in excess of existing insurance coverage. We
cannot assure you that New Devon will be able to maintain adequate insurance in
the future at rates it considers reasonable or that any particular types of
coverage will be available. An event that is not fully covered by insurance
could have a material adverse effect on New Devon's financial position and
results of operations.
New Devon will be subject to other uncertainties of foreign operations
New Devon will have international operations in Australia, Azerbaijan,
Brazil, Canada, Egypt, Qatar and Venezuela. Local political, economic and other
uncertainties may adversely affect these operations. These uncertainties
include:
. the risk of war, general strikes, civil unrest, expropriation, forced
renegotiation or modification of existing contracts, and import, export
and transportation regulations and tariffs;
. taxation policies, including royalty and tax increases and retroactive
tax claims;
14
<PAGE>
. exchange controls, currency fluctuations, devaluation or other
activities that limit or disrupt markets and restrict payments or the
movement of funds, and other uncertainties arising out of foreign
government sovereignty over international operations;
. laws and policies of the United States affecting foreign trade, taxation
and investment;
. the possibility of being subject to the exclusive jurisdiction of
foreign courts in connection with legal disputes and the possible
inability to subject foreign persons to the jurisdiction of courts in
the United States; and
. difficulties in enforcing New Devon's rights against a governmental
agency because of the doctrine of sovereign immunity.
New Devon will have a higher debt level than Devon, which may result in a lower
debt rating and require a substantial portion of operating cash flow to pay
interest and principal
New Devon will have higher levels of debt and interest expense than Devon on
a stand-alone basis. The increase in total indebtedness and leverage of New
Devon after the merger may have a negative impact on New Devon's ability to
realize the expected benefits of the merger, including a possible downgrade in
the credit rating of New Devon from that currently maintained by Devon.
Standard & Poor's has announced that, because of the higher leverage of New
Devon, it may assign a debt rating to New Devon that is lower than Devon's
current senior debt rating of "BBB+". The increased debt level will also
require New Devon to use a substantial portion of its operating cash flow to
pay interest and principal on its debt instead of for other corporate purposes.
New Devon plans to raise between $300 and $500 million in a public offering
of additional shares of New Devon common stock and intends to use the net
proceeds from the offering to fund capital expenditures and repay indebtedness.
There can be no assurances that the proposed public offering will be completed
and, consequently, there can be no assurance that the total indebtedness of New
Devon will be reduced from the proceeds of an offering.
The interest of Devon's largest stockholder may conflict with the interests of
New Devon's other stockholders
Kerr-McGee Corporation currently owns 9,954,000 shares, or 20.4%, of the
outstanding Devon common stock. After completion of the merger, Kerr-McGee
would own up to 14.2% of the outstanding shares of New Devon's common stock.
This percentage will be reduced further if New Devon completes its planned
offering of new shares of common stock. Sales by Kerr-McGee of substantial
amounts of Devon or New Devon common stock in the public or private market, or
the perception that such sales may occur, could cause the prices of those
shares to decline. Kerr-McGee has requested that Devon register with the SEC
Devon common stock held by Kerr-McGee in connection with a public offering of
Kerr-McGee debt securities. These debt securities would be mandatorily
exchangeable for Devon common stock or, at Kerr-McGee's option, the cash
equivalent.
As a substantial stockholder, Kerr-McGee may have the power to influence the
outcome of matters submitted to a vote of the New Devon stockholders, and Kerr-
McGee's interests may not reflect the interests of other stockholders. Devon
and Kerr-McGee have not implemented any specific procedures to deal with
conflicts that may arise in the future between Kerr-McGee's interests and those
of other New Devon stockholders. In the event a conflict arises, New Devon will
implement procedures it deems appropriate to deal with the specific situation.
Under an agreement between Devon and Kerr-McGee dated December 31, 1996,
Devon is obligated to nominate a specified number of persons designated by
Kerr-McGee for election to Devon's board. The exact number would generally be
set so that Kerr-McGee's representation on the Devon board approximates the
percentage of Devon's common stock that Kerr-McGee owns. The December 31, 1996,
agreement also restricts Kerr-McGee's ability to acquire or dispose of Devon
common stock and grants Kerr-McGee preemptive rights in connection with
offerings of Devon convertible securities.
15
<PAGE>
The Kerr-McGee designees to Devon's board resigned their positions on May 19,
1999, and Devon and Kerr-McGee have agreed that the December 31, 1996,
agreement will terminate when the merger occurs.
New Devon will have charter and other provisions that may make it difficult to
cause a change of control
Some provisions of New Devon's certificate of incorporation and by-laws and
of the Delaware General Corporation Law, as well as New Devon's stockholder
rights plan, may make it difficult for stockholders to cause a change in
control of New Devon and replace incumbent management. These provisions
include:
. a classified board, the members of which serve staggered three-year
terms and may be removed by stockholders only for cause;
. a prohibition on stockholders calling special meetings and acting by
written consent; and
. rights issued under its rights plan, which would "flip in" if a hostile
bidder acquired 15% of New Devon's common stock.
16
<PAGE>
NEW DEVON AFTER THE MERGER
We believe New Devon will rank solidly in the top ten of all United States-
based independent oil and gas producers in terms of market capitalization,
total proved reserves and annual production. We expect the merger to provide
New Devon with the following advantages:
Larger and More Diversified Asset Base. At the end of 1998, Devon and
PennzEnergy combined had aggregate proved reserves of approximately 660 million
barrels of oil equivalent. On an energy equivalent basis, about 52% of these
reserves were natural gas and 48% were oil and natural gas liquids.
Approximately 64% of the proved reserves, or 423 million equivalent barrels,
were located in the United States. These reserves were concentrated in four
primary operating areas: the Permian Basin, the Rocky Mountain Region, the Gulf
Coast/East Texas Region and the Offshore Gulf of Mexico. Approximately 22% of
the combined reserves, or 144 million equivalent barrels, were located in the
Western Canadian Sedimentary Basin. The balance of proved reserves,
approximately 94 million equivalent barrels, was located outside North America,
primarily in Azerbaijan. In addition to the proved oil and gas properties, the
combined companies had a substantial inventory of exploration acreage totaling
approximately 15 million net acres.
New Devon should also realize substantial oil and natural gas production.
Assuming the merger was effective as of January 1, 1999, New Devon's estimated
1999 production would be between 28 and 31 million barrels of oil and natural
gas liquids and between 275 and 300 billion cubic feet of natural gas.
Increased Financial Strength and Flexibility. New Devon's equity market
capitalization is expected to be approximately $2.9 billion as a result of the
merger (not including New Devon's planned common stock offering). As a result
of this size and market capitalization, New Devon should have greater access to
capital than either Devon or PennzEnergy currently has alone. In addition, we
believe that New Devon should have an enhanced ability to pursue acquisitions
and to participate in further consolidation among independent exploration and
production companies.
Cost Savings. New Devon is expecting $50 to $60 million in annual cost
savings from reduced operating and general and administrative expenses. New
Devon plans to consolidate the corporate headquarters and selected field
offices of Devon and PennzEnergy, eliminate duplicative staff and expenses,
achieve purchasing synergies and implement other cost saving measures.
Improved Capital Efficiencies. New Devon plans to pursue the best exploration
opportunities available to the combined company and to focus on exploitation
projects with the highest rates of return. In addition, due to its greater
financial strength, New Devon will be better able to pursue and accelerate the
development, exploitation and exploration of PennzEnergy's oil and gas assets.
As a result, New Devon believes it has the potential for greater returns on
capital than Devon or PennzEnergy could achieve alone.
Greater Human and Technological Resources. New Devon will have significant
expertise with regard to various oilfield technologies, including coal bed
methane, enhanced oil recovery, deep onshore natural gas drilling, shallow and
deep water offshore drilling and other exploration, production and processing
technologies. New Devon will also have significant international operations and
experience in Canada and outside North America. As a result, New Devon will
have an enhanced ability to acquire, explore for, develop and exploit oil and
natural gas reserves domestically both onshore and offshore, as well as
internationally.
17
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents historical per share data for Devon and
PennzEnergy and pro forma per share data giving effect to the merger. You
should read this table in conjunction with the historical consolidated
financial statements of Devon and PennzEnergy which are filed with the SEC and
incorporated by reference in this document. You should not rely on the pro
forma per share data as being necessarily indicative of actual results had the
merger occurred on the dates assumed, or of future results.
<TABLE>
<CAPTION>
PennzEnergy
-------------------------
Devon New Devon Equivalent
Historical Pro Forma(/1/) Historical Pro Forma(/2/)
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Net earnings (loss) per
share from continuing
operations--basic and
diluted:
Year ended December 31,
1998................... $(1.25) $(0.66) $(1.07) $(0.30)
Three months ended March
31, 1999............... 0.12 (0.25) (0.65) (0.11)
Cash dividends per share:
Year ended December 31,
1998................... 0.15 0.17 1.00 0.08
Three months ended March
31, 1999............... 0.05 0.05 0.06 0.02
Book value per share:
As of December 31,
1998................... 10.80 14.17 8.17 6.34
As of March 31, 1999.... 10.93 14.27 8.03 6.39
</TABLE>
- --------
(/1/) New Devon's pro forma data include the effect of the merger on the basis
described in the notes to the pro forma combined financial statements
included elsewhere in this document.
(/2/) PennzEnergy's equivalent pro forma amounts have been calculated by
multiplying New Devon's pro forma net earnings (loss), cash dividends and
book value per share amounts by the exchange ratio of 0.4475 shares of New
Devon common stock for each share of PennzEnergy common stock, so that the
PennzEnergy equivalent pro forma per share amounts are comparable to the
respective values of one share of PennzEnergy common stock.
New Devon intends to continue paying a regular quarterly dividend of $0.05
per share after the merger, subject to approval and declaration by New Devon's
board of directors.
18
<PAGE>
COMPARATIVE MARKET PRICE DATA
The following table sets forth the high and low sales prices and trading
volumes of the shares of Devon common stock, traded under the symbol "DVN" on
the American Stock Exchange, and of the PennzEnergy common stock, traded under
the symbol "PZE" on the New York Stock Exchange, for the calendar quarters and
months indicated. The sales prices and trading volumes are as reported in
published financial sources. Sales prices and trading volumes for 1997 and 1998
can be found in Devon's and PennzEnergy's most recent Forms 10-K. See "Where
You Can Find More Information" on page 89.
<TABLE>
<CAPTION>
Devon PennzEnergy
---------------------------- ----------------------------
High Low Volume High Low Volume
------ ------ -------------- ------ ------ --------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Quarter ended:
March 31, 1999........ $31.75 $20.13 14,271 $16.75 $ 8.94 22,256
June 30, 1999......... $37.44 $25.94 14,221 $16.69 $ 9.25 21,251
September 30, 1999
(through July 14).... $38.50 $36.00 1,511 $17.31 $15.81 1,817
</TABLE>
On May 19, 1999, the last full trading day prior to the joint public
announcement by Devon and PennzEnergy of the proposed merger, the last reported
sales price on the American Stock Exchange of shares of Devon common stock was
$31.50. The last reported sales price of PennzEnergy common stock on the New
York Stock Exchange on the same day was $14.625. Devon and PennzEnergy
stockholders are urged to obtain current quotations before deciding how to
vote.
19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information has been prepared to
assist in the analysis of the financial effects of the merger. This pro forma
information is based on the historical financial statements of Devon and
PennzEnergy.
The information was prepared based on the following:
. New Devon will utilize the full cost method of accounting for its oil
and gas activities.
. The merger will be accounted for as a purchase of PennzEnergy by New
Devon.
. New Devon plans to raise between $300 and $500 million in a public
offering of additional shares of New Devon common stock. The proceeds
from the planned offering would be used to fund capital expenditures and
repay long-term debt. The pro forma financial statements do not reflect
any effects of the planned offering.
. The unaudited pro forma balance sheet has been prepared as if the merger
occurred on March 31, 1999. The unaudited pro forma statements of
operations have been prepared as if the merger occurred on January 1,
1998.
. Expected annual cost savings of $50 to $60 million have not been
reflected as an adjustment to the historical data. These cost savings
are expected to result from the consolidation of the corporate
headquarters of Devon and PennzEnergy and the elimination of duplicate
staff and expenses.
. The unaudited pro forma statements of operations do not include the
effects of a reduction of the carrying value of oil and gas properties
because the reduction is directly related to the merger. As of March 31,
1999, the pro forma reduction would have been $657.0 million ($407.4
million after tax). The unaudited pro forma balance sheet does include
the effect of this reduction.
The March 31, 1999, pro forma reduction was based on a posted West
Texas Intermediate oil price of $15.25 per barrel and a Texas Gulf
Coast index gas price of $1.80 per Mcf. As of June 30, 1999, both West
Texas Intermediate oil and Texas Gulf Coast index gas prices had
increased to $16.50 per barrel and $2.14 per Mcf, respectively. Using
these prices, the pro forma reduction of the carrying value of oil and
gas properties would be reduced to less than $200 million (less than
$150 million after tax). The actual reduction, if any, that will be
recorded by New Devon will depend on the oil and gas prices in effect
at the end of the quarter in which the merger is actually closed.
No pro forma adjustments have been made with respect to the following unusual
items. These items are reflected in the historical results of Devon or
PennzEnergy, as applicable, and should be considered when making period-to-
period comparisons:
. In 1998, PennzEnergy realized pretax gains on the sale and exchange of
Chevron Corporation common stock of $230.1 million. The unaudited pro
forma statement of operations does not include the related $207.0
million after-tax extraordinary loss resulting from the early
extinguishment of debt.
. In 1998, PennzEnergy incurred $24.3 million of nonrecurring general and
administrative expenses in connection with the spin-off of Pennzoil-
Quaker State Company on December 30, 1998.
. In 1998, Devon incurred $13.1 million of nonrecurring expenses related
to the merger with Northstar.
. In 1998, Devon reduced the carrying value of its oil and gas properties
by $126.9 million ($88.0 million after-tax) due to the full cost ceiling
limitation.
The unaudited pro forma financial statements and related notes are presented
for illustrative purposes only. If the merger had occurred in the past, New
Devon's financial position or operating results might have been different from
those presented in the unaudited pro forma information. The unaudited pro forma
information should not be relied upon as an indication of the financial
position or operating results that New Devon would have achieved if the merger
had occurred as of March 31, 1999, or January 1, 1998. You also should not rely
on the unaudited pro forma information as an indication of the future results
that New Devon will achieve after the merger.
20
<PAGE>
Unaudited Pro Forma Balance Sheet
March 31, 1999
(In Thousands)
<TABLE>
<CAPTION>
PennzEnergy Pro
Historical Forma
Reclassified Adjustments New Devon
Devon (Note 5) (Note 2) Pro Forma
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Assets:
Current assets............ $ 101,067 $ 124,264 $(10,300)(a) $ 225,331
10,300 (c)
Oil and gas properties,
net...................... 1,128,388 1,640,894 413,455 (a) 3,078,591
552,884 (c)
(657,030)(d)
Other properties, net..... 23,674 -- 5,000 (a) 28,674
Investment in common stock
of Chevron Corporation
(Note 3)................. -- 629,453 -- 629,453
Other assets.............. 14,376 36,537 79,156 (a) 130,069
---------- ---------- -------- ----------
Total assets............ $1,267,505 $2,431,148 $393,465 $4,092,118
========== ========== ======== ==========
Liabilities:
Current liabilities....... $ 95,152 $ 161,564 $ (5,374)(a) $ 251,342
Debentures exchangeable
into shares of Chevron
Corporation common stock
(Note 3)................. -- 739,810 17,911 (a) 757,721
Other long-term debt...... 422,293 852,353 76,602 (a) 1,422,793
71,545 (a)
Other long-term
liabilities.............. 34,590 131,327 (2,590)(a) 163,327
Deferred income taxes..... 36,172 161,282 (161,282)(a) 349,685
563,184 (c)
(249,671)(d)
Company-obligated
mandatorily redeemable
convertible preferred
securities of subsidiary
trust holding solely 6.5%
convertible junior
subordinated debentures
of Devon Energy
Corporation.............. 149,500 -- 149,500
Stockholders' equity:
Preferred stock........... -- 1,500 1,500
Common stock.............. 4,849 43,507 2,145 (a) 6,994
(43,507)(b)
Additional paid-in
capital.................. 798,640 356,351 709,166 (a) 1,670,306
14,000 (a)
148,500 (a)
(356,351)(b)
Accumulated deficit....... (239,353) (34,172) 34,172 (b) (646,712)
(407,359)(d)
Accumulated other
comprehensive earnings
(loss)................... (34,338) 247,223 (247,223)(b) (34,338)
Treasury stock............ -- (229,597) 229,597 (b) --
---------- ---------- -------- ----------
Total stockholders'
equity................. 529,798 384,812 83,140 997,750
---------- ---------- -------- ----------
Total liabilities and
stockholders' equity... $1,267,505 $2,431,148 $393,465 $4,092,118
========== ========== ======== ==========
</TABLE>
21
<PAGE>
Unaudited Pro Forma Statement of Operations
Year Ended December 31, 1998
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
PennzEnergy Pro
Historical Forma
Reclassified Adjustments New Devon
Devon (Note 5) (Note 2) Pro Forma
-------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oil sales.................. $143,624 $159,294 $ 302,918
Gas sales.................. 209,344 344,594 553,938
NGL sales.................. 16,692 47,011 63,703
Other...................... 17,848 286,468 (8,513)(h) 295,803
-------- -------- --------- ----------
Total revenues........... 387,508 837,367 (8,513) 1,216,362
-------- -------- --------- ----------
Costs and expenses:
Lease operating expenses... 113,484 181,255 294,739
Production taxes........... 13,916 14,232 28,148
Depreciation, depletion and
amortization.............. 123,844 208,009 112,797 (e) 444,650
General and administrative
expenses.................. 23,554 126,124 (10,300)(h) 139,378
Northstar combination
expenses.................. 13,149 -- 13,149
Interest expense........... 22,632 156,272 4,114 (f) 176,659
(6,359)(g)
Exploration expenses....... -- 139,970 (139,970)(h) --
Deferred effect of changes
in foreign currency
exchange rate on
subsidiary's long-term
debt...................... 16,104 -- 16,104
Distributions on preferred
securities of subsidiary
trust..................... 9,717 -- 9,717
Reduction of carrying value
of oil and gas
properties................ 126,900 74,739 (74,739)(h) 126,900
-------- -------- --------- ----------
Total costs and
expenses................ 463,300 900,601 (114,457) 1,249,444
-------- -------- --------- ----------
Earnings (loss) before income
tax expense (benefit)....... (75,792) (63,234) 105,944 (33,082)
Income tax expense (benefit):
Current.................... 7,687 2,637 -- 10,324
Deferred................... (23,194) (20,405) 40,259 (i) (3,340)
-------- -------- --------- ----------
Total income tax expense
(benefit)............... (15,507) (17,768) 40,259 6,984
-------- -------- --------- ----------
Net earnings (loss).......... (60,285) (45,466) 65,685 (40,066)
Preferred stock dividends.... -- 5,625 -- 5,625
-------- -------- --------- ----------
Net earnings (loss)
applicable to common
shareholders................ $(60,285) $(51,091) $ 65,685 $ (45,691)
======== ======== ========= ==========
Net loss per average common
share outstanding--basic and
diluted..................... $ (1.25) $ (1.07) $ (0.66)
======== ======== ==========
Weighted average common
shares outstanding--basic
(Note 4).................... 48,376 47,716 69,729
======== ======== ==========
</TABLE>
22
<PAGE>
Unaudited Pro Forma Statement of Operations
Three Months Ended March 31, 1999
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
PennzEnergy Pro
Historical Forma
Reclassified Adjustments New Devon
Devon (Note 5) (Note 2) Pro Forma
------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil sales..................... $27,913 $ 37,001 $ 64,914
Gas sales..................... 53,551 69,428 122,979
NGL sales..................... 3,929 8,884 12,813
Other......................... 1,873 11,163 (3,646) (h) 9,390
------- -------- -------- --------
Total revenues.............. 87,266 126,476 (3,646) 210,096
------- -------- -------- --------
Costs and expenses:
Lease operating expenses...... 27,420 38,916 66,336
Production taxes.............. 2,969 2,968 5,937
Depreciation, depletion and
amortization................. 33,558 68,141 (3,947) (e) 97,752
General and administrative
expenses..................... 6,223 24,643 (2,575) (h) 28,291
Interest expense.............. 6,664 30,560 1,028 (f) 36,545
(1,707) (g)
Exploration expenses -- 9,107 (9,107) (h) --
Deferred effect of changes in
foreign currency exchange
rate on subsidiary's long-
term debt.................... (3,161) -- (3,161)
Distributions on preferred
securities of subsidiary
trust........................ 2,429 -- 2,429
------- -------- -------- --------
Total costs and expenses.... 76,102 174,335 (16,308) 234,129
------- -------- -------- --------
Earnings (loss) before income
tax expense (benefit).......... 11,164 (47,859) 12,662 (24,033)
Income tax expense (benefit):
Current....................... 1,903 11 -- 1,914
Deferred...................... 3,281 (19,125) 4,812 (i) (11,032)
------- -------- -------- --------
Total income tax expense
(benefit).................. 5,184 (19,114) 4,812 (9,118)
------- -------- -------- --------
Net earnings (loss)............. 5,980 (28,745) 7,850 (14,915)
Preferred stock dividends....... -- 2,434 -- 2,434
------- -------- -------- --------
Net earnings (loss) applicable
to common shareholders......... $ 5,980 $(31,179) $ 7,850 $(17,349)
======= ======== ======== ========
Net earnings (loss) per average
common share outstanding--basic
and diluted.................... $ 0.12 $ (0.65) $ (0.25)
======= ======== ========
Weighted average common shares
outstanding--basic (Note 4).... 48,470 47,888 69,900
======= ======== ========
</TABLE>
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
December 31, 1998 and March 31, 1999
1. Method of Accounting for the Merger
New Devon will account for the merger using the purchase method of accounting
for business combinations. Accordingly, PennzEnergy's assets acquired and
liabilities assumed by New Devon will be revalued and recorded at their
estimated "fair values." In the merger, New Devon will issue 0.4475 shares of
New Devon common stock for each outstanding share of PennzEnergy common stock.
This will result in New Devon issuing approximately 21.4 million shares of its
common stock to PennzEnergy stockholders.
The purchase price of PennzEnergy's net assets acquired will be based on the
value of the New Devon common stock issued to the PennzEnergy stockholders. The
value of the New Devon common stock issued is based on the average trading
price of Devon's common stock for a period of three days before and after the
public announcement of the merger. This average trading price equaled $33.40
per share.
2. Pro Forma Adjustments Related to the Merger
The unaudited pro forma balance sheet includes the following adjustments:
(a) This entry adjusts the historical book values of PennzEnergy's assets
and liabilities to their estimated fair values as of March 31, 1999. The
calculation of the total purchase price and the preliminary allocation to
assets and liabilities are shown below.
<TABLE>
<CAPTION>
(In Thousands,
Except
Share Price)
--------------
<S> <C>
Calculation and preliminary allocation of purchase price:
Shares of New Devon common stock to be issued to
PennzEnergy stockholders................................. 21,446
Average Devon stock price................................. $ 33.40
----------
Fair value of common stock to be issued................... 716,296
Plus preferred stock to be assumed by New Devon........... 150,000
Plus estimated merger costs to be incurred................ 71,545
Plus fair value of PennzEnergy employee stock options to
be assumed by New Devon.................................. 14,000
Less estimated stock registration and issuance costs to be
incurred................................................. (4,985)
----------
Total purchase price........................................ 946,856
Plus fair value of liabilities to be assumed by New Devon:
Current liabilities....................................... 156,190
Debentures exchangeable into Chevron Corporation common
stock.................................................... 757,721
Other long-term debt...................................... 928,955
Other long-term liabilities............................... 128,737
----------
2,918,459
----------
Less fair value of non oil and gas assets to be acquired by
New Devon:
Current assets............................................ 113,964
Non oil and gas properties................................ 5,000
Investment in common stock of Chevron Corporation......... 629,453
Other assets.............................................. 115,693
----------
864,110
----------
Fair value allocated to oil and gas properties, including
$111 million of undeveloped leasehold...................... $2,054,349
==========
</TABLE>
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
December 31, 1998 and March 31, 1999 -- (Continued)
The total purchase price includes the value of the New Devon common stock
to be issued, net of $5.0 million of estimated registration and issuance
costs. The purchase price also includes:
. $150 million of New Devon preferred stock to be issued in exchange
for the same amount of PennzEnergy preferred stock. The unaudited
pro forma balance sheet includes $1.5 million of PennzEnergy's
historical aggregate par value of the preferred stock, plus $148.5
million of additional paid-in capital.
. $71.5 million of estimated merger costs. These costs include
advisory fees, severance and other merger-related costs. These costs
are added to long-term debt in the unaudited pro forma balance
sheet.
. $14 million of New Devon employee stock options to be issued in
exchange for existing vested PennzEnergy employee stock options. The
value of these options is added to additional paid-in capital in the
unaudited pro forma balance sheet.
(b) This adjustment includes a $43.5 million reduction to par value, a
$356.4 million reduction of additional paid-in capital, a $34.2 million
reduction of accumulated deficit, a $247.2 million reduction of accumulated
other comprehensive earnings and a $229.6 million reduction of treasury
stock. These adjustments eliminate PennzEnergy's historical book values of
those accounts.
(c) This adjustment increases the value of PennzEnergy's oil and gas
properties acquired by $552.9 million, and increases current assets by
$10.3 million, both for related deferred income taxes. This adjustment
equals the deferred income tax effect of the difference between the fair
values assigned to PennzEnergy's assets and liabilities and their bases for
income tax purposes. Due to the tax-free nature of the merger, New Devon's
tax basis in those assets and liabilities will be the same as PennzEnergy's
tax basis.
(d) This adjustment reduces the value of proved oil and gas properties by
$657.0 million pursuant to the "ceiling test" required under the full cost
method of accounting. As of March 31, 1999, the pro forma carrying value of
New Devon's oil and gas properties, less deferred income taxes, would have
exceeded the pro forma full cost ceiling by approximately $407.4 million.
Accordingly, the unaudited pro forma balance sheet reflects a reduction of
$657.0 million to oil and gas properties, partially offset by a $249.6
million deferred income tax benefit, resulting in an after-tax charge of
$407.4 million taken against retained earnings.
This adjustment reflects the estimated full cost ceiling reduction that
would have been required had the merger occurred on March 31, 1999, based
on a posted West Texas Intermediate oil price of $15.25 per barrel and a
Texas Gulf Coast index gas price of $1.80 per Mcf. As of June 30, 1999,
both West Texas Intermediate oil and Texas Gulf Coast index gas prices had
increased to $16.50 per barrel and $2.14 per Mcf, respectively. Using these
prices, the pro forma reduction of the carrying value of oil and gas
properties would be reduced to less than $200 million (less than $150
million after tax). The actual reduction, if any, that will be recorded by
New Devon will depend on the oil and gas prices in effect at the end of the
quarter in which the merger is actually closed.
The unaudited pro forma statements of operations include the following
adjustments:
(e) This adjustment reflects the pro forma depreciation, depletion and
amortization expense using the full cost method of accounting based on the
allocation of the purchase price. This adjustment assumes an estimated
$657.0 million ($407.4 million after tax) reduction of the carrying value
of oil and gas properties under the full cost ceiling test, as of January
1, 1998. See pro forma adjustment (d) above for
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
December 31, 1998 and March 31, 1999 -- (Continued)
further information on this estimated noncash charge. This pro forma
reduction is directly related to the merger and therefore is not reflected
in the accompanying unaudited pro forma statements of operations.
(f) This adjustment increases interest expense due to the $71.5 million
of merger costs assumed to be funded with borrowings from credit
facilities.
(g) This adjustment reduces interest expense for the year 1998 and the
first quarter of 1999 by $6.4 million and $1.7 million, respectively. These
amounts represent the amortization of the pro forma premium recorded in
long-term debt as of January 1, 1998, as part of pro forma adjustment (a)
to record PennzEnergy's assets and liabilities at their estimated fair
values.
(h) This adjustment eliminates historical amounts recorded by PennzEnergy
under the successful efforts accounting method for gains on property sales,
general and administrative expenses, exploration expenses and asset
impairments to conform to the full cost method of accounting followed by
Devon. Under the full cost method, proceeds from the sale of oil and gas
properties are generally recorded as an adjustment of the carrying value of
the properties, with no gain or loss recognized. Also, general and
administrative expenses incurred for property acquisition, exploration and
development activities are capitalized under the full cost method. In
addition, exploration expenses, which include items such as dry hole costs
and lease expirations or impairment expenses, are capitalized under the
full cost method. The $74.7 million reduction of oil and gas properties
recorded by PennzEnergy in the year 1998 was calculated under the
successful efforts method and therefore has been eliminated in the pro
forma statement of operations for 1998.
(i) This adjustment records the net tax effect of all pro forma
adjustments at an effective income tax rate of 38%.
3. Investment in Chevron Common Stock and Related Exchangeable Debentures
As of March 31, 1999, and December 31, 1998, PennzEnergy beneficially owned
approximately 7.1 million shares of Chevron Corporation common stock. These
shares have been deposited with an exchange agent for possible exchange for
$761.2 million principal amount of exchangeable debentures of PennzEnergy. Each
$1,000 principal amount of the exchangeable debentures is exchangeable into
9.3283 shares of Chevron common stock, an exchange rate equivalent to $107 7/32
per share of Chevron common stock.
The exchangeable debentures consist of $443.8 million of 4.90% debentures and
$317.4 million of 4.95% debentures. The exchangeable debentures were issued on
August 3, 1998, and mature August 15, 2008. The exchangeable debentures are
callable beginning on August 15, 2000. The exchangeable debentures are
exchangeable at the option of the holders at any time prior to maturity for
shares of Chevron common stock. In lieu of delivering Chevron common stock,
PennzEnergy may, at its option, pay to any holder an amount in cash equal to
the market value of the Chevron common stock to satisfy the exchange request.
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
December 31, 1998 and March 31, 1999 -- (Continued)
4. Common Shares Outstanding
Net earnings (loss) per average share outstanding have been calculated based
upon the pro forma weighted average number of shares outstanding as follows:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1998 1999
------------ ------------
(In Thousands)
<S> <C> <C>
Devon's weighted average common shares
outstanding................................... 48,376 48,470
New Devon shares to be issued in exchange for
all outstanding shares of PennzEnergy ........ 21,353 21,430
------ ------
Pro forma weighted average New Devon shares
outstanding................................... 69,729 69,900
====== ======
</TABLE>
Pro forma common shares outstanding at March 31, 1999, assuming the merger
occurred on that date, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
Devon's common shares outstanding.......................... 48,492
New Devon shares to be issued in exchange for all
outstanding shares of
PennzEnergy .............................................. 21,446
------
Pro forma New Devon common shares outstanding.............. 69,938
======
</TABLE>
5. PennzEnergy Historical and Reclassified Balances
Devon and PennzEnergy record certain revenues and expenses differently in
their respective consolidated financial statements. To make the unaudited pro
forma financial information consistent, we have reclassified certain of
PennzEnergy's balances to conform to Devon's financial presentation. The
following tables present PennzEnergy's balances as presented in its historical
financial statements and the reclassified balances which are included in the
accompanying unaudited pro forma statements of operations.
Securities and Exchange Commission rules regarding pro forma presentation
require that the pro forma statements of operations disclose income or loss
from continuing operations. As shown in the tables below, PennzEnergy's
historical results for the year 1998 included a loss from discontinued
operations and extraordinary items that are not included in the reclassified
balances presented in the accompanying unaudited pro forma statement of
operations for 1998.
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
December 31, 1998 and March 31, 1999 -- (Continued)
In addition to the reclassifications shown below for the unaudited pro forma
statements of operations, a reclassification has been made to PennzEnergy's
historical balance sheet for the accompanying unaudited pro forma balance sheet
as of March 31, 1999. PennzEnergy had $40.9 million classified as minority
interest in its March 31, 1999, historical consolidated balance sheet. To
conform to Devon's presentation, this amount is included as other long-term
liabilities in the accompanying unaudited pro forma balance sheet.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Three Months Ended March 31, 1999
------------------------------------------ ------------------------------------------
PennzEnergy PennzEnergy
PennzEnergy Historical PennzEnergy Historical
Historical Reclassifications Reclassified Historical Reclassifications Reclassified
----------- ----------------- ------------ ----------- ----------------- ------------
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net sales.............. $ 550,899 $(550,899) $ -- $115,313 $(115,313) $ --
Oil sales.............. -- 159,294 159,294 -- 37,001 37,001
Gas sales.............. -- 344,594 344,594 -- 69,428 69,428
NGL sales.............. -- 47,011 47,011 -- 8,884 8,884
Investment and other
income................ 286,468 -- 286,468 11,163 -- 11,163
--------- --------- -------- -------- --------- --------
Total revenues....... 837,367 -- 837,367 126,476 -- 126,476
--------- --------- -------- -------- --------- --------
Costs and expenses:
Lease operating
expenses............. 217,194 (35,939) 181,255 46,643 (7,727) 38,916
Production taxes...... -- 14,232 14,232 -- 2,968 2,968
General and
administrative
expenses............. 52,228 73,896 126,124 8,972 15,671 24,643
Depreciation,
depletion and
amortization......... 208,009 -- 208,009 68,141 -- 68,141
Impairment of long-
lived assets......... 74,739 -- 74,739 -- -- --
Exploration expenses.. 161,615 (21,645) 139,970 13,118 (4,011) 9,107
Taxes, other than
income............... 30,544 (30,544) -- 6,901 (6,901) --
Interest charges,
net.................. 156,272 -- 156,272 30,560 -- 30,560
--------- --------- -------- -------- --------- --------
Total costs and
expenses............ 900,601 -- 900,601 174,335 -- 174,335
--------- --------- -------- -------- --------- --------
Loss from continuing
operations before
income tax............. (63,234) -- (63,234) (47,859) -- (47,859)
Income tax benefit...... (17,768) -- (17,768) (19,114) -- (19,114)
--------- --------- -------- -------- --------- --------
Loss from continuing
operations............. $ (45,466) $ -- $(45,466) $(28,745) $ -- $(28,745)
========= ======== ========= ========
Loss from discontinued
operations............. (3,246) --
--------- --------
Loss before
extraordinary items.... (48,712) (28,745)
Extraordinary items..... (206,963) --
--------- --------
Net loss................ (255,675) (28,745)
Preferred stock
dividends.............. 5,625 2,434
--------- --------
Net loss available to
common shareholders.... $(261,300) $(31,179)
========= ========
</TABLE>
28
<PAGE>
THE STOCKHOLDER MEETINGS AND PROXY SOLICITATIONS
DEVON
Time, Place and Date
The meeting of Devon stockholders will be held on August 17, 1999, at 10:00
a.m.,Oklahoma City time in the Green Country Room on the second floor of the
Westin Hotel, One North Broadway, Oklahoma City, Oklahoma.
Purpose
The purpose of the Devon meeting is to consider and vote upon a proposal to
approve the merger agreement, a proposal to approve the Devon 1997 stock option
plan amendment, and any other business that may be presented at the meeting.
We know of no other matters to be brought before the meeting.
Quorum
The presence, in person or by proxy, of stockholders holding a majority of
the voting shares entitled to vote at the meeting will constitute a quorum.
Record Date
Only stockholders of record at the close of business on July 6, 1999, as
shown in Devon's records, are entitled to vote, or to grant proxies to vote, at
the Devon meeting.
Recommendation of the Board of Directors
The Devon board of directors believes that the merger agreement and the
merger are in the best interests of the stockholders and recommends that they
vote FOR approval of the merger agreement and the merger. The Devon board also
recommends that the stockholders vote FOR the stock option plan amendment.
Votes Required
The affirmative vote of the holders of a majority of the outstanding shares
of Devon common stock and the exchangeable shares, voting as a single class, is
required to approve the merger agreement. The affirmative vote of the holders
of a majority of the votes cast at the Devon meeting on the proposal is
required to approve the Devon 1997 stock option plan amendment. However, if the
merger is not approved, the stock option plan amendment will not be
implemented. Devon will appoint an inspector of election to tabulate all votes
and to certify the results of all matters voted upon at the meeting.
As of the record date, there were 48,830,782 Devon shares outstanding and
entitled to vote at the meeting, of which 43,773,581 were shares of common
stock and 5,057,201 were exchangeable shares.
If you hold your Devon shares in the name of a bank, broker or other nominee,
you should follow the instructions provided by your bank, broker or nominee
when voting your shares or when granting or revoking a proxy.
Neither the corporate law of Oklahoma, the state in which Devon is
incorporated, nor Devon's certificate of incorporation or by-laws have any
provisions regarding the treatment of abstentions and broker nonvotes. "Broker
nonvotes" are shares which are present at the meeting and for which a broker or
nominee has received no instruction by the beneficial owner as to how that
owner wishes the shares to be voted. It is Devon's policy (a) to count
abstentions and broker nonvotes for purposes of determining the presence of a
29
<PAGE>
quorum at the meeting; (b) to treat abstentions as votes not cast but as shares
represented at the meeting for determining results on actions requiring a
majority vote; (c) not to consider broker nonvotes for determining actions
requiring a majority vote; and (d) not to consider abstentions or broker
nonvotes in determining results of plurality votes. Abstentions, broker
nonvotes and failures to vote will have the effect of votes cast against the
merger agreement and the Devon merger. Abstentions have the effect of a
negative vote on the stock option plan amendment and broker nonvotes do not
affect the outcome of the vote on the stock option plan amendment.
Voting Procedures and Proxies
Voting by Holders of Common Stock
Each share of Devon common stock is entitled to one vote at the meeting. The
enclosed proxy card is a means by which a stockholder may authorize the voting
of his or her shares of Devon common stock at the meeting. Each proxy that is
properly signed, dated and returned to Devon in time for the meeting, and not
revoked, will be voted in accordance with the instructions contained in that
proxy. A proxy may be revoked at any time prior to its exercise by delivering a
written notice of revocation or a later dated proxy to the corporate secretary
of Devon. In addition, a stockholder present at the meeting may revoke his or
her proxy and vote in person.
Voting by Holders of Exchangeable Shares
Each exchangeable share is also entitled to one vote at the meeting through a
voting and exchange trust agreement. Under the voting agreement, CIBC Mellon
Trust Company, the trustee, is entitled to exercise voting rights on behalf of
holders of the exchangeable shares. The trustee holds one share of special
voting stock of Devon. The share of special voting stock is entitled to a
number of votes equal to the number of exchangeable shares outstanding that are
held by persons other than Devon. Each holder of exchangeable shares, other
than Devon, is entitled to give the trustee voting instructions for a number of
votes equal to the number of that holder's exchangeable shares. A voting
direction card is a means by which a holder of exchangeable shares may
authorize the voting of his or her voting rights at the meeting. The trustee
will exercise each vote only as directed by the relevant holders on the voting
direction card. In the absence of instructions from a holder as to voting, the
trustee will not exercise those votes. A holder may also instruct the trustee
to give him or her a proxy entitling him or her to vote personally the relevant
number of votes or to grant to Devon's management a proxy to vote those votes.
The voting direction may be revoked at any time prior to its exercise by
delivering a written notice of revocation or a later dated voting direction
card to the trustee. In addition, a holder of exchangeable shares present at
the meeting may revoke his or her voting direction card and vote in person.
General Matters
If any other matters are properly presented at the meeting for consideration,
the persons named in the proxy card will have the discretion to vote on these
matters in accordance with their best judgment. Proxies voted against the
proposal to approve the merger will not be voted in favor of any adjournment of
the meeting for the purpose of soliciting additional proxies. Your presence
without voting at the meeting will not automatically revoke your proxy, and any
revocation during the meeting will not affect votes previously taken.
Validity
The inspectors of election will determine all questions as to the validity,
form, eligibility (including time of receipt) and acceptance of proxy cards.
Their determination will be final and binding. The board of directors of Devon
has the right to waive any irregularities or conditions as to the manner of
voting. Devon may accept your proxy by any form of communication permitted by
Oklahoma law so long as Devon is reasonably assured that the communication is
authorized by you.
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Solicitation of Proxies
The accompanying proxy is being solicited on behalf of the board of directors
of Devon. The expenses of preparing, printing and mailing the proxy and the
materials used in the solicitation will be borne by Devon.
Innisfree M&A Incorporated has been retained by Devon to aid in the
solicitation of proxies, for a fee of $6,000 and the reimbursement of out-of-
pocket expenses. Proxies may also be solicited by personal interview, telephone
and telegram by directors, officers and employees of Devon, who will not
receive additional compensation for performing that service. Arrangements also
may be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of proxy materials to the beneficial owners of
Devon shares held by those persons, and Devon will reimburse them for
reasonable expenses they incur.
Auditors
KPMG LLP, independent auditors, have served as the independent auditors of
Devon since 1980. Representatives of KPMG LLP plan to attend the Devon meeting
and will be available to answer appropriate questions. Its representatives will
also have an opportunity to make a statement at the meeting if they so desire,
although it is not expected that any statement will be made.
PENNZENERGY
Time, Place and Date
The meeting of PennzEnergy stockholders will be held at 10:00 a.m., Houston
time, on August 17, 1999, at the Crystal Ballroom at The Rice, 909 Texas
Avenue, Houston, Texas.
Purpose
The purpose of the PennzEnergy meeting is to consider and vote upon a
proposal to approve the merger agreement and any other business that may be
presented at the meeting.
We know of no other matters to be brought before the meeting.
Quorum
The presence, in person or by proxy, of stockholders holding a majority of
the outstanding shares of PennzEnergy common stock entitled to vote at the
meeting will constitute a quorum.
Record Date
Only stockholders of record at the close of business on July 6, 1999, as
shown in PennzEnergy's records, are entitled to vote, or to grant proxies to
vote, at the PennzEnergy meeting.
Recommendation of the Board of Directors
The PennzEnergy board of directors believes that the merger is in the best
interests of PennzEnergy and its stockholders and recommends that the
PennzEnergy stockholders vote FOR approval of the merger agreement and the
merger.
Votes Required
Approval of the merger requires the affirmative vote of the holders of a
majority of the outstanding shares of PennzEnergy common stock. Because of this
vote requirement, abstentions will have the same effect as votes against the
merger agreement and the merger. The failure of a stockholder to return a proxy
card will also have the effect of a vote against the merger agreement and the
merger. Under the rules of the New York Stock Exchange, brokers who hold shares
in street name for customers have the authority to vote on certain "routine"
proposals when they have not received instructions from beneficial owners.
Under these rules, such
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brokers are precluded from exercising their voting discretion with respect to
proposals for nonroutine matters such as the merger agreement and the merger.
Thus, absent specific instructions from you, your broker is not empowered to
vote your shares with respect to the approval and adoption of the merger
agreement and the merger (i.e., "broker nonvotes"). Since the affirmative vote
of a majority of the outstanding PennzEnergy shares is required for approval of
the merger agreement and the merger, a broker nonvote will have the same effect
as a vote against the merger agreement and the merger.
As of the record date, there were 47,989,845 shares of PennzEnergy common
stock outstanding and entitled to vote.
Voting Procedures and Proxies
General Matters
A proxy card was sent to each PennzEnergy stockholder as of the record date.
If you properly received a proxy card, you may grant a proxy to vote on the
proposal to approve the merger agreement by marking your proxy card
appropriately, executing it in the space provided, and returning it to
PennzEnergy. If you hold your PennzEnergy shares in the name of a bank, broker
or other nominee, you should follow the instructions provided by your bank,
broker or nominee when voting your shares.
If you have timely submitted a properly executed proxy card, clearly
indicated your votes, and have not revoked your proxy, your shares will be
voted as indicated. If you have timely submitted a properly executed proxy card
and have not clearly indicated your votes, your shares will be voted FOR the
proposal to approve the merger agreement.
If any other matters are properly presented at the meeting for consideration,
the persons named in the proxy card will have the discretion to vote on these
matters in accordance with their best judgment. Proxies voted against the
proposal to approve the merger agreement will not be voted in favor of any
adjournment of the meeting for the purpose of soliciting additional proxies.
Revocation
You may revoke your proxy card at any time prior to its exercise by:
. giving written notice of such revocation to the secretary of
PennzEnergy;
. appearing and voting in person at the meeting; or
. properly completing and executing a later dated proxy and delivering it
to the secretary of PennzEnergy at or before the meeting.
Your presence without voting at the meeting will not automatically revoke
your proxy, and any revocation during the meeting will not affect votes
previously taken.
Validity
The inspectors of election will determine all questions as to the validity,
form, eligibility (including time of receipt) and acceptance of proxy cards.
Their determination will be final and binding. The board of directors of
PennzEnergy has the right to waive any irregularities or conditions as to the
manner of voting. PennzEnergy may accept your proxy by any form of
communication permitted by Delaware law so long as PennzEnergy is reasonably
assured that the communication is authorized by you.
Solicitation of Proxies
The accompanying proxy is being solicited on behalf of the board of directors
of PennzEnergy. The expenses of preparing, printing and mailing the proxy and
the materials used in the solicitation will be borne by PennzEnergy.
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Morrow & Co., Inc., New York, New York has been retained by PennzEnergy to
aid in the solicitation of proxies, for a fee of $15,000 and the reimbursement
of out-of-pocket expenses. Proxies may also be solicited by personal interview,
telephone and telegram by directors, officers and employees of PennzEnergy, who
will not receive additional compensation for performing that service.
Arrangements also may be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation materials to the
beneficial owners of PennzEnergy shares held by such persons, and PennzEnergy
will reimburse them for reasonable expenses they incur.
Auditors
Arthur Andersen LLP serves as the independent public accountants of
PennzEnergy. Representatives of Arthur Andersen plan to attend the PennzEnergy
meeting and will be available to answer appropriate questions. Its
representatives will also have an opportunity to make a statement at the
meeting if they so desire, although it is not expected that any statement will
be made.
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THE MERGER
This section of the joint proxy statement/prospectus describes the proposed
merger. While we believe that the description covers the material terms of the
merger and the related transactions, this summary may not contain all of the
information that is important to you. You should read this entire document and
the other documents we refer to carefully for a more complete understanding of
the merger. In addition, we incorporate important business and financial
information about each of Devon and PennzEnergy into this joint proxy
statement/prospectus by reference. You may obtain the information incorporated
by reference into this joint proxy statement/prospectus without charge by
following the instructions in the section entitled "Where You Can Find More
Information" on page 89 of this joint proxy statement/prospectus.
Background of the Merger
In March and early April 1999, in the course of Devon's discussions with
investment bankers about possible strategic alliances, Morgan Stanley suggested
PennzEnergy as an attractive merger partner and Devon indicated a strong
interest in exploring a transaction with PennzEnergy. On April 7, 1999, Morgan
Stanley approached James L. Pate, PennzEnergy's chairman, to determine his
willingness to talk with Devon. Morgan Stanley described Devon and the possible
merits of a strategic combination to the PennzEnergy stockholders. Mr. Pate
expressed his willingness to engage in exploratory discussions with Devon.
On April 13, 1999, Mr. Pate and Devon's chief executive officer, J. Larry
Nichols, met to discuss the possibility of a strategic combination. Both agreed
that the idea was worth pursuing. The two executives agreed to conduct a
preliminary review of the other company's oil and gas reserve data before
proceeding further. On April 15, 1999, Devon and PennzEnergy executed a mutual
confidentiality and standstill agreement. At about this time, both Devon and
PennzEnergy engaged Morgan Stanley to act as financial advisor in connection
with the transaction. On April 18, 1999, Mr. Pate and a representative from
Morgan Stanley met with Mr. Nichols to discuss due diligence matters,
governance issues and potential benefits of a merger between the two companies.
On April 20, 1999, Mr. Pate and Mr. Nichols met to further discuss terms of a
potential transaction. On April 26, 1999, representatives from Morgan Stanley
met with PennzEnergy's legal advisors to discuss issues relating to the merger,
including certain tax considerations.
During the weeks of April 26 and May 3, 1999, several members of Devon's
technical staff and independent reserve engineers, LaRoche Petroleum
Consultants, met with representatives of PennzEnergy's independent reserve
engineering firm, Ryder Scott, to review PennzEnergy's proved oil and gas
reserve data. At PennzEnergy's request, representatives of Ryder Scott met with
LaRoche to review Devon's United States proved oil and gas reserves. A
representative of Morgan Stanley was present at these meetings. At
PennzEnergy's request, representatives of Ryder Scott also met with Paddock
Lindstrom and AMH Petroleum Consultants to review Devon's Canadian proved oil
and gas reserves.
During this period, at the request of Messrs. Nichols and Pate,
representatives of Morgan Stanley compiled and prepared materials for their
discussion, including basic information about each company and its operations,
valuation analyses, comparative summaries and pro forma analyses. At the
conclusion of this process, Messrs. Pate and Nichols determined that further
merger discussions were warranted.
Messrs. Nichols' and Pate's discussions were predicated on a "merger of
equals" format, with the combined company having a board of directors composed
initially of an equal number of Devon and PennzEnergy designees. Messrs.
Nichols and Pate tentatively agreed upon locating the headquarters of the
combined company in Oklahoma City and maintaining an office in Houston
primarily for Gulf of Mexico operations. They also discussed the possible roles
of Mr. Nichols as president and chief executive officer and Mr. Pate as
chairman of the board of directors, as well as the possible composition of
senior management to be drawn primarily from Devon's executive officers and
augmented with selected PennzEnergy officers.
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On April 30, 1999, Mr. Pate engaged J.P. Morgan to act as PennzEnergy's
financial advisor in negotiations with Devon and requested that J.P. Morgan
representatives review the material prepared by Morgan Stanley.
On May 7, 1999, Mr. Pate met with PennzEnergy's outside directors to review
PennzEnergy's strategic alternatives and to determine their interest in Mr.
Pate's proceeding to engage in substantive merger negotiations with Devon. A
representative of J.P. Morgan attended the meeting and expressed preliminary
views respecting a possible transaction with Devon. After that meeting, Mr.
Pate called Mr. Nichols to report that PennzEnergy's outside directors were
interested in continuing discussions with Devon. Mr. Pate requested that the
parties determine an exchange ratio prior to conducting final due diligence and
negotiating definitive merger documents. On that same day Devon engaged
PaineWebber to act as Devon's financial advisor in the negotiations with
PennzEnergy and to render an opinion to the Devon board of directors if the
transaction were to proceed.
On May 10, 1999, Mr. Nichols and other representatives of Devon met with
representatives of Morgan Stanley, J.P. Morgan and PaineWebber to discuss a
proposed exchange ratio and other outstanding merger issues. The parties
reviewed the two companies' historical trading ratios, relative values of
reserves, cash flow, production, relative debts and liabilities and potential
future projects and prospects. At the end of this session, the two companies'
representatives concurred that the exchange ratio of 0.4475 shares of Devon for
each share of PennzEnergy was an appropriate exchange ratio on which to base
further discussions.
Concurrent with the meeting to discuss the exchange ratio, the two companies
directed their attorneys to begin negotiating definitive agreements. The two
companies and their legal and financial advisors continued discussions of
merger terms and the drafting of a merger agreement and option agreements for
the remainder of the week of May 10, 1999.
On May 17 and 18, 1999, representatives of Devon and PennzEnergy met to
discuss reserves, operations, pending projects and other due diligence issues.
At the same time, representatives of the companies and legal advisors continued
to work on documentation for the proposed merger and related transactions.
On May 19, 1999, the PennzEnergy board of directors met to discuss the
proposed transaction, received the fairness opinion of J.P. Morgan and approved
(with Stephen D. Chesebro' dissenting) the merger agreement, the stock option
agreements and the merger, subject to PennzEnergy stockholder approval. On May
19, 1999, the Devon board of directors met separately to discuss the proposed
transaction. Prior to the commencement of the board meeting, Devon received the
written resignations of three of its board members, all of whom were
representatives of Kerr-McGee Corporation. Kerr-McGee had previously advised
Devon that the Kerr-McGee representatives would resign in order for Kerr-McGee
to increase its flexibility in dealing with its investment in Devon. At the
Devon board meeting, the remaining eight board members discussed the proposed
transaction, received the fairness opinion of PaineWebber and unanimously
approved the merger agreement, the option agreements and the merger, subject to
Devon stockholder approval.
The merger agreement and stock option agreements were signed after the close
of trading on May 19, 1999, and announced in a joint press release the
following morning before the stock markets opened.
Reasons for the Merger
Devon's Reasons for the Merger. The Devon board of directors considered
various factors, including the following, in unanimously approving the merger:
1. A Broader and More Diversified Portfolio of Opportunities -- Devon
currently has operations exclusively onshore in North America. The
combination of PennzEnergy's assets with Devon's assets strengthens Devon's
position in two of its established core areas: the Permian Basin and the
Rocky Mountain Region. It also adds two new core areas: the Gulf Coast/East
Texas Region and the offshore Gulf of Mexico. Exposure to a greater number
of established core operating and exploration areas reduces the property
concentration for Devon's stockholders. Exposure to a greater number of
established United States and international core areas also provides Devon
with a broader range of drilling and acquisition opportunities.
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2. Improved Efficiency and Cost Savings -- Many duplicative
administrative and operating functions of the two companies can be
eliminated as a result of the merger. Devon stockholders will benefit from
a much larger asset base without the incremental administrative costs.
3. Expanded Stockholder Base and Stock Liquidity -- Devon currently has
an estimated 10,000 stockholders and approximately 49 million shares
outstanding. After the merger, New Devon will have approximately 60,000
stockholders and approximately 70 million shares outstanding (excluding
approximately 8 to 10 million shares which may be issued in connection with
the proposed public offering of New Devon common stock). This should result
in increased stock trading and improved liquidity for Devon's stockholders.
4. Improved Access to Capital -- New Devon's equity market capitalization
is expected to be approximately $2.9 billion (excluding any new equity
issuance). This compares with Devon's pre-merger equity market
capitalization of $1.7 billion. The larger size of New Devon should provide
it with more stability and better access to capital.
5. Tax Consequences of the Merger -- The merger is structured to be tax-
free to Devon, PennzEnergy and their respective stockholders, except for
the cash PennzEnergy stockholders will receive in lieu of fractional shares
of New Devon common stock and the potential for tax liability to New Devon
discussed under "Material United States Federal Income Tax Considerations--
Possible Effect upon Taxation of Pennzoil-Quaker State Spinoff."
6. Management -- New Devon will benefit from the leadership of Devon's
senior management. This team, led by J. Larry Nichols, has a track record
of successfully developing and managing a rapidly growing, profitable oil
and gas company.
7. PaineWebber Opinion -- The Devon board also considered the
presentation and opinion of PaineWebber described below to the effect that,
based upon its review and assumptions and subject to specific matters
stated in the opinion, the effective exchange ratio was fair, from a
financial point of view, to Devon's stockholders.
Based on these factors, and other factors the members of the Devon board
deemed relevant, the Devon board unanimously approved the merger agreement and
the merger.
The Devon board believes that the merger agreement is in the best interests
of the Devon stockholders (including the holders of exchangeable shares) and
recommends that the Devon stockholders (including the holders of exchangeable
shares) approve the merger agreement and the merger.
The above discussion of the information and factors considered and given
weight by the Devon board is not intended to be exhaustive. However, the
discussion is believed to include all material factors considered by the Devon
board. In reaching the decision to approve and recommend approval to Devon
stockholders of the merger agreement and the merger, the Devon board did not
assign any relative or specific weights to the factors considered. In addition,
individual directors may have given differing weights to different factors.
The Devon board realizes that there are risks associated with the merger.
These risks include the prospect that some of the potential benefits set forth
above may not be realized or that there may be high costs associated with
realizing those benefits. These factors are discussed more fully in this joint
proxy statement/prospectus under "Risk Factors." However, the Devon board
believes that the positive factors should outweigh any negative factors,
although we can give no assurances in this regard.
PennzEnergy's Reasons for the Merger.
PennzEnergy's board of directors has determined that the merger is advisable
and in the best interests of its stockholders. At a meeting held on May 19,
1999, the PennzEnergy board of directors approved the merger agreement and
resolved to recommend that the stockholders of PennzEnergy vote for adoption of
the merger agreement and approval of the merger.
In determining to recommend approval of the merger agreement and the merger,
the PennzEnergy board considered how combining with Devon would achieve a
number of PennzEnergy's business objectives and
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strategies. The board considered these matters in the context of an industry
environment in which economic factors were producing strong competitive
motivations for consolidation as evidenced by recent business combination
transactions occurring among major companies as well as independent and smaller
companies. The PennzEnergy board considered the extent to which the company's
objective of increasing production volumes and cash flow will be met through
the addition of Devon's high-quality producing properties and exploitation
opportunities in the United States and Canada. The PennzEnergy board believes
that the combination of the two companies will provide superior growth
opportunities in the long term. In connection with PennzEnergy's strategy for
reducing financial leverage, the PennzEnergy board considered Devon's
substantially lower debt-to-equity level and the better access to capital New
Devon would have, including the ability to raise equity capital on acceptable
terms. It also considered the current capital structure of both PennzEnergy and
Devon, the expected capital structure of New Devon and that New Devon would be
expected to have a higher debt rating than PennzEnergy. PennzEnergy's board
also considered the extent to which the objectives of reducing costs and
improving efficiencies would be significantly advanced by the combination of
the two companies.
The PennzEnergy board also considered additional factors, including the
following:
. the expected strategic position of New Devon, with oil and natural gas
properties and interests onshore in the United States and Canada, on the
United States Gulf Coast both onshore and offshore, and internationally
in key areas such as Azerbaijan, Egypt, Qatar, Venezuela, Brazil and
Australia, and the greater average reserve life of New Devon's oil and
gas properties when compared to those of PennzEnergy;
. the potential for appreciation of the value of New Devon common stock,
and the ability of PennzEnergy stockholders to participate in any such
appreciation through their initial ownership of approximately 31% of the
common stock of New Devon;
. the expected strength and experience of the proposed management team for
New Devon;
. the relative historical trading values for both PennzEnergy and Devon
common stock, including Devon's relatively higher trading multiples and
the expected higher trading multiples to be experienced by New Devon;
. the expected accounting treatment of the merger as a purchase by Devon;
. the financial performance and condition, business operations and future
prospects of each of PennzEnergy and Devon;
. the other strategic alternatives available to PennzEnergy;
. the structure of the transaction and the terms and conditions of the
merger agreement and the stock option agreements and their impact on the
accounting treatment of possible alternative business combinations; and
the terms and conditions of the merger agreement that permit
PennzEnergy's board of directors, in the exercise of its fiduciary
duties, to engage in negotiations with or furnish information to third
parties in response to any unsolicited acquisition proposal that is more
favorable to PennzEnergy stockholders than the merger and to terminate
the merger agreement in order to enter into a definitive agreement
relating to such alternative proposal upon payment of a $22 million
termination fee;
. the challenges and potential costs of combining the businesses of two
major companies, and the attendant risks of not achieving the expected
operational efficiencies, other synergies or improvements in cash flow
and earnings;
. the oral opinion, followed later by delivery of a written opinion,
received by the PennzEnergy board of directors from J.P. Morgan to the
effect that, as of May 19, 1999, the consideration was fair from a
financial point of view to PennzEnergy stockholders, as described under
"Opinions of Financial Advisors--Opinion of J.P. Morgan Securities Inc.";
and
. the treatment of the merger as two "reorganizations" for federal income
tax purposes.
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Based on this analysis, the PennzEnergy board of directors determined that
the merger is advisable and in the best interests of PennzEnergy stockholders.
In making its determination, the PennzEnergy board of directors considered the
factors above as a whole and did not assign specific or relative weights to
those factors. In addition, individual members of the PennzEnergy board of
directors may have given different weights to different factors. Moreover, the
foregoing discussion of the factors considered by the PennzEnergy board of
directors is not intended to be exhaustive. Finally, the PennzEnergy board of
directors believes that the merger is an opportunity for PennzEnergy
stockholders to participate in a combined enterprise that has significantly
greater business and financial resources than PennzEnergy would have, on a
stand-alone basis, absent the merger.
Opinions of Financial Advisors
Opinion of PaineWebber Incorporated
PaineWebber was retained as Devon's financial advisor in connection with the
merger. Devon instructed PaineWebber, in its role as a financial advisor, to
evaluate the fairness, from a financial point of view, of the effective
exchange ratio in which each share of PennzEnergy's common stock will be
converted into 0.4475 shares of New Devon common stock and each share of
Devon's common stock will be converted into one share of New Devon common
stock.
The full text of the PaineWebber opinion, dated May 19, 1999, which sets
forth the assumptions made, procedures followed, matters considered and
limitations on the review undertaken, is attached as Annex B to this joint
proxy statement/prospectus. You should read the PaineWebber opinion carefully
and in its entirety. The summary of the PaineWebber opinion included in this
document is qualified in its entirety by reference to the full text of the
PaineWebber opinion.
On May 19, 1999, PaineWebber delivered its oral and written opinion to the
Devon board, to the effect that, as of that date and based upon its review and
assumptions and subject to the limitations summarized in its opinion, the
effective exchange ratio was fair, from a financial point of view, to Devon's
stockholders. In arriving at its opinion, PaineWebber did not ascribe a
specific range of values to Devon or PennzEnergy but made its determination as
to the fairness of the effective exchange ratio on the basis of the financial
and comparative analyses described below. PaineWebber's opinion was directed to
and prepared at the request and for the information of the Devon board and did
not constitute a recommendation to any Devon stockholder as to how any
stockholder should vote with respect to the merger. PaineWebber was not
requested to opine as to, and its opinion did not address, the relative merits
of the merger and any other transactions or business strategies discussed by
the Devon board as alternatives to the merger or Devon's underlying business
decision to proceed with the merger. In addition, PaineWebber's opinion did not
address the prices at which shares of New Devon common stock may trade
following the merger.
In arriving at its opinion, PaineWebber, among other things:
. reviewed a draft of the merger agreement dated May 17, 1999;
. reviewed such publicly available information concerning Devon and
PennzEnergy that PaineWebber believed to be relevant to its analysis;
. discussed with the senior management of Devon and PennzEnergy their
respective businesses, operations, financial conditions, assets,
reserves, production profiles, exploration programs and prospects and
discussed with the senior management of Devon the cost savings, operating
synergies and strategic benefits expected to result from a combination of
the businesses of Devon and PennzEnergy;
. reviewed financial and operating information with respect to the
businesses, operations and prospects of Devon and PennzEnergy, including
financial projections furnished to PaineWebber by Devon based on:
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(1) certain estimates of proved and non-proved reserves,
(2) projected annual production of such reserves in certain domestic and
international areas, and
(3) the amounts and timing of the cost savings and operating synergies
expected to result from a combination of the businesses of Devon and
PennzEnergy;
. reviewed the trading histories of Devon's common stock and PennzEnergy's
common stock from December 31, 1998, to the present and compared those
trading histories with those of other companies that PaineWebber deemed
relevant;
. compared the historical financial results and present financial condition
of Devon and PennzEnergy with those of other companies that PaineWebber
deemed relevant;
. compared the financial terms of the merger with the financial terms of
certain other business combination transactions that PaineWebber deemed
relevant;
. reviewed and analyzed the potential pro forma impact of the merger on
Devon, including the cost savings and operating synergies expected by the
management of Devon to result from a combination of the businesses of
Devon and PennzEnergy; and
. undertook other financial studies and performed other analyses and
investigations as PaineWebber deemed appropriate.
In preparing its opinion, PaineWebber assumed and relied upon the accuracy
and completeness of all information that was publicly available, supplied or
otherwise communicated to PaineWebber by Devon and PennzEnergy, without
assuming any responsibility to independently verify that information.
PaineWebber assumed that the financial projections for Devon and New Devon
furnished to PaineWebber by Devon had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of Devon as to the future financial performance of Devon and New
Devon. PaineWebber also relied upon the assurances of the managements of Devon
and PennzEnergy that they were not aware of any facts or circumstances that
would make the information provided to PaineWebber incomplete or misleading. In
arriving at its opinion, PaineWebber did not make any independent evaluation or
appraisal of the assets or liabilities, contingent or otherwise, of Devon or
PennzEnergy nor was PaineWebber furnished with any such evaluations or
appraisals. Upon the advice of Devon and its legal and accounting advisors,
PaineWebber assumed that the merger will be accounted for under the purchase
method of accounting and will qualify as a tax-free reorganization for U.S.
federal income tax purposes. PaineWebber also assumed with the consent of Devon
that any material liabilities, contingent or otherwise, known or unknown, of
Devon and PennzEnergy were as set forth in the consolidated financial
statements of Devon and PennzEnergy, respectively. PaineWebber's opinion was
based upon economic, monetary and market conditions as they existed on the date
of its opinion.
The following paragraphs summarize the material analyses performed by
PaineWebber and reviewed with the Devon board at its meeting on May 19, 1999,
in connection with PaineWebber's delivery of its opinion to the Devon board at
that same meeting.
Summary Valuation Analyses. In connection with rendering its opinion,
PaineWebber performed certain financial analyses as described below. The
various valuation methodologies and the implied exchange ratios derived from
those methodologies are included in the following table. This table should be
read together with the more detailed descriptions set forth below. The
preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances. As a result,
fairness opinions are not readily susceptible to partial analysis or summary
description. Accordingly, PaineWebber believes that its analyses must be
considered as a whole and that considering any portion of its analyses and the
factors considered, without considering all analyses and factors, could create
a misleading or incomplete view of the process underlying its opinion. In
performing its analyses, PaineWebber made numerous assumptions with respect to
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<PAGE>
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Devon or PennzEnergy. Any
estimates contained in the analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth in those analyses. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold. Accordingly,
any estimates are inherently subject to substantial uncertainty and neither
Devon nor PaineWebber assumes responsibility for their accuracy.
<TABLE>
<CAPTION>
Implied
Exchange Ratio
Valuation Methodology Summary Description Range
---------------------------------- -------------------------- --------------
<C> <S> <C>
Net Asset Value Analysis Net present value, using 0.37-0.45
selected hydrocarbon
pricing scenarios and
discount rates, of the
future pre-tax cash flows
that both companies could
be expected to generate
from their proved
reserves, adjusted for
certain other assets and
liabilities
Comparable Public Company Analysis Market valuation benchmark 0.38-0.63
based on the common stock
trading multiples of
selected comparable
companies
Comparable Transactions Analysis Market valuation benchmark 0.34-0.49
based on consideration
paid in selected
comparable transactions
Premiums Paid Analysis Analysis of premiums paid 0.42-0.50
in historical business
combination transactions
Historical Exchange Ratio Analysis Analysis of the relative 0.39-0.43
daily historical closing
prices of each company
over selected time periods
The Effective Exchange Ratio in 0.4475
the Merger
</TABLE>
Net Asset Value Analysis. PaineWebber estimated, at a range of discount rates
and hydrocarbon pricing scenarios, the present value of the future pre-tax cash
flows that Devon and PennzEnergy could be expected to generate from their
respective proved reserves as of December 31, 1998. In the analysis,
PaineWebber assumed three alternative cases for future oil and natural gas
prices. The first scenario, known as the PaineWebber Price Forecast, was
calculated using commodity prices as estimated by PaineWebber. The second
scenario, known as the Futures Price Forecast, was generated using the average
futures prices listed on the New York Mercantile Exchange on May 17, 1999. The
third scenario, known as the Devon Price Forecast, was calculated using prices
as estimated by Devon's management. PaineWebber added to those estimated values
for proved reserves assessments of the value of certain other assets and
liabilities of Devon and PennzEnergy, including, but not limited to, other land
and acreage, working capital and the book value of debt. These assessments of
the value of certain other assets and liabilities were made by PaineWebber
based on information and assumptions provided by Devon's and PennzEnergy's
managements and on various industry benchmarks. The net asset value analysis
resulted in an implied exchange ratio range of 0.37 to 0.45.
Comparable Public Company Analysis. With respect to Devon, PaineWebber
reviewed the public stock market trading multiples for selected publicly traded
United States and international independent exploration and production
companies with financial and operating characteristics which PaineWebber deemed
to be similar to those of Devon, including:
Apache Corporation
Barrett Resources Corporation
Burlington Resources Inc.
Noble Affiliates, Inc.
Pioneer Natural Resources Company
Santa Fe Snyder Corporation (pro forma for the merger of Snyder Oil and
Santa Fe Energy)
Tom Brown, Inc.
Vintage Petroleum, Inc.
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<PAGE>
With respect to PennzEnergy, PaineWebber reviewed the public stock market
trading multiples for selected publicly traded United States and international
independent exploration and production companies, with financial and operating
characteristics which PaineWebber deemed to be similar to those of PennzEnergy
including:
Anadarko Petroleum Corporation
Apache Corporation
Burlington Resources Inc.
Enron Oil & Gas Company
HS Resources, Inc.
Noble Affiliates, Inc.
Ocean Energy Inc. (pro forma for the merger of Seagull Energy and Ocean
Energy)
Pioneer Natural Resources Company
Santa Fe Snyder Corporation (pro forma for the merger of Snyder Oil and
Santa Fe Energy)
Union Pacific Resources Group Inc.
Using publicly available information, PaineWebber calculated and analyzed the
common equity market value multiples of both historical cash flow from
operations from the previous twelve months and projected cash flow from
operations based upon published analyst estimates obtained from First Call
Research. PaineWebber also calculated and analyzed the adjusted capitalization
multiples of certain historical financial and reserve criteria such as EBITDA,
proved reserves of oil and gas and pre-tax SEC PV-10%. The adjusted
capitalization of each company was obtained by summing the book value of total
debt, the market value of common equity, the book value of its preferred stock
and the book value of other long-term liabilities.
The comparable public company analysis resulted in an implied exchange ratio
range of 0.38 to 0.63. However, because of the inherent differences between the
businesses, operations and prospects of Devon and PennzEnergy and the companies
included in the comparable company groups, PaineWebber believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative
results of this analysis. Accordingly, PaineWebber also made qualitative
judgments concerning differences between the financial and operating
characteristics of Devon and PennzEnergy and companies in the comparable
company groups that would affect the public trading values of Devon and
PennzEnergy and the comparable companies.
Comparable Transactions Analysis. With respect to PennzEnergy, PaineWebber
reviewed certain publicly available information on selected United States and
international exploration and production company transactions which were
announced from March 1997 to January 1999. The selected transactions
PaineWebber analyzed included:
Santa Fe Energy Resources Inc./Snyder Oil Corporation
Seagull Energy Corporation/Ocean Energy Inc.
Kerr-McGee Corporation/Oryx Energy Company
Devon Energy Corporation/Northstar Energy Corporation
Lomak Petroleum Inc./Domain Energy Corporation
Atlantic Richfield Co./Union Texas Petroleum Holdings, Inc.
Union Pacific Resources Group Inc./Norcen Energy Resources Ltd.
Ocean Energy Inc./United Meridian Corp.
Sonat Inc./Zilkha Energy Co.
Chesapeake Energy Corp./Hugoton Energy Corp.
Belco Oil & Gas Corp./Coda Energy Inc.
Burlington Resources Inc./Louisiana Land and Exploration Co.
The Meridian Resource Corporation/Cairn Energy USA Inc.
Louis Dreyfus Natural Gas Corp./American Exploration Company
Parker & Parsley Petroleum Co./Mesa Inc.
Texas Pacific Group/Belden & Blake Corp.
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<PAGE>
For each transaction, PaineWebber calculated an enterprise transaction value
multiple based on different statistics of the target company, including:
. earnings before interest, taxes, depreciation, depletion and amortization
("EBITDA") during the latest twelve month period prior to announcement of
the transaction;
. proved oil and gas reserves; and
. pre-tax SEC PV-10%.
The enterprise transaction value multiples for each of the above-mentioned
statistics were applied to the respective PennzEnergy data points and adjusted
for the book value of total debt and preferred securities and other long-term
liabilities to calculate an implied equity value range for PennzEnergy. In
addition, PaineWebber calculated for each transaction an equity transaction
value multiple based on the target company's cash flow from operations during
the latest twelve-month period prior to announcement of the transaction. The
multiples were applied to PennzEnergy's cash flow from operations for the
twelve months ended March 31, 1999, to calculate an implied equity value range.
This range of equity values was then compared to the closing stock price of
Devon common stock as of May 17, 1999.
The comparable transactions analysis resulted in an implied exchange ratio
range of 0.34 to 0.49. However, because the market conditions, rationale and
circumstances surrounding each of the transactions analyzed were specific to
each transaction and because of the inherent differences between the
businesses, operations and prospects of Devon and PennzEnergy and the companies
involved in the comparable transactions analyzed, PaineWebber believed that it
was inappropriate to, and therefore did not, rely solely on the quantitative
results of this analysis. Accordingly, PaineWebber also made qualitative
judgments concerning differences between the characteristics of these
transactions and the merger that would affect the equity values of Devon and
PennzEnergy and those other companies.
Premiums Paid Analysis. PaineWebber, using a sample of 353 domestic business
combination transactions announced between January 1, 1997 and May 17, 1999,
with disclosed transaction values of $500 million to $3 billion, reviewed the
premiums paid to the price of the target company one day, one week and four
weeks prior to the announcement of the transaction. Using this information,
PaineWebber determined the mean and median premiums paid one day prior to
announcement of the transaction to be 25.3% and 19.7%, respectively, the mean
and median premiums paid one week prior to announcement of the transaction to
be 29.8% and 24.3%, respectively, and the mean and median premiums paid four
weeks prior to the announcement of the transaction to be 34.4% and 30.2%,
respectively. PaineWebber applied these premiums to PennzEnergy's common stock
price one day, one week and four weeks prior to May 17, 1999, and compared
these values to the closing price of Devon's common stock as of May 17, 1999.
Further, PaineWebber, using a sample of 23 domestic business combination
transactions recognized as mergers of equals announced between January 1, 1997,
and May 17, 1999, reviewed the premiums paid to the price of the target company
one day, one week and four weeks prior to the announcement of the transaction.
Using this information, PaineWebber determined the mean and median premiums
paid one day prior to announcement of the transaction to be 14.1% and 10.7%,
respectively, the mean and median premiums paid one week prior to announcement
of the transaction to be 18.1% and 14.2%, respectively and the mean and median
premiums paid four weeks prior to the announcement of the transaction to be
17.4% and 18.5%, respectively. PaineWebber applied these premiums to
PennzEnergy's common stock price one day, one week and one month prior to May
17, 1999, and compared these values to the closing price of Devon's common
stock as of May 17, 1999. The premiums paid analysis resulted in an implied
exchange ratio range of 0.42 to 0.50.
Historical Exchange Ratio Analysis. PaineWebber reviewed the daily historical
closing prices of both Devon's and PennzEnergy's common stock for the period
from December 31, 1998, to May 17, 1999. PaineWebber analyzed the ratio of the
May 17, 1999, closing price for Devon's common stock to the corresponding
closing price of PennzEnergy's common stock. In addition, PaineWebber reviewed
the ratio of the closing prices for Devon and PennzEnergy based on 30-, 60- and
90-trading day averages ending May 17,
42
<PAGE>
1999, and the ratio of the average closing prices between December 31, 1998,
and May 17, 1999. The historical exchange ratio analysis resulted in an implied
exchange ratio range of 0.39 to 0.43.
Pro Forma Merger Consequences Analysis. PaineWebber analyzed the pro forma
consequences that could result from the merger. In connection with these
analyses, PaineWebber reviewed projections of Devon and New Devon provided by
the management of Devon for the years 1999 through 2003. PaineWebber then
developed its own analysis of the pro forma effects of the merger, after
considering information that PaineWebber deemed to be relevant. The analysis
indicated the merger will be accretive to Devon's cash flow from operations per
share in the years 1999 through 2003.
PaineWebber is a prominent investment banking and financial advisory firm
with experience in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. The Devon
board selected PaineWebber because of its expertise, reputation and familiarity
with Devon in particular and the oil and gas industry in general and because
its investment banking professionals have substantial experience in
transactions comparable to the merger.
Pursuant to the terms of an engagement letter between PaineWebber and Devon,
dated May 18, 1999, Devon paid PaineWebber a fee of $1.0 million upon delivery
of its opinion and has agreed to pay an additional fee of $1.5 million upon the
public filing of this document. PaineWebber's compensation for services in
rendering the opinion was not contingent upon the results of the opinion. In
addition, Devon agreed to reimburse PaineWebber for certain of its related
expenses incurred in connection with its engagement. Devon also agreed, under a
separate agreement, to indemnify PaineWebber, its affiliates and each of its
directors, officers, agents and employees and each person, if any, controlling
PaineWebber or any of its affiliates against certain liabilities, including
liabilities under federal securities laws.
In the past, PaineWebber Incorporated and its affiliates have provided
investment banking and other financial services to Devon and to PennzEnergy and
have received fees for rendering these services.
In the ordinary course of its business, PaineWebber actively trades in the
debt and equity securities of Devon and PennzEnergy for its own account and for
the accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities.
Opinion of J.P. Morgan Securities Inc.
Pursuant to an engagement letter dated May 17, 1999, PennzEnergy retained
J.P. Morgan as its financial advisor and to deliver a fairness opinion in
connection with the proposed merger.
At the meeting of the PennzEnergy board on May 19, 1999, J.P. Morgan rendered
its oral opinion that, as of that date, the consideration to be received by
PennzEnergy's stockholders in the proposed merger was fair to them from a
financial point of view. J.P. Morgan confirmed its oral opinion by delivering
its written opinion to the PennzEnergy board, dated May 19, 1999, to the same
effect.
The full text of J.P. Morgan's written opinion, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached as Annex C to this joint proxy statement/prospectus and is
incorporated into this document by reference. PennzEnergy's stockholders are
urged to read the opinion in its entirety. J.P. Morgan's opinion is addressed
to the PennzEnergy board, is directed only to the consideration to be received
in the proposed merger and does not constitute a recommendation to any
stockholder of PennzEnergy as to how that stockholder should vote at the
PennzEnergy meeting. The summary of the opinion of J.P. Morgan set forth in
this joint proxy statement/prospectus is qualified in its entirety by reference
to the full text of that opinion.
43
<PAGE>
In arriving at its opinion, J.P. Morgan reviewed, among other things:
. the merger agreement;
. the audited financial statements of PennzEnergy and Devon for the fiscal
year ended December 31, 1998, and the unaudited financial statements of
PennzEnergy and Devon for the period ended March 31, 1999;
. current and historical market prices of PennzEnergy's and Devon's common
stock;
. publicly available information concerning the business of PennzEnergy
and Devon and of other companies engaged in businesses comparable to
those of PennzEnergy and Devon, and the reported market prices for other
companies' securities deemed comparable;
. publicly available terms of transactions involving companies comparable
to PennzEnergy and Devon and the consideration received for those
companies;
. the terms of other business combinations deemed relevant by J.P. Morgan;
and
. certain internal tax information provided by representatives of
PennzEnergy and Devon and information provided by independent reserve
engineers in the case of PennzEnergy and by management and independent
reserve engineers in the case of Devon, including estimates of proved
oil and natural gas reserves and projected annual production volumes of
those reserves in certain domestic and international areas.
J.P. Morgan also held discussions with representatives of PennzEnergy and
Devon with respect to aspects of the merger, the past and current business
operations of PennzEnergy and Devon, the financial condition and future
prospects and operations of PennzEnergy and Devon, the effects of the merger on
the financial condition and future prospects of PennzEnergy and Devon, and
other matters believed necessary or appropriate to J.P. Morgan's inquiry. In
addition, J.P. Morgan conducted summary level due diligence with management of
PennzEnergy and considered other information as it deemed appropriate for the
purposes of its opinion.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or
that was furnished to it by PennzEnergy and Devon or otherwise reviewed by J.P.
Morgan. J.P. Morgan has not assumed any responsibility or liability for any of
that information. J.P. Morgan has not conducted any valuation or appraisal of
any assets or liabilities, nor have any valuations or appraisals been provided
to J.P. Morgan. In relying on financial information provided to J.P. Morgan,
J.P. Morgan has assumed that it has been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management of PennzEnergy and Devon to which such information relates. J.P.
Morgan has also assumed that the merger will have the tax consequences
described in discussions with, and materials furnished to, J.P. Morgan and that
the other transactions contemplated by the merger agreement will be consummated
as described in the merger agreement.
The tax information furnished to J.P. Morgan was prepared by representatives
of PennzEnergy and Devon. Estimates of proved oil and natural gas reserves and
projected annual production volumes of these reserves in certain domestic and
international areas were furnished to J.P. Morgan by independent reserve
engineers in the case of PennzEnergy and by Devon management and independent
reserve engineers in the case of Devon. Neither PennzEnergy nor Devon publicly
discloses internal financial information of the type provided to J.P. Morgan in
connection with J.P. Morgan's analysis of the merger, and this information was
not prepared with a view toward public disclosure. This information was based
on numerous variables and assumptions that are inherently uncertain and may be
beyond the control of management, including, without limitation, factors
related to general economic and competitive conditions and prevailing interest
rates. Accordingly, actual results could vary significantly from those set
forth in this information.
J.P. Morgan's opinion was based on economic, market and other conditions as
in effect and information made available to J.P. Morgan as of the date of its
opinion. Subsequent developments may affect the J.P. Morgan opinion, and J.P.
Morgan does not have any obligation to update, revise, or reaffirm its opinion.
J.P. Morgan expressed no opinion as to the price at which New Devon's common
stock will trade at any future
44
<PAGE>
time. J.P. Morgan's opinion related only to the fairness, from a financial
point of view, to PennzEnergy's stockholders of the consideration to be
received by them in the proposed merger, and J.P. Morgan did not express any
opinion as to any other alternative transactions that may have been considered
or available to the management or board of directors of PennzEnergy.
In accordance with customary investment banking practices, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following table summarizes some of the material financial analyses utilized by
J.P. Morgan in conjunction with providing its opinion. These and other
financial analyses performed by J.P. Morgan are described below. This table
should be read with the more detailed descriptions set forth below.
<TABLE>
<CAPTION>
PennzEnergy
Valuation Methodology Contribution
--------------------- -------------
<S> <C>
Net Asset Value Analysis.................................. 24.6% - 29.6%
Historical Exchange Ratio Analysis........................ 27.9% - 29.9%
Selected Transactions Analysis............................ 23.2% - 35.1%
Selected Comparable Company Analysis...................... 27.4% - 34.2%
PennzEnergy's Stockholders Approximate Continuing
Ownership Position in New Devon.......................... 30.7%
</TABLE>
Net Asset Value Analysis. J.P. Morgan conducted a discounted cash flow
analysis of the proved reserves for the purpose of determining the fully
diluted equity value per share for PennzEnergy's and Devon's common stock. J.P.
Morgan calculated the unlevered free cash flows that PennzEnergy and Devon are
expected to generate during fiscal years 1999 through 2013 and the remaining
reserves projected at 2013 based upon publicly available financial information
and internal tax information provided by representatives of PennzEnergy and
Devon, and engineering projections prepared by independent reserve engineers in
the case of PennzEnergy and by Devon management and independent reserve
engineers in the case of Devon, through the year ended 2013. The unlevered free
cash flows were then discounted to present values using a range of discount
rates from 9% to 11% for PennzEnergy and from 8% to 10% for Devon, which were
judged to be appropriate by J.P. Morgan after calculating an estimate of the
weighted average cost of capital of PennzEnergy and Devon, respectively. The
present value of the unlevered free cash flows and the range of terminal asset
values were then adjusted for PennzEnergy's and Devon's other assets and
liabilities, including working capital and 1999 fiscal first quarter excess
cash and total debt.
The net asset value analysis resulted in an implied contribution to New Devon
by PennzEnergy of between 24.6% and 29.6%, which J.P. Morgan compared favorably
to the approximately 30.7% continuing ownership stake that PennzEnergy's
stockholders would have in New Devon following the merger.
Historical Exchange Ratio Analysis. J.P. Morgan reviewed and analyzed the
relative historical contribution of PennzEnergy and Devon to New Devon based on
historical comparative stock price performance. The following historical
periods were reviewed: market capitalizations on May 14, 1999, and (1) the
average for the 30-day period prior to May 14, 1999; (2) the average for the
60-day period prior to May 14, 1999; and (3) the average for the 135-day period
prior to May 14, 1999, which was the entire trading history period since the
inception of PennzEnergy. J.P. Morgan observed that the relative contribution
of PennzEnergy to the combined pro forma entity in these reviewed historical
periods would have been between 27.9% and 29.9% depending on the measure used,
which J.P. Morgan compared favorably to the approximately 30.7% continuing
ownership stake that PennzEnergy's stockholders would have in New Devon
following the merger.
Selected Transactions Analysis. J.P. Morgan reviewed and compared financial
information relating to PennzEnergy to information relating to the following
selected transactions in the exploration and production industry since 1997:
Dominion Resources Inc./Remington Energy Ltd.
Seagull Energy Corporation/Ocean Energy Inc.
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<PAGE>
Kerr-McGee Corporation/Oryx Energy Company
Union Pacific Resources Group Inc./Norcen Energy Resources Ltd.
Parker & Parsley Petroleum Company/Mesa Inc.
Relevant transaction multiples were analyzed including (1) the firm value
(equity purchase price plus assumed net debt) divided by latest twelve-month
("LTM") earnings before interest, tax, depreciation and exploration ("EBITDAX")
prior to the transaction; and (2) the equity purchase price divided by LTM
operating cash flow ("OCF") prior to the transaction. The appropriate EBITDAX
multiple ranges were determined to be 5.5x to 6.5x. The appropriate OCF
multiple ranges were determined to be 4.0x to 5.0x.
J.P. Morgan also reviewed and compared financial information relating to
Devon to information relating to selected transactions in the exploration and
production industry since 1997:
BP Amoco p.l.c./Atlantic Richfield Co.
Santa Fe Energy Resources Inc./Snyder Oil Corporation
Atlantic Richfield Co./Union Texas Petroleum Holdings, Inc.
Ocean Energy Inc./United Meridian Corp.
Texaco Inc./Monterey Resources, Inc.
Pioneer Natural Resources Company/Chauvco Resources Ltd.
Gulf Canada Resources Ltd./Stampeder Exploration
Relevant transaction multiples were analyzed including (1) the firm value
(equity purchase price plus assumed net debt) divided by LTM EBITDAX prior to
the transaction; and (2) the equity purchase price divided by LTM OCF prior to
the transaction. The appropriate EBITDAX multiple ranges were determined to be
10.0x to 11.0x. The appropriate OCF multiple ranges were determined to be 10.0x
to 10.5x.
J.P. Morgan observed that the relative contribution by PennzEnergy to the
combined pro forma entity based on the selected transaction analyses would have
been between 23.2% and 35.1% depending on the measure used, which J.P. Morgan
compared favorably to the approximately 30.7% continuing ownership stake that
PennzEnergy's stockholders would have in New Devon following the merger.
Selected Comparable Company Analysis. J.P. Morgan reviewed and compared
financial information relating to PennzEnergy to corresponding financial
information, ratios and public market multiples for:
Pioneer Natural Resources Company
Louis Dreyfus Natural Gas Corp.
Forest Oil Corporation
Ocean Energy Inc.
HS Resources, Inc.
Range Resources Corporation
These companies were chosen because they are publicly traded companies with
operations and capital structures that for purposes of analysis may be
considered similar to PennzEnergy. J.P. Morgan noted, however, that none of
these companies is identical to PennzEnergy. Accordingly, a comparison of these
companies to PennzEnergy is not purely mathematical. Rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the comparable companies and other factors that
could affect the publicly trading values of the comparable companies.
Relevant trading multiples for PennzEnergy were analyzed including (1) the
firm value (equity purchase price plus assumed net debt) divided by 2000
estimated EBITDAX, using selected research analyst estimates; and (2) market
value of common equity divided by 2000 estimated OCF, using First Call
estimates. The appropriate EBITDAX multiple ranges were determined to be 5.0x
to 6.0x. The appropriate OCF multiple ranges were determined to be 3.0x to
3.5x.
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<PAGE>
J.P. Morgan also reviewed and compared financial information relating to
Devon to corresponding financial information, ratios and public market
multiples for:
Anadarko Petroleum Corporation
Burlington Resources Inc.
Barrett Resources Corporation
Apache Corporation
These companies were chosen because they are publicly traded companies with
operations and capital structures that for purposes of analysis may be
considered similar to those of Devon. J.P. Morgan noted, however, that none of
these companies is identical to Devon. Accordingly, a comparison of these
companies to Devon is not purely mathematical. Rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the publicly trading values of the comparable companies.
Relevant trading multiples for Devon were analyzed including (1) the firm
value (equity purchase price plus assumed net debt) divided by 2000 estimated
EBITDAX, using selected research analyst estimates; and (2) market value of
common equity divided by 2000 estimated OCF, using First Call estimates. The
appropriate EBITDAX multiple ranges were determined to be 9.0x to 10.0x. The
appropriate OCF multiple ranges were determined to be 8.5x to 9.5x.
J.P. Morgan observed that the relative contribution by PennzEnergy to the
combined pro forma entity based on this analysis would have been between 27.4%
and 34.2% depending on the measure used, which J.P. Morgan compared favorably
to the approximately 30.7% continuing ownership stake that PennzEnergy's
stockholders would have in New Devon following the merger.
Pro Forma Merger Analysis. J.P. Morgan analyzed the then-current pro forma
New Devon cash flow and EBITDAX per share forecasts for 1999 and 2000 based on
First Call estimates. The analysis showed, assuming $50 to $60 million in
annual cost savings, on a per share basis, that the merger would be accretive
from 1999 on to New Devon's shareholders, excluding nonrecurring integration-
related costs.
The summary set forth above is not a complete description of the analyses or
data presented by J.P. Morgan. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. J.P. Morgan believes that the summary set forth above and
its analyses must be considered as a whole and that selecting portions of them,
without considering all of its analyses, could create an incomplete view of the
processes underlying its analyses and opinion. J.P. Morgan based its analyses
on assumptions that it deemed reasonable, including assumptions concerning
general business and economic conditions and industry-specific factors. The
other principal assumptions upon which J.P. Morgan based its analyses are set
forth above under the description of each such analysis. J.P. Morgan's analyses
are not necessarily indicative of actual values or actual future results that
might be achieved, which values may be higher or lower than those indicated.
Moreover, J.P. Morgan's analyses are not and do not purport to be appraisals or
otherwise reflective of the prices at which businesses actually could be bought
or sold.
As a part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with combinations and acquisitions, investments for passive and
control purposes, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. J.P. Morgan was selected to advise PennzEnergy
and to deliver a fairness opinion with respect to the merger on the basis of
this experience and its familiarity with PennzEnergy.
For services rendered in connection with the merger and the delivery of its
opinion, PennzEnergy has agreed to pay J.P. Morgan a fee of $4 million, $2
million of which was payable upon public announcement of
47
<PAGE>
the merger and $2 million of which is payable upon closing of the merger. In
addition, if the merger agreement is terminated under circumstances pursuant to
which a termination fee is paid to PennzEnergy, PennzEnergy has agreed to pay
J.P. Morgan a fee of 18% of the termination fee for its services. In addition,
PennzEnergy has agreed to reimburse J.P. Morgan for its expenses incurred in
connection with its services, including the fees and disbursements of counsel,
and will indemnify J.P. Morgan against certain liabilities.
J.P. Morgan and its affiliates maintain banking and other business
relationships with PennzEnergy, for which it receives customary fees. In the
past two years, J.P. Morgan and its affiliates have provided financial advisory
and commercial banking services to, and have entered into commodities and
foreign exchange trades with, PennzEnergy. In the ordinary course of their
businesses, affiliates of J.P. Morgan may actively trade the debt and equity
securities of PennzEnergy or Devon for their own accounts or for the accounts
of customers and, accordingly, they may at any time hold long or short
positions in these securities.
Interests of Certain Persons in the Merger
Board of Directors. Thomas F. Ferguson, David M. Gavrin, Michael E. Gellert,
John A. Hagg, Michael M. Kanovsky, J. Larry Nichols, and H.R. Sanders, Jr.,
current members of the Devon board, will be appointed to the New Devon board.
Henry R. Hamman, Robert A. Mosbacher, Jr., James L. Pate, Terry L. Savage,
Brent Scowcroft, and Robert B. Weaver, current members of the PennzEnergy
board, will be appointed to the New Devon board. One additional New Devon
director, mutually approved by the chairman of the board of PennzEnergy and the
president of Devon, will be designated by the PennzEnergy board.
Indemnification of Devon and PennzEnergy Officers and Directors. New Devon
has agreed to maintain all rights to indemnification with respect to matters
occurring through the closing of the merger in favor of the directors and
officers of Devon and PennzEnergy and their subsidiaries in accordance with the
charter documents and by-laws and any indemnification agreement and to the
fullest extent permitted under applicable law. New Devon has also agreed to
continue in effect director and officer liability insurance for these persons
for seven years after the merger.
Devon and PennzEnergy Employee Stock Options. New Devon will assume the
employee stock option plans and arrangements of Devon and PennzEnergy. Each
outstanding Devon or PennzEnergy stock option will be converted into an option
to purchase shares of New Devon common stock. Each outstanding PennzEnergy
stock option will become immediately exercisable as a result of the merger.
Each outstanding Devon option granted since December 10, 1998 will also become
immediately exercisable as a result of the merger. See "The Merger Agreement--
Consideration to be Received in the Merger" on page 49.
Other Matters. After the merger, James L. Pate will receive an annual salary
of $200,000, plus normal business expenses, for serving as the chairman of the
board of New Devon. Mr. Pate will also receive 15,000 restricted shares of the
New Devon common stock effective upon completion of the merger. One-third of
this stock will become unrestricted on each of the first, second and third
anniversaries of the merger or earlier in the event of Mr. Pate's death,
disability or removal as chairman of the board of New Devon.
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THE MERGER AGREEMENT
This section of the joint proxy statement/prospectus describes various
material provisions of the merger agreement. Because the description of the
merger agreement contained in this joint proxy statement/prospectus is a
summary, it does not contain all the information that may be important to you.
You should read carefully the entire copy of the amended and restated merger
agreement attached as Annex A to this joint proxy statement/prospectus before
you decide how to vote.
General
In the merger two things will happen:
. First, Devon Oklahoma Corporation, a newly formed, wholly owned Oklahoma
subsidiary of New Devon, will be merged into Devon. Devon will continue
as the surviving corporation and will become a wholly owned subsidiary
of New Devon.
. Second, immediately afterward, PennzEnergy will be merged into New
Devon, with New Devon continuing as the surviving corporation.
Closing of the Merger; Effective Time of the Merger; Surviving Corporations
Closing of the Merger. Unless Devon and PennzEnergy agree otherwise, the
closing of the merger will occur on the first business day after the date on
which all closing conditions have been satisfied or waived. The closing of the
merger is expected to take place after the approval of the stockholders of both
companies at the special meetings.
Effective Time of the Merger. At the closing of the merger, Devon will file a
certificate of merger with the Oklahoma Secretary of State. Immediately
thereafter, on the same day, New Devon will file a certificate of merger with
the Delaware Secretary of State. Unless Devon and PennzEnergy agree otherwise,
each of the mergers will become effective at the times the certificates are
duly filed with the Delaware and Oklahoma Secretaries of State.
Surviving Corporations. New Devon will be the surviving corporation in the
merger of PennzEnergy into New Devon, and New Devon's name will be changed to
"Devon Energy Corporation." Devon will become a wholly owned subsidiary of New
Devon and will change its name. In the merger, the certificate of incorporation
and by-laws of New Devon in effect immediately prior to the effective time of
the merger will be the certificate of incorporation and by-laws of the
surviving corporation. See "Comparison of the Rights of Holders of Devon and
PennzEnergy Common Stock to Those of New Devon Common Stock" on page 73. The
initial directors and senior executive officers of New Devon following the
merger will be as described in "Directors and Executive Officers of New Devon"
on page 66.
Consideration to be Received in the Merger
In the merger, without any action on the part of the Devon and PennzEnergy
stockholders, the issued and outstanding shares of Devon and PennzEnergy
capital stock will be treated as follows:
(a) each outstanding share of Devon common stock will be converted into
one share of New Devon common stock;
(b) each share of Devon common stock owned or held by Devon or
PennzEnergy, or their wholly owned subsidiaries, including treasury stock
will be canceled and retired;
(c) each outstanding share of PennzEnergy common stock will be converted
into 0.4475 shares of New Devon common stock;
(d) each share of PennzEnergy common stock owned or held by Devon or
PennzEnergy or their wholly owned subsidiaries, including treasury stock
will be canceled and retired;
(e) each outstanding share of PennzEnergy 6.49% cumulative preferred
stock, series A, will be converted into one share of 6.49% cumulative
preferred stock, series A, of New Devon;
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(f) the one outstanding share of Devon special voting stock will be
converted into one share of special voting stock of New Devon;
(g) each outstanding share exchangeable for one share of Devon common
stock immediately prior to the merger will become exchangeable for one
share of New Devon common stock;
(h) each outstanding trust convertible preferred security of Devon
Financing Trust convertible into 1.6393 shares of Devon common stock will
become convertible into 1.6393 shares of New Devon common stock;
(i) each share of New Devon common stock held in treasury or owned or
held by Devon or PennzEnergy or their wholly-owned subsidiaries will be
canceled and retired;
(j) each outstanding and unexercised option to purchase a share of Devon
common stock issued under Devon's employee benefit plans will be converted
into an option to purchase one share of New Devon common stock; and
(k) each outstanding and unexercised option to purchase a share of
PennzEnergy common stock issued under PennzEnergy's employee benefit plans
will be converted into an option to purchase 0.4475 shares of New Devon
common stock at an exercise price equal to the quotient of dividing the
exercise price immediately prior to the merger by 0.4475 (rounded to the
nearest cent), will have the same terms and conditions that were applicable
to the PennzEnergy stock options and will become immediately exercisable as
a result of the merger.
Exchange of Shares; Fractional Shares
Exchange Agent. Prior to the merger, New Devon will appoint BankBoston, N.A.
or another exchange agent reasonably acceptable to Devon and PennzEnergy to
effect the exchange of certificates representing shares of Devon common stock
and PennzEnergy common stock for certificates representing shares of New Devon
common stock and cash to be paid in lieu of fractional shares of PennzEnergy
common stock. From time to time as needed, New Devon will deposit, for the
benefit of holders of Devon common stock and PennzEnergy common stock,
certificates representing New Devon common stock with the exchange agent for
conversion of shares as described under "--Consideration to be Received in the
Merger" on page 49.
Exchange of Shares. Promptly after the merger, the exchange agent will mail
to each holder of certificates of Devon common stock and PennzEnergy common
stock a letter of transmittal and instructions explaining how to surrender
those certificates to the exchange agent.
Devon stockholders and PennzEnergy stockholders who surrender their stock
certificates to the exchange agent, together with a properly completed and
signed letter of transmittal and any other documents required by the
instructions to the letter of transmittal, will receive New Devon common stock
certificates representing the number of shares that each holder is entitled in
accordance with the applicable exchange ratio, with a check representing the
amount of cash being paid in lieu of fractional shares of New Devon common
stock. Holders of unexchanged Devon stock certificates or PennzEnergy stock
certificates will not receive any dividends or other distributions made by New
Devon after the merger until their stock certificates are surrendered. Upon
surrender, however, subject to applicable laws, those holders will receive all
dividends and distributions made on the related shares of New Devon common
stock subsequent to the merger, less the amount of any withholding taxes,
together with a check representing the amount of cash in lieu of fractional
shares of New Devon common stock, in each case without interest. Any shares of
New Devon common stock to be issued in the merger or funds set aside by New
Devon to pay cash in lieu of fractional shares in connection with the merger or
to pay dividends or other distributions on shares of New Devon common stock to
be issued in the merger that are not claimed one year after the merger will be
delivered to New Devon. Thereafter, New Devon shall act as the exchange agent
and former stockholders of Devon or PennzEnergy may look only to New Devon for
payment of their shares of New Devon common stock, cash in lieu of fractional
shares and unpaid dividends and distributions. None of New Devon, the exchange
agent or any other person will be liable to any former holder of Devon common
stock or PennzEnergy common stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
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Devon stock certificates and PennzEnergy stock certificates should not be
returned with the enclosed proxy card and should not be forwarded to the
exchange agent except with a signed letter of transmittal and any other
documents that may be required by the exchange agent. A letter of transmittal
and accompanying instructions will be provided to Devon and PennzEnergy
stockholders following the merger.
Fractional Shares. No fractional shares of New Devon common stock will be
issued to holders of PennzEnergy common stock. In lieu of fractional shares,
each holder of shares of PennzEnergy common stock will receive by cash, check
or other form of payment an amount representing that holder's proportionate
interest in the net proceeds from the sale by the exchange agent on the
principal securities exchange on which the New Devon common stock is traded of
the aggregate of the fractions of shares of New Devon common stock which would
otherwise be issued. Until the net proceeds of the sale or sales have been
distributed to the holders of PennzEnergy common stock, the exchange agent will
hold the proceeds in trust for the holders of PennzEnergy common stock. The
exchange agent will determine the portion of the net proceeds each holder of
PennzEnergy common stock is entitled to receive by multiplying the amount of
the aggregate net proceeds by a fraction:
(1) the numerator of which is the amount of the fractional part of a
share of New Devon common stock to which the holder is entitled; and
(2) the denominator of which is the aggregate amount of fractional share
interests to which all holders of PennzEnergy common stock are entitled.
No interest will be paid in connection with the exchange of fractional
shares.
Preferred Stock. Promptly after the merger, New Devon will take all steps
necessary to issue a new single global stock certificate registered in the name
of Cede & Co., as nominee of The Depository Trust Company, representing shares
of New Devon preferred stock into which shares of PennzEnergy preferred stock
are converted, and to fully effect the conversion of PennzEnergy preferred
stock into New Devon preferred stock in the Depository Trust Company system for
all purposes, including with respect to payments of dividends and transfers of
beneficial ownership. Dividends declared or made after the merger with respect
to PennzEnergy preferred stock or New Devon preferred stock will be paid to
Cede & Co., as nominee of The Depository Trust Company, for crediting to
accounts of holders of New Devon preferred stock.
Conditions to the Merger
Conditions to Each Company's Obligation to Effect the Merger. The obligations
of Devon and PennzEnergy to effect the merger are subject to a number of
conditions, including the following, unless waived by both companies:
. the approval of the merger agreement by the Devon stockholders and by
the PennzEnergy stockholders;
. the expiration or early termination of the waiting period under (a) the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (b) any
material applicable foreign competition or antitrust law or regulation;
. no law, decree, order or injunction prohibiting the consummation of the
merger, provided the parties have agreed to use their commercially
reasonable best efforts to have any applicable decree, order or
injunction lifted;
. the effectiveness of the registration statement of which this joint
proxy statement/prospectus is a part and the SEC not issuing a stop
order suspending the effectiveness; and
. the approval of the shares of New Devon common stock to be issued in the
merger for listing on the New York Stock Exchange or the American Stock
Exchange, subject to official notice of issuance.
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Additional Conditions to Each Company's Obligations. The obligation of Devon
and PennzEnergy to effect the merger is further subject to the following
additional conditions, unless waived by the other:
. material compliance with its agreements and covenants under the merger
agreement;
. its representations and warranties set forth in the merger agreement and
documents delivered in connection with the merger agreement being true
and correct in all material respects;
. its receipt of a written opinion of Baker & Botts, L.L.P., in the case
of PennzEnergy, and McAfee & Taft A Professional Corporation, in the
case of Devon, that:
(1) the merger will be treated for federal income tax purposes as two
reorganizations within the meaning of Section 368(a) of the
Internal Revenue Code; and
(2) no gain or loss will be recognized by such company or its
stockholders who exchange all of their common stock for New Devon
common stock, except for cash in lieu of fractional shares; and
. the absence of any material event or occurrence since the date of the
merger agreement.
Representations and Warranties
The merger agreement contains representations and warranties by Devon and
PennzEnergy as to themselves and their subsidiaries concerning, among other
things:
. organization, standing and authority;
. corporate authorization to enter into the merger and related
transactions;
. capital structure;
. significant subsidiaries;
. the absence of defaults caused by execution of the merger agreement;
. compliance with agreements, court orders and laws;
. accuracy of financial statements and reports filed with the SEC;
. the absence of material litigation;
. the absence of certain changes or events;
. tax matters;
. employee benefits and labor matters;
. the absence of violations or liabilities under environmental laws;
. the ownership and rights to use intellectual property;
. good title to properties;
. insurance matters;
. broker's and finder's fees;
. receipt of financial advisors' opinions;
. the absence of ownership of the other company's capital stock;
. qualification of the merger as a reorganization for federal income
tax purposes;
. required board and stockholder approvals;
. amendments of the companies' rights agreements to permit the merger
and related transactions; and
. the absence of noncompetition and material asset sale or purchase
contracts.
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Certain Covenants
Operating Covenants. Prior to the merger, each of Devon and PennzEnergy will
conduct its operations in the ordinary course in substantially the same manner
as previously conducted, and will use its commercially reasonable best efforts
to preserve intact its business organization and goodwill and keep available
the services of its respective officers and maintain satisfactory relationships
with those persons with whom it is having business relationships. With certain
exceptions, the merger agreement places specific restrictions on the ability of
each of Devon and PennzEnergy to, among other things:
. amend its certificate of incorporation or by-laws;
. fail to promptly notify the other of any material change in its
condition or business or any material litigation or material
governmental complaints, investigations or hearings (including those
contemplated and delivered in writing) or the material breach of any
representation or warranty contained in the merger agreement;
. fail to promptly deliver to the other any SEC filings made subsequent to
the date of the merger agreement;
. issue its capital stock, effect any change in its capitalization, grant
any right to acquire capital stock (other than to new employees
consistent with past practice or pursuant to existing contractual
commitments), increase any compensation or benefits or adopt any
employee benefit plan;
. declare, set aside or pay dividends or redeem, purchase or otherwise
acquire any shares of its capital stock, except that PennzEnergy may
continue to pay dividends on shares of PennzEnergy common stock and the
PennzEnergy preferred stock at a rate not greater than $0.0625 per share
and $1.6225 per share, respectively, in any quarter and Devon may
continue to pay dividends on the shares of Devon common stock and
exchangeable shares at a rate not greater than $0.05 per share;
. dispose of material assets outside the ordinary course of business;
. acquire businesses or entities for an aggregate consideration in excess
of $3 million or for which a filing under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 is required without the consent of
the other party;
. except as may be required by a change in law or in generally accepted
accounting practices, change any of its accounting principles or
practices;
. fail to use reasonable efforts to maintain its insurance;
. make or rescind any material tax election, settle or compromise any
material tax liability, or materially change its methods of reporting
income or deductions for federal income tax purposes, except as may be
required by applicable law;
. (1) incur any indebtedness for borrowed money (except under existing
credit lines, refinancing of existing debt and other immaterial
borrowings that in each case permit prepayment without material
penalty), (2) guarantee any indebtedness or issue any debt securities
(or warrants or rights to acquire any debt securities), or guarantee any
debt securities of others, (3) except in the ordinary course of
business, enter into any material leases or create any material
mortgages, liens, security interests or other encumbrances on its
property in connection with any indebtedness or (4) make or commit to
make any capital expenditures in excess of $3 million over the fiscal
1999 capital expenditures budget;
. purchase any shares of Devon common stock or PennzEnergy common stock;
. agree to do any of the above actions;
. take any action that is likely to materially delay or adversely affect
the ability of Devon or PennzEnergy to obtain any consent or approval of
any governmental commission, board or other regulatory body or the
expiration of any applicable waiting period required to complete the
merger;
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. terminate, amend, modify or waive any provision of any confidentiality
or standstill agreement to which it is a party or fail to enforce to the
fullest extent permitted under applicable law the provisions of those
agreements;
. enter into or amend any agreement with any holder of shares of Devon
common stock or PennzEnergy common stock with respect to the holding,
voting or disposing of shares; and
. cause by resolution of its board of directors the acceleration of
rights, benefits or payments under its employment benefits plans.
The merger agreement contains additional agreements relating to, among other
things:
. the preparation, filing and distribution of this document and New
Devon's filing of the registration statement on Form S-4 of which this
document is a part;
. the recommendation of the merger by each company's board of directors to
their respective stockholders;
. convening and holding the Devon stockholders meeting and the PennzEnergy
stockholders meeting;
. access to information and cooperation regarding filings with
governmental and other agencies and organizations;
. public announcements;
. mutual notification of specified matters;
. the delivery of the comfort letters from each company's independent
accountants;
. agreements as to certain employee benefits matters;
. absence of actions or omissions that would result in the merger not
qualifying as two reorganizations under Section 368(a) of the Internal
Revenue Code;
. actions preventing the merger or the transactions contemplated by the
merger agreement from causing the rights issued pursuant to the Devon
and PennzEnergy rights agreements to be exercised; and
. termination of agreements involving sharing of costs with affiliates or
former affiliates of PennzEnergy.
Affiliate Agreements. Devon and PennzEnergy have agreed to use their
reasonable best efforts to cause their affiliates (as defined by Rule 145 under
the Securities Act) to enter into written agreements prior to the merger not to
sell, pledge, transfer or otherwise dispose of any shares of New Devon issued
to them in connection with the merger, except in compliance with Rule 145 under
the Securities Act or unless the shares have been registered under the
Securities Act or there is an available exemption from the registration
requirements. An affiliate would include any person that controls, is
controlled by, or is under common control with Devon or PennzEnergy and may
include some of their officers and directors and principal stockholders.
New Devon intends to register under the Securities Act the shares of New
Devon common stock issuable upon exercise of Devon stock options and
PennzEnergy stock options that are assumed by New Devon, whereupon New Devon
common stock issuable upon exercise of the Devon stock options or PennzEnergy
stock options may be sold without restrictions by Devon optionholders and
PennzEnergy optionholders who are not affiliates of Devon or PennzEnergy. Devon
optionholders and PennzEnergy optionholders who are affiliates of Devon or
PennzEnergy must comply with the volume, current public information and manner
of sale limitations of Rule 144 under the Securities Act.
Listing of the New Devon Common Stock. Devon and PennzEnergy have agreed to
use their reasonable best efforts to cause the shares of New Devon common stock
to be issued in the merger to be approved for listing on the New York Stock
Exchange prior to the merger. If they cannot obtain that approval, they will
use
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reasonable best efforts to cause the New Devon common stock to be approved for
listing on the American Stock Exchange.
Indemnification and Insurance
Following the merger, and for a period of seven years, New Devon will
indemnify and hold harmless to the fullest extent permitted under applicable
law each past or present officer or director of Devon or PennzEnergy, and each
person who served at the request of Devon or PennzEnergy as a director,
officer, trustee or fiduciary of another entity or enterprise. Those persons
will be indemnified for actions taken by them, or failures to act, while
serving in those capacities, whether claimed before or after the merger.
Following the merger, New Devon will cause directors' and officers' liability
insurance to be maintained for a period of seven years. The insurance will
cover persons who are or were covered by Devon's or PennzEnergy's existing
directors' and officers' liability insurance policies. The terms of the
insurance will be substantially no less advantageous to such persons than the
existing insurance with respect to acts or omissions prior to the merger.
However, New Devon will not be required to pay annual premiums in excess of
250% of the last annual premium paid by Devon or PennzEnergy, but will purchase
as much coverage as reasonably practicable for such amount.
Other Acquisition Proposals
In the merger agreement each of Devon and PennzEnergy has agreed that it and
its subsidiaries will:
. not knowingly permit any of its officers, directors, employees, agents
or representatives to solicit, initiate or knowingly encourage any
inquiry, proposal or offer for a third-party tender offer, combination,
consolidation, business combination or similar transaction involving any
assets or class of its capital stock, or participate in any discussions
or negotiations concerning such an acquisition proposal; and
. immediately cease any existing negotiations with any third parties with
respect to any of the above; except that PennzEnergy or Devon, or their
boards of directors, may respond publicly to a third-party tender offer
as required by the federal securities laws or provide information on a
confidential basis to any person, or have discussions with any person,
who makes an unsolicited bona fide acquisition proposal with respect to
all of the outstanding common stock or substantially all of the company
assets, as long as:
(1) the company involved, whether Devon or PennzEnergy, provides
immediate notice to the other that it has received the unsolicited
request for information or an acquisition proposal, and continues
to provide timely updates as to material developments;
(2) in the good faith judgment of its board of directors, after
consultation with its financial and outside legal advisors and
taking into account the likelihood of consummation, the acquisition
proposal is superior to the merger and the failure to respond to
the information request or to engage in discussions would be
inconsistent with its fiduciary obligations; and
(3) it does not enter into any agreement with respect to an
acquisition proposal prior to the termination of the merger
agreement.
The Devon board or the PennzEnergy board may withdraw or change its original
recommendation to stockholders to vote for the merger agreement, or recommend
that stockholders vote instead for a superior acquisition proposal, but only if
the board determines, after consultation with its counsel, that the failure to
do so would be inconsistent with its fiduciary obligations. As described
further in the next two sections of this joint proxy statement/prospectus, each
of Devon and PennzEnergy has the right to terminate the merger agreement in
order to accept a superior acquisition proposal, subject to the payment of a
termination fee and expenses. See "-- Termination Fees and Expenses" on page
56.
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Termination
Prior to the merger, the merger agreement may be terminated:
. by mutual written consent of Devon and PennzEnergy;
. by either Devon or PennzEnergy if:
(1) the merger is not consummated by December 31, 1999, so long as
the party seeking to terminate did not prevent consummation by failing
to fulfill any of its obligations under the merger agreement;
(2) either of their stockholders fail to approve the merger; or
(3) there is a legal prohibition to closing the merger so long as the
party seeking termination has used its commercially reasonable best
efforts to remove such action.
. by Devon if:
(1) the Devon board determines that proceeding with the merger would
be inconsistent with its fiduciary obligations due to a superior
proposal, but only if Devon provides PennzEnergy with one week's notice
of its intent to terminate and during such week, Devon considers any
adjustments in the terms and conditions of the merger agreement that
PennzEnergy may propose, and Devon pays to PennzEnergy a termination
fee of up to $22 million;
(2) PennzEnergy breaches any of its agreements in the merger
agreement or if any representation or warranty of PennzEnergy becomes
untrue, where the conditions to the merger agreement would not be
satisfied, and the breach is not cured within 30 days and Devon is not
in material breach of the merger agreement; or
(3) the PennzEnergy board withdraws, or materially modifies, its
approval or recommendation of the merger, or recommends an acquisition
proposal.
. by PennzEnergy if:
(1) the PennzEnergy board determines that proceeding with the merger
would be inconsistent with its fiduciary obligations due to a
superior proposal, but only if PennzEnergy provides Devon with one
week's notice of its intent to terminate and during such week,
PennzEnergy considers any adjustments in the terms and conditions
of the merger agreement that Devon may propose, and PennzEnergy
pays to Devon a termination fee of up to $22 million;
(2) Devon or New Devon breaches any of its agreements in the merger
agreement or if any representation or warranty of Devon or New
Devon becomes untrue, where the conditions to the merger agreement
would not be satisfied, and the breach is not cured within 30 days
and PennzEnergy is not in material breach of the merger agreement;
or
(3) the Devon board withdraws, or materially modifies, its approval or
recommendation of the merger, or recommends an acquisition
proposal.
Termination Fees and Expenses
Termination Fees Payable by Devon. Devon has agreed to pay PennzEnergy a cash
termination fee of up to $22 million at the time of termination of the merger
agreement if one of the following circumstances occurs:
. Devon terminates the merger agreement because of a superior acquisition
proposal;
. after the public announcement that Devon has received an acquisition
proposal, Devon or PennzEnergy terminates the merger agreement because
the Devon stockholders vote against the merger; or
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. after the public announcement or receipt by Devon of an acquisition
proposal, PennzEnergy terminates the merger agreement because the Devon
board has withdrawn or materially modified its approval or
recommendation of the merger, or the Devon board has recommended to
Devon stockholders the acquisition proposal.
If the circumstances specified in the first or third preceding clause occur,
the termination fee will be $22 million. If the circumstances specified in the
second preceding clause occur, the termination fee will be $10 million, plus an
additional $12 million if, within twelve months of terminating the merger
agreement, Devon accepts an acquisition proposal to sell at least a majority of
its common stock or assets to a third party.
Termination Fees Payable by PennzEnergy. PennzEnergy has agreed to pay Devon
a cash termination fee of up to $22 million at the time of termination of the
merger agreement if one of the following circumstances occurs:
. PennzEnergy terminates the merger agreement because of a superior
acquisition proposal;
. after the public announcement that PennzEnergy has received an
acquisition proposal, PennzEnergy or Devon terminates the merger
agreement because the PennzEnergy stockholders vote against the merger;
or
. after the public announcement or receipt by PennzEnergy of an
acquisition proposal, Devon terminates the merger agreement because the
PennzEnergy board has withdrawn or materially modified its approval or
recommendation of the merger, or the PennzEnergy board has recommended
to PennzEnergy stockholders the acquisition proposal.
If the circumstances specified in the first or third preceding clause occur,
the termination fee will be $22 million. If the circumstances specified in the
second preceding clause occur, the termination fee will be $10 million, plus an
additional $12 million if, within twelve months of terminating the merger
agreement, PennzEnergy accepts an acquisition proposal to sell at least a
majority of its common stock or assets to a third party.
If the board of directors of PennzEnergy or Devon recommends that its
stockholders accept a third-party tender or exchange offer for its common
stock, it will be treated for purposes of determining termination fees as
though an acquisition agreement for PennzEnergy or Devon has been executed and
delivered.
If either company fails to promptly pay any termination amount due, and, in
order to obtain such payment, the other party commences a suit which results in
a judgment against the party owing the termination amount, the party owing the
termination amount will pay to the other party its costs and expenses in
connection with such suit, together with interest on the termination amount
from each date for payment until the date of such payment at the published
prime rate of The Chase Manhattan Bank in effect on the date such payment was
required to be made plus two percent.
Merger Costs
Devon and PennzEnergy expect to incur approximately $71.5 million of
nonrecurring business combination costs, primarily related to investment
banking expenses, severance, legal and accounting fees, financial printing
expenses and other related charges.
Other Expenses
All costs and expenses incurred in connection with the merger agreement and
related transactions will be paid by the party incurring them, except that
termination fees and expenses will be paid as provided above in "-- Termination
Fees and Expenses" on page 56.
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Amendment; Extension and Waiver
Amendment. Subject to the next sentence, the merger agreement may be amended
at any time with the consent of the Devon board and the PennzEnergy board. If
the merger agreement has been approved by the Devon stockholders and the
PennzEnergy stockholders, then it cannot be amended subsequently without
obtaining any further stockholder approval required by law.
Extension and Waiver. At any time prior to the completion of the merger, each
of Devon and PennzEnergy may, to the extent permitted by law, grant the other
party additional time to perform its obligations under the merger agreement,
and may waive compliance with any agreements or conditions for the benefit of
that party.
Stock Exchange Listing
The American Stock Exchange has conditionally approved, subject to
stockholder approval, the listing, on a "when issued" basis, of the shares of
New Devon common stock to be issued in the merger and upon future exercise of
the exchangeable shares, conversion of the trust convertible preferred
securities and upon future exercise of Devon and PennzEnergy stock options.
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THE STOCK OPTION AGREEMENTS
Because the description of the stock option agreements contained in this
joint proxy statement/prospectus is a summary, it does not contain all the
information that may be important to you. You should read carefully the entire
copies of the stock option agreements attached as Annexes D and E to this joint
proxy statement/prospectus before you decide how to vote.
General
As an inducement and condition to entering into the merger agreement, Devon
and PennzEnergy granted to each other options to purchase shares of their
common stock equal to approximately 14.9% of their currently outstanding shares
in substantially identical stock option agreements.
Terms of the Options
Number of Shares and Exercise Price. Under the Devon stock option agreement,
Devon has granted to PennzEnergy an option to purchase up to 6,429,066 shares
of Devon common stock at a price per share of $32.375, the closing price for
Devon common stock on the American Stock Exchange on the day immediately prior
to the execution of the stock option agreement. Under the PennzEnergy stock
option agreement, PennzEnergy has granted to Devon an option to purchase up to
7,145,912 shares of PennzEnergy common stock at a price per share equal to
$14.488, which is 0.4475 times the closing price for Devon common stock on the
American Stock Exchange on the day immediately prior to execution of the stock
option agreement.
Each option has customary adjustment provisions to change the number of
shares issuable under that option and the exercise price in the event of a
stock dividend, a stock split, a merger, an exchange of shares, an
extraordinary or liquidating dividend, or similar kinds of events in order to
fully preserve the economic benefits provided under the option. The number of
shares issuable under each option will also be adjusted in the event the party
granting the option issues additional shares of common stock in order to ensure
that the option remains exercisable for an aggregate of 14.9% of that party's
outstanding common stock.
Exercise Rights. Either Devon or PennzEnergy may exercise its option in the
event that the merger agreement is terminated under circumstances which entitle
it to receive a termination fee, as described above in "The Merger Agreement --
Termination" and "Termination Fee and Expenses" on page 56. These circumstances
generally involve:
. an adverse change in, or failure to reconfirm, the recommendation of
a party's board of directors to such party's stockholders to approve
the merger after an acquisition proposal has been received or
publicly announced;
. the approval or recommendation by a party's board of directors of a
superior proposal; or
. the failure of a party's stockholders to approve the merger after an
acquisition proposal has been publicly announced.
Expiration. To the extent an option has not been exercised, it will expire
upon the earliest of:
. completion of the merger;
. twelve months after the first event after which the option can be
exercised; and
. the termination of the merger agreement prior to the later of (a) an
event after which the option can be exercised, and (b) an event
giving rise to the payment of the $12 million fee associated with
the termination.
Repurchase at the Option of the Grantee
Each of Devon and PennzEnergy has the right to require the other to
repurchase the option and any shares of its common stock purchased and held by
the optionholder under the option after the occurrence of an event
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after which the option can be exercised, and prior to 120 days after the
expiration of the option term.
Repurchase Price. The price per share the issuer of the option will pay upon
that event is equal to the sum of:
. the aggregate exercise price paid for the exercised option shares
being repurchased;
. the excess of the applicable price over the exercise price,
multiplied by the number of exercised option shares being
repurchased; and
. the excess of the applicable price over the exercise price,
multiplied by the number of unexercised option shares being
repurchased.
The applicable price for a share of common stock issued under either the
Devon stock option or the PennzEnergy stock option is equal to the higher of:
. the then current market price, based on the average closing price
during the ten preceding trading days, or
. the highest purchase price per share to be paid by a third party in
connection with a tender or exchange offer or a business combination
transaction involving the common stock.
Registration Rights
Devon and PennzEnergy have granted each other customary rights to register
the shares of common stock issuable upon exercise of their options. Each has
the right to require the other to file up to two registration statements under
the Securities Act to register the shares for resale. In addition, each has
agreed that if it files its own registration statement to register shares of
its common stock unrelated to the options, it will allow the other to
participate in that registration statement in order to register shares issuable
under its option, subject to certain volume limitations. In connection with any
registration described above, the issuer and optionholder will provide to each
other and any underwriter of the offering customary representations, warranties
and covenants, including covenants of indemnification and contribution.
Limitation of Profit
Each of Devon's and PennzEnergy's total profit under its stock option
agreement may not exceed $23 million. The total profit under each stock option
agreement is the sum of:
. the amounts received by the grantee in the repurchase of all or part
of the unexercised portion of the option;
. the amounts received by the grantee in the sale of option shares,
less the grantee's purchase price for the option shares; and
. all termination fees and expenses received or payable under the
merger agreement;
less, any payments made to the grantor to reduce grantee's total profit.
Any excess amount received by Devon or PennzEnergy above $23 million must be
returned to the other party, either by delivering for cancellation shares of
common stock previously issued to it, by making a cash payment, by reducing the
amount of the termination fee otherwise payable to it under the merger
agreement, or by any combination of those methods.
Effect of Stock Option Agreements
The stock option agreements are intended to increase the likelihood that the
merger will be completed in accordance with the terms of the merger agreement.
The stock option agreements have the effect of making an
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acquisition or other combination of either company by or with a third party
more costly because of the need to acquire or otherwise provide for the shares
issuable under the option. Moreover, after consulting with their independent
accountants, Devon and PennzEnergy believe that, if either option becomes
exercisable, it is likely for two years to prohibit any other acquiror of the
company which issued such option from accounting for the acquisition by using
the pooling-of-interests accounting method. Accordingly, the stock option
agreements may discourage a third party from proposing a competing transaction,
including one that might be more favorable to stockholders than the merger.
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PROPERTIES OF NEW DEVON
The following table shows the total proved reserves of New Devon on a pro
forma basis as of December 31, 1998:
<TABLE>
<CAPTION>
Proved Reserves as of December 31, 1998
------------------------------------------------------------
10%
10% Present Present
Primary Operating Areas Devon PennzEnergy New Devon MBoe% Value Value %
- ----------------------- --------- ----------- --------- ----- -------------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
North America--MBoe
Western Canadian
Sedimentary Basin..... 143,908 -- 143,908 22% $ 462,921 22%
Permian Basin.......... 53,375 61,351 114,726 17% 292,951 14%
Rocky Mountain
Region................ 78,973 23,677 102,650 16% 355,902 17%
Gulf Coast/East Texas
Region................ 1,800 86,927 88,727 13% 390,560 19%
Offshore Gulf of
Mexico................ -- 78,674 78,674 12% 339,995 16%
Other U.S.............. 21,295 16,477 37,772 6% 107,583 5%
--------- ------- --------- ---- ---------- ----
Total--North America.... 299,351 267,106 566,457 86% 1,949,912 93%
--------- ------- --------- ---- ---------- ----
International--MBoe
Azerbaijan............. -- 76,082 76,082 11% 135,867 7%
Other International.... -- 17,557 17,557 3% 1,887 0%
--------- ------- --------- ---- ---------- ----
Total International..... -- 93,639 93,639 14% 137,754 7%
--------- ------- --------- ---- ---------- ----
Total North America and
International.......... 299,351 360,745 660,096 100% $2,087,666 100%
========= ======= ========= ==== ========== ====
Oil--MBbls
U.S.................... 44,451 95,969 140,420 21%
Western Canadian
Sedimentary Basin..... 39,006 -- 39,006 6%
Azerbaijan............. -- 76,082 76,082 11%
Other International.... -- 17,180 17,180 3%
--------- ------- --------- ----
Total................ 83,457 189,231 272,688 41%
========= ======= ========= ====
Gas--MMcf
U.S.................... 596,987 849,368 1,446,355 37%
Western Canadian
Sedimentary Basin..... 601,907 -- 601,907 15%
Other International.... -- 2,266 2,266 0%
--------- ------- --------- ----
Total................ 1,198,894 851,634 2,050,528 52%
========= ======= ========= ====
NGLs--MBbls
U.S.................... 11,494 29,575 41,069 6%
Western Canadian
Sedimentary Basin..... 4,585 -- 4,585 1%
--------- ------- --------- ----
Total................ 16,079 29,575 45,654 7%
========= ======= ========= ====
Total--MBoe............. 299,351 360,745 660,096 100%
========= ======= ========= ====
</TABLE>
Primary Operating Areas -- North America
New Devon's North American property base will be concentrated in five primary
operating areas: the Western Canadian Sedimentary Basin, which encompasses
portions of British Columbia, Alberta, Saskatchewan and Manitoba; the Permian
Basin of southeastern New Mexico and west Texas; the Rocky Mountain Region,
which spans from northeast Wyoming to northwest New Mexico; the offshore Gulf
of Mexico; and the Gulf Coast/East Texas Region in portions of Texas and
Louisiana.
Western Canadian Sedimentary Basin
New Devon's single largest reserve position will be in the Western Canadian
Sedimentary Basin with proved reserves of 143.9 million barrels of oil
equivalent, or 22% of the total company on a pro forma basis as of December 31,
1998. This basin is a large geologic feature encompassing portions of British
Columbia, Alberta, Saskatchewan and Manitoba. This basin feature forms a wedge-
shaped depression that tapers from a maximum thickness of 17,000 feet on the
western and southern margins to a zero edge along the northeast.
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New Devon's properties in this basin will range from shallow oil and natural
gas production in Northern Alberta to deep, long-lived gas reservoirs in the
Foothills area near the Alberta/British Columbia border. In addition,
approximately 2.2 million net acres of undeveloped leasehold in the Western
Canadian Sedimentary Basin should continue to provide New Devon with numerous
exploration and development opportunities.
Permian Basin
This region encompasses approximately 66,000 square miles in southeastern New
Mexico and West Texas and contains more than 500 major oil and gas fields.
Since 1987, several significant acquisitions of properties by Devon in the
Permian Basin have established prospective acreage in areas in which leasehold
positions could not otherwise be obtained. The Permian Basin will represent one
of New Devon's largest reserve positions with total reserves of 114.7 million
barrels of oil equivalent, or 17% of the total company on a pro forma basis as
of December 31, 1998. In addition, several hundred thousand acres of
undeveloped leasehold should continue to provide New Devon with numerous
exploration and development opportunities in the Permian Basin.
Rocky Mountain Region
The Rocky Mountain Region includes oil and gas producing basins that are
grouped together because of their geographic location rather than their
geological characteristics. The region generally encompasses all or portions of
the states of Colorado, Montana, New Mexico, North Dakota, Utah and Wyoming.
New Devon's properties will be primarily located in the San Juan Basin in
northwest New Mexico, the Raton Basin in northeast New Mexico and southeast
Colorado, and the Big Horn and Powder River basins in northeast Wyoming. The
Rocky Mountain Region will represent one of New Devon's largest reserve areas
with 102.7 million barrels of oil equivalent, or 16% of the total company on a
pro forma basis as of December 31, 1998. New Devon will also have over one
million acres of net undeveloped leasehold in the Rocky Mountain Region.
New Devon's largest natural gas reserve position in the Rocky Mountain Region
will relate to its interests in two federal units in the San Juan Basin. The
San Juan Basin is a densely drilled area covering 3,700 square miles. It has
been historically considered the second largest gas producing basin in the
United States. Prior to 1990, the basin's gas production primarily came from
conventional sandstone formations at a depth of about 5,500 feet. However, in
the early 1980's, development of the shallower Fruitland coal formation began.
Coal seam gas production has increased total production so significantly that
the San Juan Basin could be considered the largest gas producing basin in the
United States.
New Devon's coal seam expertise will also play an important role in both the
Powder River and Raton basins. These basins, which are less developed than the
San Juan Basin, have become two of the more active domestic onshore exploration
areas in the United States. During the next five years, New Devon plans to
drill several thousand coalbed methane wells in the Powder River and Raton
Basins which could, in aggregate, add proved natural gas reserves in excess of
two trillion cubic feet. Peak production for the Powder River Basin is
anticipated for 2003, while peak production in the Raton Basin is estimated for
2004 to 2006. Additionally, New Devon anticipates initial operation of a 126-
mile gas gathering system servicing the Powder River Basin in the fourth
quarter of 1999. When it is fully developed in 2001, this system will have an
estimated capacity of 450 million cubic feet of gas per day and will have
access to multiple interstate pipelines.
Gulf Coast/East Texas Region
New Devon's interest in the Gulf Coast/East Texas Region consists of over
465,000 net acres in portions of the states of Texas and Louisiana and includes
both oil and gas producing zones. On a pro forma basis as of December 31, 1998,
New Devon's Gulf Coast/East Texas reserves were 88.7 million barrels of oil
equivalent, or 13% of the total company. In south Texas, where exploration by
the oil and gas industry is accelerating, 3-D seismic data covers New Devon's
major acreage positions underlain by Charco Lobo, the Middle Wilcox and the
Frio-Vicksburg formations.
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<PAGE>
Offshore Gulf of Mexico
New Devon will be one of the ten largest producers on the shelf in the
Offshore Gulf of Mexico with operations on 75 blocks. On a pro forma basis as
of December 31, 1998, proved reserves in the Gulf totaled 78.7 million barrels
of oil equivalent, or 12% of the total company. New Devon will operate more
than 40 fields and 80 platforms on the central and western shelf. New Devon
also will hold interests in another 98 exploratory blocks, 39 of which are
deepwater. Of the 39 deepwater blocks, two blocks are in production and two
blocks are undergoing development. New Devon will conduct both shallow and
deepwater exploration and development drilling in the Gulf of Mexico.
Primary Operating Areas -- International
New Devon's property base outside North America will include approximately 94
million barrels of oil equivalent reserves or 14% of the total company on a pro
forma basis as of December 31, 1998. New Devon will also have 10.5 million net
undeveloped acres outside of North America. While New Devon's international
operations will be focused primarily in Azerbaijan, New Devon will also have
interests in Venezuela, Brazil, Egypt, Qatar and Australia.
Azerbaijan
Most of New Devon's proved reserves that lie outside North America will be in
Azerbaijan. On a pro forma basis as of December 31, 1998, proved reserves in
Azerbaijan totaled 76.1 million barrels of oil equivalent, or 11% of the total
company. New Devon's properties in Azerbaijan will be located in the Caspian
Basin, which is considered home to some of the world's last known major
undeveloped hydrocarbon reserves. New Devon will hold a 4.8% carried interest
in the Azeri-Chirag-Gunashli joint development area, which is estimated to
contain five billion barrels of crude oil. Peak production for Azerbaijan is
estimated sometime between 2005 and 2008.
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Developed and Undeveloped Acreage
The following table sets forth New Devon's developed and undeveloped oil and
gas lease and mineral acreage on a pro forma basis as of December 31, 1998.
Gross acres are the total number of acres in which New Devon will own a working
interest. Net refers to gross acres multiplied by New Devon's fractional
working interests therein.
<TABLE>
<CAPTION>
Developed Undeveloped
----------- -------------
Gross Net Gross Net
----- ----- ------ ------
(In Thousands of Acres)
<S> <C> <C> <C> <C>
United States -- Onshore........................ 2,815 1,583 3,049 1,789
United States -- Offshore....................... 328 204 532 384
Canada.......................................... 1,120 584 2,995 2,175
Australia....................................... -- -- 679 271
Azerbaijan...................................... 10 -- 202 39
Egypt........................................... -- -- 9,111 8,842
Qatar........................................... -- -- 519 389
Venezuela....................................... 23 12 1,434 1,004
----- ----- ------ ------
Total......................................... 4,296 2,383 18,521 14,893
===== ===== ====== ======
</TABLE>
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DIRECTORS AND EXECUTIVE OFFICERS
OF NEW DEVON
Directors
The New Devon certificate of incorporation classifies the New Devon board
into three classes having staggered terms of three years each. The number of
directors will be fixed from time to time by resolution of the New Devon board.
The New Devon board is currently set at four members. Upon completion of the
merger, we expect the New Devon board will be set at fourteen members,
initially consisting of the following:
<TABLE>
<CAPTION>
Current
Board Expiration of
Name Age Membership First Term
---- --- ----------- -------------
<S> <C> <C> <C>
Thomas F. Ferguson(1)........................ 63 Devon 2001
David M. Gavrin(2)........................... 64 Devon 2001
Michael E. Gellert(3)........................ 68 Devon 2002
John A. Hagg................................. 51 Devon 2000
Henry R. Hamman.............................. 61 PennzEnergy 2000
William J. Johnson(4)........................ 64 -- 2002
Michael M. Kanovsky.......................... 50 Devon 2002
Robert A. Mosbacher, Jr...................... 48 PennzEnergy 2002
J. Larry Nichols............................. 57 Devon 2000
James L. Pate(5)............................. 63 PennzEnergy 2002
H.R. Sanders, Jr. ........................... 67 Devon 2002
Terry L. Savage.............................. 54 PennzEnergy 2001
Brent Scowcroft.............................. 74 PennzEnergy 2001
Robert B. Weaver............................. 60 PennzEnergy 2000
</TABLE>
- --------
(1) Chairman of the Audit Committee. The Audit Committee will also consist of
one additional former Devon board member and one former PennzEnergy board
member.
(2) Chairman of the Compensation and Stock Option Committee. The Compensation
and Stock Option Committee will also consist of one additional former Devon
board member and two former PennzEnergy board members.
(3) Chairman of the Nominating Committee. The Nominating Committee will also
consist of one additional former Devon board member and two former
PennzEnergy board members.
(4) Designated by PennzEnergy and mutually approved by PennzEnergy's chairman
of the board and Devon's president. Mr. Johnson is a private consultant for
the oil and gas industry and is President and a director of JonLoc Inc., an
oil and gas company of which he and his family are the sole shareholders.
He also serves as a director of Tesoro Petroleum and J. Ray McDermott, S.A.
From 1991 to 1994, Mr. Johnson was President, Chief Operating Officer and a
director of Apache Corporation.
(5) Chairman of the Board and Chairman of the Executive Committee. The
Executive Committee will consist of Mr. Pate and Mr. Nichols.
The New Devon certificate provides that until New Devon's annual stockholder
meeting in 2000, (1) the initial directors of New Devon designated by Devon and
their designated successors will nominate successors to and fill any vacancies
in that Devon group of directors and (2) the initial directors of New Devon
designated by PennzEnergy and their designated successors will nominate
successors to and fill any vacancies in that PennzEnergy group of directors.
One member of the PennzEnergy group of directors must be a person mutually
agreed to by New Devon's chairman and president. The New Devon certificate
provides that at and after the annual stockholder meeting in 2000, a majority
of the whole board will nominate successors and fill vacancies.
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<PAGE>
Executive Officers
The New Devon board will elect executive officers of New Devon annually to
serve in their respective capacities until their successors are duly elected
and qualified or until their earlier resignation or removal. The following will
initially serve as executive officers of New Devon:
<TABLE>
<CAPTION>
Current
Company
Name Age Position in New Devon Affiliation
---- --- --------------------- -----------
<S> <C> <C> <C>
J. Larry Nichols.... 57 President and Chief Executive Officer Devon
J. Michael Lacey.... 53 Vice President-Operations and Devon
Exploration
Duke R. Ligon....... 58 Vice President-General Counsel Devon
Darryl G. Smette.... 52 Vice President-Marketing and Devon
Administrative Planning
H. Allen Turner..... 46 Vice President-Corporate Devon
Development
William T. Vaughn... 52 Vice President-Finance Devon
Danny J. Heatly..... 43 Controller Devon
Gary L. McGee....... 50 Treasurer Devon
Marian J. Moon...... 49 Secretary Devon
</TABLE>
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<PAGE>
NEW DEVON CAPITAL STOCK
General
At the time of the merger, the authorized capital stock of New Devon will
consist of:
.400,000,000 shares of New Devon common stock, par value $0.10 per share,
.4,500,000 shares of preferred stock, par value $1.00 per share, and
.one share of special voting stock, par value $0.10 per share.
There are presently 1,000 shares of New Devon common stock, par value $0.10
per share, issued and outstanding, all of which are owned by Devon. Pursuant to
the merger agreement, all of the shares of New Devon common stock owned by
Devon will be cancelled upon consummation of the merger. No shares of New Devon
preferred stock or special voting stock are presently issued or outstanding.
Common Stock
Holders of New Devon common stock will be entitled to receive dividends out
of legally available funds when and if declared by the New Devon board. Subject
to the rights of the holders of any outstanding shares of New Devon preferred
stock, holders of shares of New Devon common stock will be entitled to cast one
vote for each share held of record on all matters submitted to a vote of
stockholders. They will not be entitled to cumulative voting rights for the
election of directors. Except pursuant to the rights agreement, the shares of
New Devon common stock have no preemptive, conversion or other rights to
subscribe for or purchase any securities of New Devon. Upon liquidation or
dissolution of New Devon, the holders of shares of New Devon common stock are
entitled to share ratably in any of New Devon's assets that remain after
payment or provision for payment to creditors and holders of preferred stock.
All outstanding shares of New Devon common stock are fully paid and
nonassessable, and the shares of New Devon common stock issued in the merger
upon conversion of the trust convertible preferred securities and upon exchange
of the exchangeable shares will be fully paid and nonassessable.
Trust Convertible Preferred Securities
On July 3, 1996, Devon Financing Trust, a Delaware business trust sponsored
by Devon, issued 2,990,000 trust convertible preferred securities. The trust
convertible preferred securities, which prior to completion of the merger are
convertible into shares of Devon common stock at the rate of 1.6393 shares of
Devon common stock per trust convertible preferred security, will, immediately
following the merger, be convertible at the same rate into shares of New Devon
common stock. The conversion of the trust convertible preferred securities may
have a dilutive effect on the stockholders of New Devon and may affect the
market price of the shares of New Devon common stock.
Preferred Stock
The New Devon preferred stock may be issued in one or more series. The New
Devon board may establish attributes of any series, including the designation
and number of shares in the series, dividend rates (cumulative or
noncumulative), voting rights, redemptions, conversion or preference rights,
and any other rights and qualifications, preferences and limitations or
restrictions on shares of a series. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of New
Devon without any vote or action by the stockholders and may adversely affect
the voting and other rights of the holders of shares of New Devon common stock.
The specific terms of a particular series of preferred stock will be described
in a certificate of designation relating to that series. Upon the merger,
holders of PennzEnergy 6.49% cumulative preferred stock, series A, will receive
a total of up to 1,500,000 shares of New Devon 6.49% cumulative preferred
stock, series A. The New Devon board has designated 1,000,000 shares of
preferred stock as series A junior participating preferred stock in connection
with New Devon's rights agreement.
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Special Voting Stock
One share of special voting stock, par value $0.10 per share, is authorized
for issuance by New Devon and, upon the merger, the holder of the share of
Devon special voting stock will receive one share of New Devon special voting
stock. Except as otherwise required by law or New Devon's certificate of
incorporation, the special voting share will possess a number of votes equal to
the number of outstanding exchangeable shares from time to time not owned by
New Devon or any entity controlled by New Devon for the election of directors
and on all other matters submitted to a vote of New Devon stockholders. The
holders of shares of New Devon common stock and the holder of the special
voting share will vote together as a single class on all matters. In the event
of a New Devon liquidation event, all outstanding exchangeable shares will
automatically be exchanged for shares of New Devon common stock, and the holder
of the special voting share will not be entitled to receive any assets of New
Devon available for distribution to its stockholders. The holder of the special
voting share will not be entitled to receive dividends. At such time as the
special voting share has no votes attached to it because there are no
exchangeable shares outstanding not owned by New Devon or an entity controlled
by New Devon, the special voting share will be canceled.
Antitakeover and Other Provisions
Share Rights Plan. Under the new rights agreement of New Devon, holders of
shares of New Devon common stock will have one right for each share of New
Devon common stock that they hold. The certificates representing outstanding
shares of New Devon common stock will also evidence one right for each share.
Initially, the rights will trade with the shares of New Devon common stock.
Holders of exchangeable shares will receive one right with each share of New
Devon common stock they receive upon exchange of their exchangeable shares. If
events generally associated with an unsolicited takeover attempt of New Devon
or transactions involving a change of control occur (including an acquisition,
or a tender or exchange offer that would result in a bidder acquiring 15% or
more of New Devon's voting securities), the rights will be distributed, will
become exercisable and will trade separately from the shares of New Devon
common stock.
The rights will have antitakeover effects. They will cause substantial
dilution to a person or group that attempts to acquire New Devon in a manner
that causes the rights to become exercisable. We believe, however, that the
rights should not affect any prospective offeror willing to negotiate with the
New Devon board or interfere with any merger or other business combination
approved by the New Devon board. The New Devon board may redeem the rights for
$0.01 per right. The terms of the rights agreement may be amended by the New
Devon board without the consent of the New Devon stockholders or the holders of
the rights.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following summary describes the material U.S. federal income tax
consequences of the merger to U.S. holders of Devon capital stock and
PennzEnergy capital stock. The summary is based upon the Internal Revenue Code,
Treasury Regulations, administrative rulings and pronouncements, and judicial
precedent in effect on the date of this joint proxy statement/prospectus. These
authorities may be repealed, revoked or modified, possibly with retroactive
effect, so as to result in U.S. federal income tax consequences different from
those discussed below.
The summary deals only with Devon and PennzEnergy capital stock held by U.S.
stockholders as capital assets within the meaning of Section 1221 of the
Internal Revenue Code, and does not address all aspects of the U.S. federal
income tax consequences that may be relevant to particular U.S. stockholders of
Devon or PennzEnergy in light of their particular circumstances, such as U.S.
stockholders who (1) are subject to special tax rules, such as dealers in
securities or currencies, financial institutions, tax-exempt organizations,
life insurance companies, persons holding New Devon, Devon or PennzEnergy
capital stock as part of a hedging, conversion or straddle transaction, or U.S.
stockholders whose "functional currency" is not the U.S. dollar, or (2)
acquired their stock through the exercise or cancellation of employee stock
options or as compensation through other means. The summary also does not
address any tax consequences arising out of the tax laws of any state, local or
foreign jurisdiction.
For purposes of this summary, "U.S. stockholder" means a beneficial owner of
Devon or PennzEnergy capital stock, as applicable, that is a citizen or
resident (as that term is defined in the Internal Revenue Code) of the United
States, a corporation created or organized in or under the laws of the United
States or any state thereof, or the District of Columbia, or a partnership,
trust or estate treated for U.S. federal income tax purposes as a domestic
partnership, trust or estate.
Each U.S. stockholder is strongly advised to consult his or her own tax
advisor as to the U.S. federal income tax consequences of the merger, including
the particular facts and circumstances that may be unique to such U.S.
stockholder, and as to any estate, gift, state, local or foreign tax
consequences of the merger.
Opinions of Counsel
The obligation of Devon and PennzEnergy to effect the merger is conditioned
upon, among other things, the receipt of an opinion of McAfee & Taft A
Professional Corporation, in the case of Devon, and Baker & Botts, L.L.P., in
the case of PennzEnergy, each dated as of the date of the merger and based on
the facts, representations and assumptions set forth in the opinions, that:
(a) The merger will be treated for U.S. federal income tax purposes as
two reorganizations within the meaning of Section 368(a) of the Internal
Revenue Code; and
(b) No gain or loss will be recognized by such company or its U.S.
stockholders who exchange all of their common stock solely for New Devon
capital stock in the merger, except with respect to cash received in lieu
of fractional shares of New Devon capital stock.
Tax Consequences of the Merger
Tax Consequences to Devon and its U.S. Stockholders. Assuming that the merger
qualifies as two reorganizations as discussed above, in the opinion of McAfee &
Taft A Professional Corporation, subject to the assumptions and qualifications
set forth above, the following are the material U.S. federal income tax
consequences of the merger to Devon and its U.S. stockholders:
(a) No gain or loss will be recognized by a U.S. stockholder of Devon
upon the receipt of shares of New Devon capital stock in exchange for Devon
capital stock;
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(b) No gain or loss will be recognized by Devon or New Devon;
(c) The aggregate adjusted tax basis of the shares of New Devon capital
stock received by a U.S. stockholder of Devon in the merger will be equal
to the U.S. stockholder's aggregate adjusted tax basis in the Devon capital
stock exchanged in the merger; and
(d) The holding period of shares of New Devon capital stock received by a
U.S. stockholder in the merger will include the holding period of the Devon
capital stock exchanged for the New Devon capital stock.
Tax Consequences to PennzEnergy and its U.S. Stockholders. Assuming that the
merger qualifies as two reorganizations as discussed above, in the opinion of
Baker & Botts, L.L.P., subject to the assumptions and qualifications set forth
above, the following are the material U.S. federal income tax consequences of
the merger to PennzEnergy and its U.S. stockholders:
(a) No gain or loss will be recognized by a U.S. stockholder of
PennzEnergy upon the receipt of shares of New Devon capital stock in
exchange for PennzEnergy capital stock;
(b) Except as discussed below under "--Possible Effect upon Taxation of
Pennzoil-Quaker State Spinoff," no gain or loss will be recognized by
PennzEnergy;
(c) The aggregate adjusted tax basis of the shares of New Devon capital
stock received by a U.S. stockholder of PennzEnergy in the merger will be
equal to the U.S. stockholder's aggregate adjusted tax basis in the
PennzEnergy capital stock exchanged in the merger reduced by the amount of
adjusted tax basis properly allocable to a fractional share interest in New
Devon capital stock for which cash was received;
(d) The holding period of shares of New Devon capital stock received by a
U.S. stockholder pursuant to the merger will include the holding period of
the PennzEnergy capital stock exchanged for New Devon capital stock; and
(e) A U.S. stockholder of PennzEnergy will generally recognize capital
gain or loss upon the receipt of cash in lieu of a fractional share
interest in New Devon capital stock based upon the difference between the
amount of cash received by the U.S. stockholder and the U.S. stockholder's
adjusted tax basis allocable to the fractional share interest as set forth
above.
Gain or loss recognized by a U.S. stockholder upon the receipt of cash in
lieu of a fractional share of New Devon will be either long-term or short-term
capital gain or loss depending on the U.S. stockholder's holding period for the
PennzEnergy capital stock surrendered in the merger at the effective time of
the merger. In the case of a noncorporate U.S. stockholder (including an
individual), any capital gain will be taxable at a preferential rate if the
U.S. stockholder's holding period for the PennzEnergy capital stock exceeds one
year. The deductibility of capital losses is subject to limitations. U.S.
stockholders should consult their own tax advisors regarding the taxation of
capital gains and capital losses recognized upon the receipt of cash in lieu of
fractional shares.
Possible Effect upon Taxation of Pennzoil-Quaker State Spinoff. In December
1998, PennzEnergy, formerly named Pennzoil Company, distributed to its
stockholders all of the stock of its wholly owned subsidiary, Pennzoil-Quaker
State Company, in a spinoff. PennzEnergy obtained a private letter ruling from
the IRS that, based on the factual representations in the ruling request, the
spinoff qualified for nonrecognition of gain or loss to PennzEnergy and its
shareholders under Section 355 of the Internal Revenue Code.
Section 355(e) of the Internal Revenue Code will require PennzEnergy to
recognize gain on the spinoff, even though the spinoff otherwise qualifies for
nonrecognition under Section 355, if the spinoff is part of a plan or series of
related transactions that includes the merger. PennzEnergy and Devon believe
that the spinoff and the merger should not be treated as part of such a plan or
series of related transactions because, among other things, prior to the
spinoff neither party contemplated a business combination with the other, and
until
71
<PAGE>
April 1999 the parties had no discussions regarding a business combination.
However, the merger and spinoff will be presumed to be part of such a plan
because the merger will occur during the four-year period beginning two years
before the spinoff, and there can be no assurance that the presumption can be
overcome. PennzEnergy currently estimates New Devon's potential tax liability
with respect to the spinoff to be approximately $16 million in additional tax
for 1998 and the elimination of PennzEnergy's approximately $183 million in net
operating loss carryovers through 1998.
Net Operating Losses. As of the effective date of the merger, PennzEnergy
estimates it will have a net operating loss available for carryforward of
approximately $330 million for regular U.S. federal income tax and
approximately $211 million for U.S. federal alternative minimum tax.
PennzEnergy's U.S. federal income tax returns for 1996 and 1997 are presently
being examined by the IRS. Issues reasonably anticipated to be raised by the
IRS in that examination, together with the issues discussed above regarding the
spinoff, may result in proposed adjustments to the U.S. federal income tax
liability of PennzEnergy for prior years. To the extent any proposed
adjustments are sustained, the net operating losses of PennzEnergy available
for carryforward at the time of the merger will be reduced or eliminated.
The ability of the New Devon consolidated group to utilize pre-merger net
operating losses of PennzEnergy may be further limited because former Devon
stockholders will own more than 50 percent of the capital stock of New Devon
after the merger. Accordingly, the merger will result in an "ownership change"
of PennzEnergy as that term is defined in Section 382(g) of the Internal
Revenue Code and utilization of any net operating losses of PennzEnergy will be
subject to the limitations imposed by Section 382 of the Internal Revenue Code.
Moreover, the PennzEnergy net operating losses will have been incurred in a
"separate return limitation year" and their utilization in subsequent
consolidated U.S. federal income tax returns of the affiliated group may be
limited.
Information Reporting and Backup Withholding
Information reporting requirements will generally apply to payments of cash
in lieu of fractional shares made pursuant to the merger to U.S. stockholders
other than certain exempt recipients (such as corporations). Certain
noncorporate U.S. stockholders may be subject to backup withholding at a rate
of 31 percent on cash payments received in lieu of fractional shares of New
Devon capital stock pursuant to the merger. Backup withholding will not apply,
however, to a U.S. stockholder who:
(a) furnishes a correct taxpayer identification number and certifies that
the U.S. stockholder is not subject to backup withholding on the substitute
Form W-9 (or successor form) included in the letter of transmittal to be
delivered to Devon and PennzEnergy stockholders following consummation of
the merger;
(b) provides a certification of foreign status on Form W-8 (or successor
form); or
(c) is otherwise exempt from backup withholding.
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<PAGE>
COMPARISON OF THE RIGHTS OF HOLDERS OF DEVON AND PENNZENERGY COMMON STOCK TO
THOSE OF NEW DEVON COMMON STOCK
The following is a summary comparison of the material differences between (1)
the rights of common stockholders of Devon and holders of New Devon common
stock under the respective certificates of incorporation and by-laws of the
companies and under Oklahoma and Delaware law, and (2) the rights of common
stockholders of PennzEnergy and holders of New Devon common stock under their
respective certificates of incorporation and by-laws. PennzEnergy and New Devon
are both incorporated in Delaware and, accordingly, descriptions of Delaware
law under the column "New Devon" also apply to PennzEnergy.
The following summary is not intended to be complete and is qualified by
reference to Delaware law, Oklahoma law, the Devon certificate and by-laws, the
PennzEnergy certificate and by-laws and the New Devon certificate and by-laws.
For information on how to obtain copies of the certificates of incorporation
and by-laws of the companies, see "Where You Can Find More Information" on page
89.
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
Authorized Capital Stock
- --------------------------------------------------------------------------------
The authorized The authorized The authorized
capital stock of capital stock of New capital stock of
Devon consists of (1) Devon consists of (1) PennzEnergy consists
400,000,000 shares of 400,000,000 shares of of (1) 100,000,000
Devon common stock, New Devon common shares of PennzEnergy
par value $0.10 per stock, par value common stock, par
share, (2) 3,000,000 $0.10 per share, (2) value $0.83 1/3 per
shares of Devon 4,500,000 shares of share, (2) 27,862,924
preferred stock, par New Devon preferred shares of preference
value $1.00 per stock, par value common stock, par
share, and (3) one $1.00 per share, and value $0.83 1/3 per
share of special (3) one share of share and (3)
voting stock, par special voting stock, 9,747,720 shares of
value $0.10 per par value $0.10 per preferred stock, par
share. share. value $1.00 per
share.
- --------------------------------------------------------------------------------
Vote Required for Extraordinary Transactions
- --------------------------------------------------------------------------------
These provisions Under Delaware law, The PennzEnergy
under Oklahoma law whenever the approval certificate does not
are substantially of the stockholders require a greater
similar to the of a corporation is percentage vote than
corresponding required for a that required under
Delaware law merger, consolidation Delaware law for
provisions. or sale of assets, these actions unless
the merger, the transaction is
The Devon consolidation or sale with a beneficial
certificate does not must be approved by owner of 5% or more
require a greater owners of a majority of PennzEnergy voting
percentage vote than of the outstanding stock. (See
that required under shares entitled to Antitakeover
Oklahoma law for vote. Also, unless Provisions and
these actions except required by a Interested
in the case of some corporation's Stockholder
transactions with a certificate of Transactions on page
beneficial owner of incorporation, no 81.)
15% or more of the vote of the
Devon common stock. stockholders of a
(See Antitakeover corporation surviving
Provisions and a merger is necessary
Interested to authorize a merger
Stockholder if:
Transactions on page
81.) (1) the
certificate of
incorporation of
the surviving
corporation is not
amended;
73
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
(2) each share of
stock of the
surviving
corporation is to be
an identical share
of the surviving
corporation after
the merger; and
(3) the number of
shares to be issued
in the merger does
not exceed 20% of
the corporation's
outstanding common
stock immediately
prior to the
effective date of
the merger.
Delaware law also
provides that a parent
corporation that is
the record holder of
at least 90% of the
outstanding shares of
each class of stock of
a subsidiary may merge
that subsidiary into
the parent corporation
without the approval
of the subsidiary's
stockholders or board
of directors and
without the approval
of the parent's
stockholders.
The New Devon
certificate does not
require a greater
percentage vote than
that required under
Delaware law for these
actions.
74
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
Amendment to Governing Documents
- --------------------------------------------------------------------------------
Under Delaware law, The PennzEnergy
These provisions a corporation's certificate does not
under Oklahoma law certificate of require a greater vote
are substantially incorporation may be than that required
similar to the amended by the under Delaware law for
corresponding affirmative vote of a amendments to its
Delaware law majority of the certificate except
provisions. outstanding stock that an 80% vote is
entitled to vote at a required to amend
The Devon stockholder's meeting portions of the
certificate requires and a majority of the certificate
approval of at least outstanding stock of restricting certain
80% of the each class entitled to transactions with
outstanding shares vote as a class. Also, beneficial owners of
entitled to vote to Delaware law provides 5% or more of
amend some of the that a corporation's PennzEnergy shares. In
provisions of the certificate may cases when the 80%
Devon certificate. It require the vote of a vote is applicable,
also grants to the greater number or the vote of a majority
Devon board the power proportion than is of the PennzEnergy
to adopt, amend or required by Delaware shares excluding any
repeal the by-laws. law. owned by beneficial
owners of 5% or more
The New Devon of the PennzEnergy
certificate requires shares is also
approval of at least required.
two-thirds of the
outstanding shares
entitled to vote to
amend some of the
provisions of the New
Devon certificate. It
also grants the New
Devon board the power
to adopt, alter and
repeal the New Devon
by-laws. In addition,
the stockholders of
New Devon may amend
the by-laws with an
affirmative vote of
the holders of at
least two-thirds of
the outstanding
shares entitled to
vote, voting together
as a single class.
- --------------------------------------------------------------------------------
Dissenters' Rights
- --------------------------------------------------------------------------------
The PennzEnergy
These provisions Under Delaware law, certificate does not
under Oklahoma law unless a corporation's grant appraisal rights
are substantially certificate provides to its stockholders in
similar to the otherwise, the rights addition to those
corresponding of the dissenting provided by Delaware
Delaware law stockholders to obtain law.
provisions. the fair value for
their stock, also
The Devon referred to as
certificate does not appraisal rights, may
grant appraisal only be available in
rights to its connection with a
stockholders in statutory merger or
addition to those consolidation.
provided by Oklahoma Appraisal rights are
law. not available to a
corporation's
stockholders under
Delaware law when the
corporation is to be
the surviving
corporation and no
vote of its
stockholders is
required to approve
the merger. In
75
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
addition, unless the
corporation's
certificate provides
otherwise, no appraisal
rights are available
under Delaware law to
the holders of shares
of any class of stock
which is either:
(1) listed on a
national securities
exchange or
designated as a
national market
system security by
the NASD; or
(2) held of record
by more than 2,000
stockholders, unless
the stockholders are
required by the
terms of the merger
to accept anything
other than:
(a) shares of
stock of the
surviving
corporation;
(b) shares of
stock of any
other corporation
listed on a
national
securities
exchange and/or
designated as
described above,
or held of record
by more than
2,000 holders;
(c) cash in
lieu of
fractional
shares; or
(d) any
combination of
the above three
items.
The New Devon
certificate does not
grant appraisal rights
to its stockholders in
addition to those
required by Delaware
law.
- --------------------------------------------------------------------------------
Classified Board of Directors
- --------------------------------------------------------------------------------
Oklahoma law Delaware law The PennzEnergy
provides that a provides that a certificate currently
corporation's board of corporation's board of provides for a
directors may be directors may be classified board,
divided into various divided into various divided into three
classes with staggered classes with staggered classes. The PennzEnergy
terms of office. terms of office. certificate also provides
for cumulative voting
The Devon The New Devon in the election of
certificate currently certificate currently directors.
provides for a provides for a
classified board, classified board,
divided into three divided into three
classes. classes. The New Devon
certificate does not
provide for cumulative
voting in the election
of directors.
76
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
Number of Directors
- --------------------------------------------------------------------------------
The Devon The New Devon The PennzEnergy by-
certificate provides certificate provides laws provide that the
that the fixed number that the number of number of directors
of directors, which directors shall not has been fixed by the
must be not less than be less than three PennzEnergy board at
three nor more than nor more than twenty, seven. The
fifteen, may be and generally shall PennzEnergy
changed by resolution be fixed from time to certificate provides
adopted by two-thirds time by a resolution that the number of
of the entire Devon adopted by a majority directors shall not
board or at an annual of the entire New be less than three
meeting of Devon board. The nor more than nine,
stockholders by the number of directors and generally shall
affirmative vote of has been fixed by the be fixed from time to
holders of two-thirds New Devon board at time by the
of the outstanding fourteen. PennzEnergy by-laws.
shares entitled to
vote. The number of
directors has been
fixed by the Devon
board at eight.
- --------------------------------------------------------------------------------
Removal of Directors; Filling Vacancies
- --------------------------------------------------------------------------------
These provisions Under Delaware law, The PennzEnergy
under Oklahoma law unless otherwise certificate provides
are substantially provided in the that directors may be
similar to the certificate of removed only for
corresponding incorporation, cause.
Delaware law directors serving on
provisions. a classified board The PennzEnergy
may only be removed certificate generally
The Devon by the stockholders provides that newly
certificate and by- for cause. created directorships
laws provide that and any vacancies
vacancies and newly- The New Devon shall be filled by
created directorships certificate generally the affirmative vote
resulting from any provides that newly of a majority of the
increase in the created directorships remaining directors
authorized number of and any vacancies may then in office.
directors shall be be filled only by the
filled by a majority affirmative vote of a
of the directors then majority of the
in office. remaining directors
then in office.
The New Devon
certificate provides
that until New
Devon's annual
stockholder meeting
in 2000 (1) the
initial directors of
New Devon designated
by Devon and their
designated successors
will nominate
successors to and
fill any vacancies in
that Devon group of
directors and (2) the
initial directors of
New Devon designated
by PennzEnergy and
their designated
successors will
77
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
nominate successors
to and fill any
vacancies in that
PennzEnergy group of
directors. One member
of the PennzEnergy
group of directors
must be a person
mutually agreed to by
New Devon's chairman
and president. The
New Devon certificate
provides that at and
after the annual
stockholder meeting
in 2000, a majority
of the whole board
will nominate
successors and fill
vacancies.
- --------------------------------------------------------------------------------
Stockholder Action by Written Consent; Special Meetings
- --------------------------------------------------------------------------------
Under Oklahoma law, Under Delaware law, The PennzEnergy
unless otherwise unless otherwise certificate
provided for in a provided for in a specifically
corporation's corporation's prohibits stockholder
certificate of certificate of action by written
incorporation, incorporation, consent.
stockholders may act stockholders may act
by written consent if by written consent. The PennzEnergy by-
the consent is signed laws provide that
by the minimum number The New Devon special meetings of
of votes that would certificate stockholders can be
be necessary to specifically called by the
authorize a prohibits stockholder PennzEnergy board,
particular action at action by written the chairman of the
a meeting. Oklahoma consent. board, the executive
law also provides committee, the
that, with respect to The New Devon chairman of the
a corporation (1) certificate provides executive committee,
with a class of that special meetings the president, or by
voting stock, of stockholders can stockholders holding
registered with the be called only by the at least 25% of the
SEC or listed or New Devon board, and outstanding shares
traded on a national to the extent entitled to vote.
securities exchange, provided for in the
and (2) which has by-laws, the chairman
1,000 or more of the board or the
stockholders of president.
record, stockholders Stockholders are not
taking action by permitted to call a
written consent must special meeting or to
obtain unanimous
approval, unless
78
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
otherwise provided in require that the New
the corporation's Devon board call a
certificate of special meeting of
incorporation. stockholders.
The Devon
certificate
specifically prohibits
stockholder action by
written consent.
The Devon by-laws
provide that the Devon
board or president may
call a special meeting
of stockholders.
- --------------------------------------------------------------------------------
Fiduciary Duties of Directors
- --------------------------------------------------------------------------------
Oklahoma law Delaware law Fiduciary duties of
provides that provides that the PennzEnergy's
directors have business and affairs directors are governed
fiduciary obligations of a corporation be by Delaware law.
to the corporation and managed by or under
its stockholders. In the direction of its
particular, directors board of directors. In
must act in accordance exercising their
with the so-called powers, directors are
duties of "due care" charged with a
and "loyalty." Under fiduciary duty of care
Oklahoma law, the duty to protect the
of care requires that interests of the
directors act in an corporation and a
informed and fiduciary duty of
deliberative manner loyalty to act in the
and inform themselves, best interests of its
prior to making a stockholders.
business decision, of
all material Delaware law further
information reasonably provides that
available to them. The directors are to act
duty of loyalty is the in an informed and
duty to act in good deliberative manner
faith and in a manner and inform themselves,
which directors prior to making a
reasonably believe to business decision, of
be in the best all material
interests of the information reasonably
stockholders. It available to them.
requires that there be This duty of care also
no conflict between requires that
duty and self- directors exercise
interest. care in overseeing and
investigating the
conduct of corporate
employees. The duty of
loyalty may be
summarized as the duty
to act in good faith,
not out of self-
interest, and in a
manner which the
directors reasonably
believe to be in the
best interests of the
stockholders.
79
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
Indemnification of Officers and Directors
- --------------------------------------------------------------------------------
The Devon Delaware law PennzEnergy's by-
certificate provides provides that a laws provide that the
indemnification for corporation may corporation shall
its present and provide provide such
former directors, indemnification for indemnification to
officers, employees each person who is the maximum extent
and agents against involved in any provided by Delaware
all reasonable actual or threatened law as it may exist
expenses, including action, suit or from time to time.
attorneys' fees, and proceeding, by reason
generally against all of the fact that he
judgments, fines and or she is or was a
amounts paid in director, officer,
settlement in actions employee or agent of
brought against them. the corporation so
To qualify for long as the potential
indemnification, a indemnitee acted in
potential indemnitee good faith and in a
must have acted in manner he or she
good faith and in the reasonably believed
best interests of the to be in or not
corporation and, in opposed to the best
the case of a interests of the
criminal proceeding, corporation. In the
have had no case of a criminal
reasonable cause to proceeding, the
believe his or her potential indemnitee
conduct was unlawful. must have had no
reasonable cause to
believe his or her
conduct was unlawful.
In the case of an
action brought by or
in the right of the
corporation no
indemnification is
available for any
claim or matter as to
which the indemnitee
has been adjudged
liable to the
corporation, unless
ordered by a court.
Delaware law further
provides that a
corporation may
purchase and maintain
insurance on behalf
of its directors and
officers.
The New Devon
certificate and by-
laws provide
indemnification for
each person who is
involved in any
actual or threatened
action, suit or
proceeding, by reason
of the fact that he
or she is or was a
director, officer,
employee or agent of
New Devon. To qualify
for indemnification,
a potential
indemnitee must have
acted in good faith
and in a manner he or
she reasonably
believed to be in or
not opposed to the
best interests of New
Devon. New Devon is
authorized to
purchase and maintain
insurance on behalf
of its directors and
officers.
80
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
Director Liability
- --------------------------------------------------------------------------------
Delaware law The PennzEnergy
The Devon permits a corporation certificate contains
certificate provides to include a such a provision.
that no director provision in its
shall be personally certificate
liable to the eliminating or
corporation or its limiting the personal
stockholders for liability of a
damages for breaches director or officer
of fiduciary duty, to the corporation or
subject to some its stockholders for
limitations. damages for a breach
of the director's or
the officer's
fiduciary duty,
subject to some
limitations.
A director would be
liable under Oklahoma
law for an unlawful
payment of a dividend
or an unlawful stock
purchase or
redemption.
The New Devon
certificate contains
such a provision.
- --------------------------------------------------------------------------------
Antitakeover Provisions and Interested Stockholder Transactions
- --------------------------------------------------------------------------------
The Devon Delaware law PennzEnergy's
certificate places generally provides certificate requires
limitations on that a corporation for certain
business shall not engage in transactions with
combinations, any business interested
including combination with any stockholders an
combinations, person who becomes affirmative vote of
consolidations, sales the beneficial owner 80% of the
or other dispositions of 15% or more of the outstanding voting
of assets having an corporation's stock, stock, and
aggregate value in an interested additionally, an
excess of 10% of the stockholder, for a affirmative vote of a
consolidated assets three-year period majority of shares
of Devon or the following the date outstanding excluding
market value of all that the stockholder any shares which may
outstanding stock of becomes an interested be owned by the
Devon, with a stockholder unless: interested
stockholder who is stockholder.
the beneficial owner
of 15% or more of the
Devon common stock or
an affiliate of the
owner, which is
referred to as an
interested
stockholder, for a
period of three years
from the date a
person becomes an
interested
stockholder, unless:
(1) prior to such
date, the board of
directors of the
corporation
approved either the
business
combination or the
transaction which
resulted in the
stockholder
becoming an
interested
stockholder;
(1) the (2) upon
business completion of the
combination is transaction, the
approved by the interested
Devon board prior stockholder owned
to the date the at least 85% of the
interested voting stock of the
stockholder corporation
acquired shares; outstanding at the
time the
transaction
commenced; or
(2) the
interested
stockholder
acquired at least
85% of the voting
stock of Devon in
the transaction
in which it
became an
interested
stockholder; or
81
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
(3) the (3) upon or after
business completion of the
combination is transaction, the
approved by a business combination
majority of the is approved by the
Devon board and board of directors
by the of the corporation
affirmative vote and by the
of two-thirds of affirmative vote of
the votes at least two-thirds
entitled to be of the outstanding
cast by voting stock which
disinterested is not owned by the
stockholders at interested
an annual or stockholder.
special meeting.
New Devon's
Devon has elected certificate does not
not to be governed by opt out of these
the provisions of provisions of the
Section 1090.3 of Delaware law.
Oklahoma law, which
places limitations on
business combinations
similar to those in
Devon's certificate.
Delaware law does
not contain a similar
control shares
statute.
Devon has also
elected not to be
governed by provisions
of Oklahoma law which
limit the voting
rights of a
stockholder who
acquires a 20% or
greater ownership
interest in a public
corporation. The
voting power of all
shares acquired over
the 20% threshold, the
control shares, is
reduced to zero. The
voting rights of the
control shares may be
restored if a majority
of non-interested
stockholders approves
the return of these
voting rights. If the
non-interested
stockholders do not
restore voting rights
to the control shares,
the control shares
will remain without
voting rights for a
period of three years
after the vote is
taken.
82
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
Stockholder Rights Plan
- --------------------------------------------------------------------------------
Under the rights New Devon will have PennzEnergy has a
agreement, holders of a rights agreement rights agreement
Devon common stock similar to Devon's, similar to the Devon
have one right with except that the rights rights agreement.
respect to each share do not become However, unlike the
of Devon common stock exercisable for New Devon and New Devon
held. The certificates Devon common stock as rights agreement, the
representing a result of a stock rights issued under
outstanding shares of acquisition by a the PennzEnergy
Devon common stock tender or exchange agreements will not be
also evidence one offer for all triggered by an all-
right for each share. outstanding shares of cash offer for all
Currently, the rights New Devon common stock outstanding shares of
trade with the shares that is determined by PennzEnergy common
of Devon common stock. the independent stock which is
Upon the occurrence of directors of New Devon supported by
events generally to be fair to, not sufficient financial
associated with an inadequate, and commitments, would
unsolicited takeover otherwise in the best result in the offeror
attempt of Devon or interest of New Devon owning two-thirds of
transactions involving and its stockholders. the outstanding
a change of control, PennzEnergy shares
the rights will be upon consummation of
distributed, will the offer, offers a
become exercisable and 35% premium over a
will be tradable recent 20-day average
separately from the trading price, remains
Devon common stock. open for a specified
number of days, and
contains certain post-
offer commitments.
If a person or group
becomes the beneficial
owner of, or commences
a tender or exchange
offer for, 15% or more
of the voting shares
of Devon, then each
right would entitle
the other holders to
purchase Devon common
stock having a market
value equal to twice
the applicable
purchase price.
The rights have some
antitakeover effects.
They will cause
substantial dilution
to a person or group
that attempts to
acquire Devon in a
manner which causes
the rights to become
exercisable. The
rights may be redeemed
by the Devon board for
$0.01 per right. The
terms of the rights
agreement may be
amended by the Devon
board without the
consent of the holders
of the Devon common
stock or the rights.
83
<PAGE>
Devon New Devon PennzEnergy
- --------------------------------------------------------------------------------
Voting of the Special Voting Stock
- --------------------------------------------------------------------------------
The Devon The New Devon PennzEnergy has no
certificate provides certificate provides such voting stock.
that the share of that the share of
special voting stock, special voting stock
which represents the is entitled to the
exchangeable shares, number of votes equal
is entitled to the to the number of
number of votes exchangeable shares
determined in outstanding from time
accordance with the to time that are held
plan of arrangement by persons other than
between Devon and New Devon or its
Northstar. subsidiaries.
- --------------------------------------------------------------------------------
Notice of Stockholder Proposals and Director Nominations
- --------------------------------------------------------------------------------
For an annual A stockholder must For an annual
meeting, a stockholder give notice, in proper meeting, a stockholder
must give notice, in form, of director must give notice, in
proper form, of nominations or proper form, of
director nominations proposals to the director nominations
or proposals to the secretary for the 2000 or proposals to the
secretary between 60 annual meeting between secretary between 90
and 90 days before the February 29, 2000 and and 120 days before
one-year anniversary March 20, 2000, and the one-year
of the previous annual for each subsequent anniversary of the
meeting. If the date annual meeting between previous annual
of the annual meeting 90 and 120 days before meeting. If the date
is moved more than 30 the one-year of the annual meeting
days before or after anniversary of the is moved more than 30
the anniversary date, previous annual days before or after
a stockholder notice meeting. If the date the anniversary date,
must be given to the of the annual meeting a stockholder notice
secretary within 10 is moved more than 30 must be given to the
days after the date days before or after secretary within 10
notice of the meeting the anniversary date, days after the public
was mailed or the a stockholder notice announcement of the
public announcement of must be given to the date of the meeting.
the date of the annual secretary within 10 At a special meeting
meeting, whichever days after the public of stockholders, only
occurs first. For a announcement of the the matters set forth
special meeting called date of the meeting. in the notice shall be
to elect directors, a For a special meeting considered.
stockholder must give called to elect
notice, in proper directors, a
form, of director stockholder must give
nominations to the notice, in proper
secretary within 10 form, of director
days after the date nominations to the
notice of the meeting secretary between 90
was mailed or the and 120 days before
public announcement of the special meeting,
the date of the or within 10 days
special meeting, after the public
whichever occurs announcement of the
first. date of the meeting
and the board of
directors' proposed
nominees, if later.
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PROPOSED STOCK OPTION PLAN AMENDMENT
General
After the merger, New Devon will have approximately twice the number of
employees of Devon. In order to permit New Devon to have sufficient stock
options available for future grants to employees and directors, we are asking
the Devon stockholders to approve an amendment to the Devon employee stock
option plan to increase the number of shares available for grant from 3 million
to 6 million. At the time of the merger, the Devon 1997 stock option plan will
be assumed by New Devon and each of the outstanding options under this plan
will be converted into options to purchase New Devon common stock. If the
stockholders do not approve the merger agreement, the stock option plan
amendment will not be implemented.
The Devon 1997 stock option plan authorizes Devon, through the stock option
committee of its board, to grant stock options to employees and directors of
Devon and its subsidiaries. The Devon board has reserved 3 million shares of
Devon common stock for grant. On June 22, 1999, the Devon board, subject to
stockholder approval, reserved an additional 3 million shares of common stock
for grant if the merger with PennzEnergy is approved. As of July 6, 1999, a
total of 844,150 options to purchase Devon common stock have been granted under
the Devon 1997 stock option plan.
A description of the Devon 1997 stock option plan appears below. Because the
description of the Devon stock option plan in this joint proxy
statement/prospectus is a summary it does not contain all the information that
may be important to you. You should read carefully the entire copy of the Devon
stock option plan incorporated by reference in this document.
Background
The purpose of Devon's stock option plan is to create incentives that will
motivate employees and directors of Devon to put forth maximum efforts toward
the success and growth of Devon and to enable Devon to attract and retain
experienced people who are able to make important contributions to Devon's
success.
Administration
The stock option committee administers Devon's stock option plan. Among the
powers granted to the committee are the powers to interpret the plan, establish
rules and regulations for its operation, select employees to receive awards and
determine the timing, form, amount and other terms and conditions of the
awards. The committee may also select nonemployee directors of Devon to receive
awards and determine the vesting schedule of such awards. However, such awards
may only be made at the times and up to the amounts specified in the Devon
stock option plan. See "--Stock Option Awards to Nonemployee Directors" below.
Eligibility for Participation
Any employee of Devon or its subsidiaries and any nonemployee director of
Devon is eligible to participate in Devon's stock option plan. The selection of
participants from among employees and directors is within the discretion of the
committee.
Types of Awards
Devon's stock option plan provides for the granting of both stock options
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code and nonqualified stock options that do not qualify as
incentive stock options. Nonemployee directors may be granted only nonqualified
stock options.
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Other Components of the Devon Stock Option Plan
Devon's stock option plan authorizes the committee to grant awards during the
period beginning March 26, 1997 and ending March 25, 2007. Shares of Devon
common stock reserved for option awards that terminate by expiration,
forfeiture, cancellation or otherwise without the issuance of shares will again
be available for grant.
Stock Option Awards to Employees
Under Devon's stock option plan, the committee may grant options to purchase
shares of Devon common stock, determine the terms and conditions of such
option, the number of shares subject to the option and the manner and time of
the option's exercise. The exercise price of an option may not be less than the
fair market value of the Devon common stock on the date of grant. A participant
may pay for the option in cash, shares of Devon common stock or a combination
of both. The maximum option award for an individual may not exceed 50,000
shares in any one year.
Stock Option Awards to Nonemployee Directors
Devon's stock option plan provides for the grant of options to nonemployee
directors. Those directors are eligible to receive stock option grants of up to
3,000 shares immediately after each annual meeting of stockholders at an
exercise price equal to the fair market value of Devon's common stock on that
date. Any unexercised options will expire ten years after the date of grant.
The committee may elect to grant awards that are less than 3,000 shares and
may determine the vesting schedule for such grants. However, the committee will
have no other discretion regarding awards to nonemployee directors.
Adjustments
The total number of shares of the Devon common stock that may be purchased
through options, and the number of shares subject to outstanding options and
the related option process will be adjusted in the case of changes in capital
structure, resulting from any recapitalization, stock split, stock dividend or
similar transaction.
Change of Control
In the case of a "corporate event," as defined in the Devon stock option
plan, all options will become automatically fully vested and immediately
exercisable, with such acceleration to occur without the requirement of any
further act by Devon or the employee or director. In the case of either a
change of control date or an acquisition date, options may become automatically
vested and fully exercisable, provided the committee makes such provision in
the grant of the award.
Termination and Amendment
Devon's stock option plan terminates as of midnight, March 25, 2007. Before
that date, it may be suspended or terminated by Devon's board. In addition, the
Devon board may, from time to time, amend the plan in any manner. However, the
amendment must have stockholder approval if the amendment would increase the
number of shares available under the plan or decrease the exercise price to
less than the fair market value of Devon common stock on the date of grant. Any
other amendment to the plan would also require stockholder approval if, in the
opinion of counsel to Devon, the approval is required by any federal or state
law, rule or regulation.
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Federal Tax Treatment
Under current U.S. federal tax law, the following are the federal tax
consequences generally arising with respect to awards under the Devon 1997
stock option plan. A participant who is granted an incentive stock option does
not realize regular taxable income at the time of the grant or at the time of
exercise, but only at the time of disposition of the shares. The participant
does, however, realize alternative minimum taxable income at the time of
exercise equal to the difference between the exercise price and the market
value of the shares on the date of exercise. Devon is not entitled to any
deduction at the time of grant or at the time of exercise. If the participant
holds the shares for two years from the date of grant and one year from the
date the option is exercised, any gain or loss realized on a subsequent
disposition of the shares will be treated as a long-term capital gain or loss.
Under these circumstances, Devon will not be entitled to any deduction for
federal income tax purposes. If the participant makes a disposition prior to
these times, any gain will be ordinary income up to the excess of the market
value of the shares on the date of exercise over the exercise price and short
term capital gain as to the balance. Under these circumstances, Devon will be
entitled to a deduction equal to the amount of ordinary income recognized by
the participant on the disposition.
A participant who is granted a nonqualified option does not have taxable
income at the time of grant, but does have taxable income at the time of
exercise equal to the difference between the exercise price of the shares and
the market value of the shares on the date of exercise. Devon is entitled to a
corresponding deduction for the same amount.
Withholding Taxes
Devon will have the right to require a participant to remit to Devon, in
cash, an amount sufficient to satisfy federal, state and local withholding
requirements, if any, prior to the delivery of any certificate for shares of
Devon common stock acquired pursuant to the exercise of the options.
Notwithstanding the foregoing, a participant may tender to Devon a number of
shares of Devon common stock or Devon may withhold a number of shares of Devon
common stock the fair market value of which will satisfy the federal and state
tax requirements.
AUDITORS, TRANSFER AGENT AND REGISTRAR
The independent auditors of Devon are KPMG LLP. The independent auditors of
PennzEnergy are Arthur Andersen LLP. In the event that the merger is completed,
the New Devon board will consider the appointment of one independent auditor
for New Devon.
Boston EquiServe, Client Administration, Mail Stop 45-02-62, P.O. Box 1865,
Boston, MA 02105-1865, is transfer agent and registrar for the Devon common
stock. CIBC Mellon Trust Company is the transfer agent and registrar for the
exchangeable shares. CIBC Mellon Trust Company is also the trustee under the
voting and exchange trust agreement and Canadian co-registrar for the Devon
common stock. The transfer agent for PennzEnergy common stock is PZ Shareowner
Services, Inc., P.O. Box 4351, Houston, Texas 77210-4351.
LEGAL MATTERS
Certain legal matters in connection with the merger will be passed upon, on
behalf of PennzEnergy, by Baker & Botts, L.L.P. and, on behalf of Devon, by
McAfee & Taft A Professional Corporation, as to matters of U.S. law, and by
Burnet, Duckworth & Palmer, as to matters of Canadian law.
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EXPERTS
The consolidated financial statements of Devon as of and for each of the
years ended December 31, 1998, 1997 and 1996 have been incorporated by
reference herein in reliance upon the reports of KPMG LLP, independent
certified public accountants, and Deloitte & Touche LLP and
PricewaterhouseCoopers LLP, chartered accountants, incorporated by reference in
this document, and upon the authority of said firms as experts in accounting
and auditing.
The audited consolidated financial statements of PennzEnergy and its
subsidiaries incorporated by reference in this joint proxy statement/prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and is incorporated by
reference herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
Certain information with respect to the oil and gas reserves of Devon derived
from the reports of LaRoche Petroleum Consultants, Ltd., AMH Group Ltd.,
Paddock Lindstrom & Associates Ltd. and John P. Hunter & Associates, Ltd.,
independent consulting petroleum engineers, has been included and incorporated
by reference herein upon the authority of said firms as experts with respect to
matters covered by such reports and in giving such reports.
Certain information with respect to the oil and gas reserves of PennzEnergy
derived from the report of Ryder Scott Company, L.P., independent consulting
petroleum engineers, has been included and incorporated by reference herein
upon the authority of said firm as experts with respect to matters covered by
such report and in giving such report.
FUTURE STOCKHOLDER PROPOSALS
If the merger is completed as expected, New Devon will hold an annual
stockholders' meeting in 2000. If the merger is not completed, Devon and
PennzEnergy will each hold separate annual stockholders' meetings in 2000.
Future New Devon Annual Meetings
Any stockholder desiring to present a proposal for inclusion in New Devon's
proxy statement for the 2000 annual meeting of stockholders must present the
proposal to the New Devon secretary not later than December 11, 1999. Only
those proposals that comply with the requirements of Rule 14a-8 under the
Securities Exchange Act of 1934 will be included in New Devon's proxy statement
for the 2000 annual meeting. Written notice of stockholder proposals submitted
outside the process of Rule 14a-8 for consideration at the 2000 annual meeting
of stockholders (but not included in New Devon's proxy statement) must be
received by the New Devon corporate secretary between February 29, 2000 and
March 20, 2000 in order to be considered timely, subject to any provisions of
New Devon's by-laws. The chairman of the meeting may determine that any
proposal for which New Devon did not receive timely notice will not be
considered at the meeting. If in the discretion of the chairman any such
proposal is to be considered at the meeting, the persons designated in New
Devon's proxy statement will be granted discretionary authority with respect to
the untimely stockholder proposal.
Future Devon Annual Meetings
Any Devon stockholder who wishes to submit a proposal for action to be
included in the proxy statement and form of proxy relating to Devon's 2000
annual meeting of stockholders is required to submit that proposal to Devon on
or before December 11, 1999. Only those proposals that comply with the
requirements of Rule 14a-8 under the Securities Exchange Act of 1934 will be
included in Devon's proxy statement for the 2000 annual meeting. Written notice
of stockholder proposals submitted outside the process of Rule 14a-8 for
consideration at the 2000 annual meeting of stockholders (but not included in
Devon's proxy statement) must be received by Devon's corporate secretary
between February 19, 2000 and March 20, 2000 in order to be considered timely,
and comply with provisions of Devon's by-laws. The chairman of the meeting may
determine that any proposal for which Devon did not receive timely notice will
not be considered at the
88
<PAGE>
meeting. If in the discretion of the chairman any such proposal is to be
considered at the meeting, the persons designated in Devon's proxy statement
will be granted discretionary authority with respect to the untimely
stockholder proposal.
Future PennzEnergy Annual Meetings
In order to be included in PennzEnergy's proxy material for its 2000 annual
meeting of stockholders, eligible proposals of stockholders intended to be
presented at the PennzEnergy annual meeting must be received by the corporate
secretary of PennzEnergy on or before November 30, 1999 at the address
indicated on the first page of this joint proxy statement/prospectus. The
PennzEnergy by-laws require not less than 90 days' nor more than 120 days'
advance written notice of stockholder nominations of directors and other
stockholder proposals. In order for stockholder nominations of director
candidates or other stockholder proposals for PennzEnergy's 2000 annual meeting
of stockholders to be timely submitted, they must be received by PennzEnergy on
or after January 7, 2000 and on or before February 6, 2000. A copy of the by-
laws of PennzEnergy setting forth the requirements for the nomination of
director candidates by stockholders and the requirements for proposals by
stockholders may be obtained from PennzEnergy's corporate secretary at the
address indicated on the notice of meeting.
WHERE YOU CAN FIND MORE INFORMATION
Devon and PennzEnergy file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available to the public from commercial
document retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov".
New Devon filed a registration statement on Form S-4 to register with the SEC
the New Devon common stock to be issued to Devon stockholders and to
PennzEnergy stockholders in the merger. This joint proxy statement/prospectus
is a part of that registration statement and constitutes a prospectus of New
Devon in addition to being a proxy statement of Devon and PennzEnergy for the
meetings. As allowed by SEC rules, this joint proxy statement/prospectus does
not contain all the information you can find in the registration statement or
the exhibits to the registration statement.
The SEC allows us to "incorporate by reference" information into this joint
proxy statement/prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
joint proxy statement/prospectus, except for any information superseded by
information in, or incorporated by reference in, this joint proxy
statement/prospectus. This joint proxy statement/prospectus incorporates by
reference the documents set forth below that we have previously filed with the
SEC. These documents contain important information about our companies and
their finances.
<TABLE>
<CAPTION>
Devon SEC Filings
(File No. 001-10067) Period
-------------------------------- -----------------------------------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1998
Quarterly Report on Form 10-Q Quarter ended March 31, 1999
Current Report on Form 8-K/A Filed on February 2, 1999
Current Report on Form 8-K Filed on February 8, 1999
Current Report on Form 8-K Filed on February 22, 1999
Proxy Statement on Schedule 14-A Filed on April 9, 1999
Current Report on Form 8-K Filed on April 28, 1999
Current Report on Form 8-K Filed on May 21, 1999
Current Report on Form 8-K Filed on June 1, 1999
<CAPTION>
PennzEnergy SEC Filings
(File No. 001-05591) Period
-------------------------------- -----------------------------------
<S> <C>
Annual Report on Form 10-K Fiscal Year ended December 31, 1998
Proxy Statement on Schedule 14-A Filed on March 25, 1999
Quarterly Report on Form 10-Q Quarter ended March 31, 1999
</TABLE>
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<PAGE>
We are also incorporating by reference additional documents that we file with
the SEC between the date of this joint proxy statement/prospectus and the date
of the meetings.
Devon has supplied all information contained or incorporated by reference in
this joint proxy statement/prospectus relating to Devon, and PennzEnergy has
supplied all such information relating to PennzEnergy.
If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them by contacting Devon
or PennzEnergy directly, or the SEC. Documents incorporated by reference are
available from us without charge, excluding all exhibits unless we have
specifically incorporated by reference an exhibit in this joint proxy
statement/prospectus. Stockholders may obtain documents incorporated by
reference in this joint proxy statement/prospectus by requesting them in
writing, by e-mail or by telephone from the appropriate party at the following
address:
<TABLE>
<S> <C>
Devon Energy Corporation PennzEnergy Company
20 North Broadway, Suite 1500 P. O. Box 4616
Oklahoma City, Oklahoma 73102-8260 Houston, Texas 77210-4616
Attention: Corporate Secretary Attention: Corporate Secretary
Tel: (405) 235-3611 Tel: (713) 546-6000
[email protected] [email protected]
</TABLE>
If you would like to request documents from us, please do so by August 7,
1999, to receive them before the meetings.
You can also get more information by visiting Devon's web site at
"http://www.devonenergy.com" and PennzEnergy's web site at
"http://www.pennzenergy.com". Web site materials are not part of this joint
proxy statement/prospectus.
You should rely only on the information contained or incorporated by
reference in this joint proxy statement/prospectus. We have not authorized
anyone to provide you with information that is different from what is contained
in this joint proxy statement/prospectus. This joint proxy statement/prospectus
is dated July 15, 1999. You should not assume that the information contained in
the joint proxy statement/prospectus is accurate as of any date other than such
date, and neither the mailing of this joint proxy statement/prospectus to
stockholders nor the issuance of New Devon common stock in the merger shall
create any implication to the contrary.
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CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
Devon, PennzEnergy and New Devon have made forward-looking statements in this
document and in the documents referred to in this document which are subject to
risks and uncertainties. These statements are based on the beliefs and
assumptions of our managements and on the information currently available to
them.
Statements and calculations concerning oil and gas reserves and their present
value also may be deemed to be forward-looking statements in that they reflect
the determination, based on estimates and assumptions, that oil and gas
reserves may be profitably exploited in the future. When used or referred to in
this document, these forward-looking statements may be preceded by, followed
by, or otherwise include the words "believes," "expects," "anticipates,"
"intends," "plans," "estimates," "projects" or similar expressions, or
statements that certain events or conditions "will" or "may" occur.
Except for their ongoing obligations to disclose material information as
required by the federal securities laws, Devon, PennzEnergy and New Devon do
not have any intention or obligation to update forward-looking statements after
they distribute this document.
By Order of the Board of Directors
of Devon Energy Corporation
Marian J. Moon
Corporate Secretary
July 15, 1999
Oklahoma City, Oklahoma
By Order of the Board of Directors
of PennzEnergy Company
Linda L. Meagher
Corporate Secretary
July 15, 1999
Houston, Texas
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COMMONLY USED OIL AND GAS TERMS
"Bbl" means barrel.
"Bbl/d" means Bbl per day.
"Bcf" means billion cubic feet.
"Boe" means equivalent barrels of oil, calculated by converting gas to
equivalent Bbls. The U.S. convention for this conversion is six Mcf equals
one Boe.
"Boe/d" means Boe per day.
"Cash margin" means total revenues less cash expenses. Cash expenses are
all expenses other than the non-cash expenses of depreciation, depletion
and amortization, deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt, reduction of carrying value of oil and
gas properties and deferred income tax expense.
"MBbls" means thousand barrels.
"MBoe" means thousand Boe.
"Mcf" means thousand cubic feet.
"Mcfe" means thousand equivalent cubic feet of gas, calculated by
converting oil and NGLs to equivalent Mcf. The U.S. convention for this
conversion is one-sixth Bbl equals one Mcfe.
"MMBbls" means million barrels.
"MMBoe" means million Boe.
"MMBtu" means million British thermal units, a measure of heating value.
"MMcf" means million cubic feet.
"MMcf/d" means MMcf per day.
"Modified EBITDA" means earnings before interest (including deferred
effect of changes in foreign currency exchange rate on subsidiary's long-
term debt, and distributions on preferred securities of subsidiary trust),
taxes, depreciation, depletion and amortization and reduction of carrying
value of oil and gas properties.
"NGL" means natural gas liquids.
"Oil" includes crude oil and condensate.
"SEC 10% present value" is the pre-tax present value of future net cash
flows from proved reserves, discounted at 10% per year. Oil, gas and NGL
prices used to calculate future revenues are based on year-end prices held
constant, except where fixed and determinable price changes are provided by
contractual arrangements. Future development and production costs are also
based on year-end costs and assume the continuation of existing economic
conditions.
"Standardized measure of discounted future net cash flows" is the SEC 10%
present value defined above, less applicable income taxes.
"Tcf" means trillion cubic feet.
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ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
by and among
DEVON ENERGY CORPORATION,
DEVON DELAWARE CORPORATION,
DEVON OKLAHOMA CORPORATION
and
PENNZENERGY COMPANY
Dated as of May 19, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE 1
The Merger
Section 1.1 The Merger................................................ 1
Section 1.2 The Closing............................................... 2
Section 1.3 Effective Time............................................ 2
Section 1.4 Corporate Headquarters and Names.......................... 2
ARTICLE 2
Certificates of Incorporation and Bylaws of the Surviving Corporations
Section 2.1 Certificates of Incorporation............................. 2
Section 2.2 Bylaws.................................................... 2
ARTICLE 3
Directors and Officers of the Surviving Corporations
Section 3.1 Directors and Officers of the Delaware Surviving
Corporation............................................... 3
Section 3.2 Directors and Officers of the Oklahoma Surviving
Corporation............................................... 3
ARTICLE 4
Conversion of DVN Stock and PZE Stock
Section 4.1 Certain Definitions....................................... 3
Section 4.2 Conversion of DVN Stock, PZE Stock and Devon Oklahoma
Stock..................................................... 4
Section 4.3 Exchange of Certificates Representing DVN Stock and PZE
Stock..................................................... 5
Section 4.4 Adjustment of Exchange Ratios............................. 7
Section 4.5 Rule 16b-3 Approval....................................... 7
ARTICLE 5
Representations and Warranties of PZE
Section 5.1 Existence; Good Standing; Corporate Authority............. 8
Section 5.2 Authorization, Validity and Effect of Agreements.......... 8
Section 5.3 Capitalization............................................ 8
Section 5.4 Significant Subsidiaries.................................. 8
Section 5.5 No Violation.............................................. 9
Section 5.6 No Conflict............................................... 9
Section 5.7 SEC Documents............................................. 10
Section 5.8 Litigation................................................ 10
Section 5.9 Absence of Certain Changes................................ 10
Section 5.10 Taxes..................................................... 11
Section 5.11 Employee Benefit Plans.................................... 11
Section 5.12 Labor Matters............................................. 12
Section 5.13 Environmental Matters..................................... 12
Section 5.14 Intellectual Property..................................... 13
Section 5.15 Title to Properties....................................... 13
Section 5.16 Insurance................................................. 14
Section 5.17 No Brokers................................................ 14
Section 5.18 Opinion of Financial Advisor.............................. 14
Section 5.19 DVN Stock Ownership....................................... 14
Section 5.20 Reorganization............................................ 14
Section 5.21 Vote Required............................................. 14
Section 5.22 PZE Rights Agreement...................................... 14
Section 5.23 Certain Approvals......................................... 14
Section 5.24 Certain Contracts......................................... 15
</TABLE>
A-i
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE 6
Representations and Warranties of DVN, NEWCO and DEVON Oklahoma
Section 6.1 Existence; Good Standing; Corporate Authority.............. 15
Section 6.2 Authorization, Validity and Effect of Agreements........... 15
Section 6.3 Capitalization............................................. 15
Section 6.4 Significant Subsidiaries................................... 16
Section 6.5 No Violation............................................... 16
Section 6.6 No Conflict................................................ 17
Section 6.7 SEC Documents.............................................. 17
Section 6.8 Litigation................................................. 18
Section 6.9 Absence of Certain Changes................................. 18
Section 6.10 Taxes...................................................... 18
Section 6.11 Employee Benefit Plans..................................... 19
Section 6.12 Labor Matters.............................................. 19
Section 6.13 Environmental Matters...................................... 20
Section 6.14 Intellectual Property...................................... 20
Section 6.15 Title to Properties........................................ 21
Section 6.16 Insurance.................................................. 21
Section 6.17 No Brokers................................................. 21
Section 6.18 Opinion of Financial Advisor............................... 21
Section 6.19 PZE Stock Ownership........................................ 21
Section 6.20 Reorganization............................................. 21
Section 6.21 Vote Required.............................................. 22
Section 6.22 DVN Rights Agreement....................................... 22
Section 6.23 Certain Approvals.......................................... 22
Section 6.24 Certain Contracts.......................................... 22
ARTICLE 7
Covenants
Section 7.1 Conduct of Businesses...................................... 22
Section 7.2 No Solicitation by PZE..................................... 24
Section 7.3 No Solicitation by DVN..................................... 25
Section 7.4 Meetings of Stockholders................................... 26
Section 7.5 Filings; Reasonable Best Efforts........................... 26
Section 7.6 Inspection................................................. 27
Section 7.7 Publicity.................................................. 27
Section 7.8 Registration Statement..................................... 27
Section 7.9 Listing Application........................................ 28
Section 7.10 Letters of Accountants..................................... 28
Section 7.11 Agreements of Rule 145 Affiliates.......................... 28
Section 7.12 Expenses................................................... 28
Section 7.13 Indemnification and Insurance.............................. 29
Section 7.14 Certain Benefits........................................... 30
Section 7.15 Reorganization............................................. 30
Section 7.16 Rights Agreement........................................... 30
Section 7.17 Transition Agreement Termination........................... 30
ARTICLE 8
Conditions
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger..................................................... 31
Section 8.2 Conditions to Obligation of PZE to Effect the Merger....... 31
Section 8.3 Conditions to Obligation of DVN and Newco to Effect the
Merger..................................................... 32
</TABLE>
A-ii
<PAGE>
<TABLE>
<C> <S> <C> <C>
ARTICLE 9
Termination
Section 9.1 Termination by Mutual Consent......................... 32
Section 9.2 Termination by DVN or PZE............................. 32
Section 9.3 Termination by PZE.................................... 33
Section 9.4 Termination by DVN.................................... 33
Section 9.5 Effect of Termination................................. 34
Section 9.6 Extension; Waiver..................................... 35
ARTICLE 10
General provisions
Section 10.1 Nonsurvival of Representations, Warranties and
Agreements............................................ 36
Section 10.2 Notices............................................... 36
Section 10.3 Assignment; Binding Effect; Benefit................... 36
Section 10.4 Entire Agreement...................................... 37
Section 10.5 Amendments............................................ 37
Section 10.6 Governing Law......................................... 37
Section 10.7 Counterparts.......................................... 37
Section 10.8 Headings.............................................. 37
Section 10.9 Interpretation........................................ 37
Section 10.10 Waivers............................................... 38
Section 10.11 Incorporation of Exhibits............................. 38
Section 10.12 Severability.......................................... 38
Section 10.13 Enforcement of Agreement.............................. 38
Section 10.14 Obligation of Newco and Devon Oklahoma................ 38
Section 10.15 Subsidiaries.......................................... 38
</TABLE>
A-iii
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of May 19, 1999, is among Devon Energy Corporation, an Oklahoma
corporation ("DVN"), Devon Delaware Corporation, a Delaware corporation and a
direct, wholly owned subsidiary of DVN ("Newco"), Devon Oklahoma Corporation,
an Oklahoma corporation and a direct, wholly owned subsidiary of Newco ("Devon
Oklahoma"), and PennzEnergy Company, a Delaware corporation ("PZE").
RECITALS
WHEREAS, DVN and PZE have each determined to engage in a strategic business
combination with the other;
WHEREAS, DVN, Newco and PZE entered into an Agreement and Plan of Merger, as
amended, dated as of May 19, 1999 (the "Original Merger Agreement");
WHEREAS, DVN, Newco, PZE and Devon Oklahoma wish to enter into this Agreement
and thereby amend and restate the Original Merger Agreement in its entirety;
WHEREAS, in furtherance thereof, the parties hereto desire that (i) Devon
Oklahoma merge with and into DVN, pursuant to which each share of DVN Common
Stock (as defined in Section 4.1) will be converted into Newco Common Stock (as
defined in Section 4.1) and (ii) PZE merge with and into Newco, pursuant to
which each share of PZE Common Stock (as defined in Section 4.1) will be
converted into Newco Common Stock and each share of PZE Preferred Stock (as
defined in Section 4.1) will be converted into Newco Preferred Stock (as
defined in Section 4.1);
WHEREAS, the respective Boards of Directors of each of DVN, Newco, Devon
Oklahoma and PZE have determined the Merger (as defined in Section 1.1), in the
manner contemplated herein, to be desirable and in the best interests of their
respective corporations and stockholders and to be consistent with, and in
furtherance of, their respective business strategies and goals, and, by
resolutions duly adopted, have approved and adopted this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization within the meaning of section 368(a) of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code");
WHEREAS, as an inducement to the willingness of PZE to enter into this
Agreement, DVN has granted PZE an option to purchase shares of DVN Common Stock
pursuant to a Stock Option Agreement (as defined in Section 4.1); and
WHEREAS, as an inducement to the willingness of DVN to enter into this
Agreement, PZE has granted DVN an option to purchase shares of PZE Common Stock
pursuant to a Stock Option Agreement (as defined in Section 4.1);
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
Section 1.1 The Merger. Subject to the terms and conditions of this
Agreement, on the date of the Effective Time (as defined in Section 1.3), Devon
Oklahoma shall be merged with and into DVN (the
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"Oklahoma Merger"), and PZE shall be merged with and into Newco (the "Delaware
Merger"), both in accordance with this Agreement, with Devon Oklahoma first
merging with and into DVN, followed immediately on the same date by PZE merging
with and into Newco. The separate corporate existences of Devon Oklahoma and
PZE shall thereupon cease. Newco (sometimes hereinafter referred to as the
"Delaware Surviving Corporation") shall be the surviving corporation in the
Delaware Merger, and DVN (sometimes herein referred to as the "Oklahoma
Surviving Corporation") shall be the surviving corporation of the Oklahoma
Merger and a direct, wholly owned subsidiary of Newco. The Delaware Merger
shall have the effects specified in the Delaware General Corporation Law
("DGCL"), and the Oklahoma Merger shall have the effects specified in the
Oklahoma General Corporation Act ("OGCA"). All references in this Agreement to
the "Merger" shall be deemed to include a reference to the two in seriatim
mergers provided for in this Agreement.
Section 1.2 The Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place (a) at
the offices of Baker & Botts, L.L.P., One Shell Plaza, 910 Louisiana, Houston,
Texas, at 9:00 a.m., local time, on the first business day immediately
following the day on which the last to be fulfilled or waived of the conditions
set forth in Article 8 shall be fulfilled or waived in accordance herewith or
(b) at such other time, date or place as DVN and PZE may agree. The date on
which the Closing occurs is hereinafter referred to as the "Closing Date."
Section 1.3 Effective Time. If all the conditions to the Merger set forth in
Article 8 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 9, on the
Closing Date:
(a) A certificate of merger, prepared and executed in accordance with the
relevant provisions of the OGCA (the "Oklahoma Certificate of Merger"),
shall be filed with the Secretary of State of the State of Oklahoma (the
"Oklahoma Secretary of State"). The Oklahoma Merger shall become effective
at the time that the Oklahoma Certificate of Merger shall be duly filed
with the Oklahoma Secretary of State (the "Oklahoma Effective Time").
(b) As soon as practicable after the Oklahoma Effective Time, a
certificate of merger, prepared and executed in accordance with the
relevant provisions of the DGCL (the "Delaware Certificate of Merger"),
shall be filed with the Secretary of State of the State of Delaware (the
"Delaware Secretary of State"). The Delaware Merger shall become effective
immediately following the Oklahoma Effective Time and at the time that the
Delaware Certificate of Merger shall be duly filed with the Delaware
Secretary of State (the "Delaware Effective Time" or the "Effective Time").
Section 1.4 Corporate Headquarters and Names. After the Closing Date, the
corporate headquarters of the Delaware Surviving Corporation and the Oklahoma
Surviving Corporation shall be located in Oklahoma City, Oklahoma. The
corporate name of the Delaware Surviving Corporation, as reflected in its
charter, shall be "Devon Energy Corporation," and the corporate name of the
Oklahoma Surviving Corporation shall be changed to "Devon Energy Corporation
(Oklahoma)."
ARTICLE 2
CERTIFICATES OF INCORPORATION AND BYLAWS
OF THE SURVIVING CORPORATIONS
Section 2.1 Certificates of Incorporation. The charter of the Delaware
Surviving Corporation shall be substantially as set forth in Exhibit A with any
changes therein approved by DVN and PZE. The certificate of incorporation of
DVN in effect immediately prior to the Oklahoma Effective Time shall be the
certificate of incorporation of the Oklahoma Surviving Corporation, until duly
amended in accordance with applicable law.
Section 2.2 Bylaws. The bylaws of Newco in effect immediately prior to the
Effective Time shall be the bylaws of the Delaware Surviving Corporation, until
duly amended in accordance with applicable law. The bylaws of DVN in effect
immediately prior to the Oklahoma Effective Time shall be the bylaws of the
Oklahoma Surviving Corporation, until duly amended in accordance with
applicable law.
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ARTICLE 3
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATIONS
Section 3.1 Directors and Officers of the Delaware Surviving Corporation. At
the Delaware Effective Time:
(a) The principal officers of the Delaware Surviving Corporation shall be
those individuals set forth on Schedule 3.1; and
(b) Consistent with Newco's charter, the Board of Directors of the
Delaware Surviving Corporation shall consist of a number of persons equal
to the number of directors of DVN on the day preceding the Closing Date,
who shall be designated by DVN ("DVN Designees"), plus an equal number of
persons designated by PZE, one of whom shall have been mutually approved by
the Chairman of PZE and the President of DVN ("PZE Designees"). The DVN
Designees and PZE Designees shall have staggered terms consistent with the
provisions of Exhibit B hereto.
Section 3.2 Directors and Officers of the Oklahoma Surviving Corporation. At
the Oklahoma Effective Time:
(a) The principal officers of DVN immediately prior to the Oklahoma
Effective Time shall be the principal officers of the Oklahoma Surviving
Corporation.
(b) The directors of DVN immediately prior to the Oklahoma Effective Time
shall be the directors of the Oklahoma Surviving Corporation.
ARTICLE 4
CONVERSION OF DVN STOCK AND PZE STOCK
Section 4.1 Certain Definitions. For purposes of this Agreement, the
following terms shall have the following meanings:
(a) "Devon Oklahoma Common Stock" shall mean the common stock, par value
$0.10 per share, of Devon Oklahoma.
(b) "Devon Oklahoma Exchange Ratio" shall equal 1.0.
(c) "DVN Common Stock" shall mean the common stock, par value $0.10 per
share, of DVN.
(d) "DVN Exchange Ratio" shall equal 1.0.
(e) "Newco Common Stock" shall mean the common stock, par value $0.10 per
share, of Newco.
(f) "Newco Preferred Stock" shall mean the preferred stock, par value
$1.00 per share, of Newco.
(g) "PZE Common Stock" shall mean the common stock, par value $0.83 1/3
per share, of PZE.
(h) "PZE Exchange Ratio" shall equal 0.4475.
(i) "PZE Preferred Stock" shall mean the preferred stock, par value $1.00
per share, of PZE.
(j) "Stock Option Agreements" shall mean (i) the Amended and Restated
Stock Option Agreement dated the date hereof between DVN and PZE pursuant
to which DVN has granted to PZE an option to purchase a certain number of
shares of DVN Common Stock and (ii) the Amended and Restated Stock Option
Agreement dated the date hereof between PZE and DVN pursuant to which PZE
has granted to DVN an option to purchase a certain number of shares of PZE
Common Stock.
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Section 4.2 Conversion of DVN Stock, PZE Stock and Devon Oklahoma Stock.
(a) (i) At the Oklahoma Effective Time, each share of DVN Common Stock issued
and outstanding immediately prior to the Oklahoma Effective Time (other than
shares of DVN Common Stock (x) held in DVN's treasury or (y) owned by PZE,
Newco, Devon Oklahoma or any wholly owned Subsidiary (as defined in Section
10.15) of DVN or PZE) shall, by virtue of the Oklahoma Merger and without any
action on the part of the holder thereof, be converted into the number of
shares of Newco Common Stock equal to the DVN Exchange Ratio, subject to
adjustment as provided in Section 4.4.
(ii) At the Oklahoma Effective Time, each of the 2,900,000 issued and
outstanding trust convertible preferred securities of Devon Financing Trust
convertible into 1.6393 shares of DVN Common Stock shall, by virtue of the
Oklahoma Merger and without any action on the part of the holder thereof,
become convertible into 1.6393 shares of Newco Common Stock.
(iii) At the Oklahoma Effective Time, each share of Devon Oklahoma Common
Stock issued and outstanding immediately prior to the Oklahoma Effective Time
(other than shares of Devon Oklahoma Common Stock (x) held in Devon Oklahoma's
treasury or (y) owned by PZE, DVN or any wholly owned Subsidiary of DVN (other
than Newco) or PZE) shall, by virtue of the Oklahoma Merger and without any
other action on the part of the holder thereof, be converted into the number of
shares of the common stock of the Oklahoma Surviving Corporation equal to the
Devon Oklahoma Exchange Ratio.
(iv) At the Delaware Effective Time, each share of PZE Common Stock issued
and outstanding immediately prior to the Delaware Effective Time (other than
shares of PZE Common Stock (x) held in PZE's treasury or (y) owned by DVN,
Newco, Devon Oklahoma or any wholly owned Subsidiary of DVN or PZE) shall, by
virtue of the Delaware Merger and without any action on the part of the holder
thereof, be converted into the number of shares of Newco Common Stock equal to
PZE Exchange Ratio, subject to adjustment as provided in Section 4.4.
(v) At the Delaware Effective Time, each of the 1,500,000 shares of PZE
Preferred Stock designated as "6.49% Cumulative Preferred Stock, Series A"
issued and outstanding immediately prior to the Delaware Effective Time shall,
by virtue of the Delaware Merger and without any action on the part of the
holder thereof, be converted into one share of Newco Preferred Stock designated
as "6.49% Cumulative Preferred Stock, Series A."
(b) As a result of the Merger and without any action on the part of the
holders thereof, (i) each share of DVN Common Stock, PZE Common Stock and Devon
Oklahoma Common Stock shall cease to be outstanding and shall be canceled and
retired and shall cease to exist, and each holder of a certificate (a
"Certificate") representing any shares of DVN Common Stock, PZE Common Stock or
Devon Oklahoma Common Stock shall thereafter cease to have any rights with
respect to such shares of DVN Common Stock, PZE Common Stock or Devon Oklahoma
Common Stock, except that such Certificates shall thereafter evidence (x) the
number of whole shares of Newco Common Stock or common stock of the Oklahoma
Surviving Corporation, as the case may be, into which such shares are converted
pursuant to Section 4.2(a) and the right to receive any dividends or
distributions with respect thereto and (y), in the case of PZE Common Stock,
the right to receive cash for fractional shares of Newco Common Stock in
accordance with Sections 4.3(b) and 4.3(e) upon the surrender of such
Certificate, and (ii) the one share of Special Voting Stock, par value $.10 per
share ("DVN Special Voting Stock"), of DVN shall be converted into one share of
Special Voting Stock, par value $.10 per share, of Newco.
(c) Each share of Newco Common Stock issued and held in Newco's treasury, and
each share of Newco Common Stock owned by DVN, PZE, Devon Oklahoma or any other
wholly owned Subsidiary of DVN or PZE shall, at the Effective Time and by
virtue of the Merger, cease to be outstanding and shall be canceled and retired
without payment of any consideration therefor, and no Newco Common Stock or
other consideration shall be delivered in exchange therefor.
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(d) (i) At the Effective Time, all options (individually, a "PZE Option" or a
"DVN Option" and collectively, the "PZE Options" or the "DVN Options") then
outstanding under the stock option plans of DVN and PZE described in the DVN
Disclosure Letter (collectively, the "DVN Stock Option Plans") and PZE
Disclosure Letter (collectively, the "PZE Stock Option Plans"), respectively,
shall remain outstanding following the Effective Time and cease to represent a
right to acquire shares of DVN Common Stock and PZE Common Stock and shall be
converted automatically into options to purchase shares of Newco Common Stock
as provided in this Section 4.2(d). At the Effective Time, the DVN Options and
PZE Options shall, by virtue of the Merger and without any further action on
the part of DVN or PZE or the holder of any DVN Option or PZE Option, be
assumed by Newco in such manner that Newco (i) is a corporation "assuming a
stock option in a transaction to which section 424(a) applied" within the
meaning of section 424 of the Code or (ii) to the extent that section 424 of
the Code does not apply to any DVN Option or PZE Option, would be such a
corporation were section 424 of the Code applicable to such option. Each DVN
Option and PZE Option assumed by Newco shall be exercisable upon the same terms
and conditions as under the applicable DVN Stock Option Plan and PZE Stock
Option Plan and the applicable option agreement issued thereunder, except that
(i) each DVN Option and PZE Option shall be exercisable for that whole number
of shares of Newco Common Stock (rounded upward to the nearest whole share)
into which the number of shares of the DVN Common Stock or PZE Common Stock
subject to such DVN Option or PZE Option immediately prior to the Effective
Time would be converted under Section 4.2(a), and (ii) the option price per
share of Newco Common Stock shall be an amount equal to the option price per
share of DVN Common Stock or PZE Common Stock subject to such DVN Option or PZE
Option, as the case may be, in effect immediately prior to the Effective Time
divided by the DVN Exchange Ratio for DVN Options and the PZE Exchange Ratio
for PZE Options, subject to adjustment as provided in Section 4.4 (the price
per share, as so determined, being rounded upward to the nearest full cent).
(ii) Newco shall take all corporate action necessary to reserve for issuance
a number of shares of Newco Common Stock equal to the number of shares of Newco
Common Stock issuable upon the exercise of the DVN Options and PZE Options
assumed by Newco pursuant to this Section 4.2(d). From and after the date of
this Agreement, except as provided in Section 7.1(f), no additional options
shall be granted by DVN or PZE or their Subsidiaries under the DVN Stock Option
Plans or PZE Stock Option Plans or otherwise. At the Effective Time or as soon
as practicable, but in no event more than three business days, thereafter,
Newco shall file with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form S-8 covering all shares of Newco Common Stock to
be issued upon exercise of DVN Options and PZE Options and shall cause such
registration statement to remain effective for as long as there are outstanding
any DVN Options or PZE Options.
(e) Newco shall take such action as may be necessary to provide for (i)
succession of Newco for DVN under the Support Agreement dated as of December
10, 1998 between DVN and Northstar Energy Company ("Northstar") and the Voting
and Exchange Trust Agreement dated as of December 10, 1998 between DVN and CIBC
Mellon Trust Company; (ii) the making of changes to, or in the rights of
holders of, exchangeable shares of Northstar economically equivalent to the
exchange of Newco Common Stock for DVN Common Stock in the Merger (it being
understood that such economic equivalence shall be based solely on the DVN
Exchange Ratio) and (iii) the convertibility of Convertible Debentures (as
hereinafter defined) into Newco Common Stock, subject to the terms of the
Indenture (as hereinafter defined) and the Supplemental Indenture (as
hereinafter defined). "Indenture" means the Indenture, dated as of July 3,
1996, between Devon Energy Corporation and The Bank of New York, and
"Supplemental Indenture" means the First Supplemental Indenture, dated as of
July 3, 1996, between Devon Energy Corporation and The Bank of New York.
"Convertible Debentures" has the meaning assigned to such term in the
Supplemental Indenture.
Section 4.3 Exchange of Certificates Representing DVN Stock and PZE Stock.
(a) As of the Effective Time, Newco shall deposit, or shall cause to be
deposited, with Bankboston, N.A. or such other party reasonably satisfactory to
DVN and PZE (the "Exchange Agent"), for the benefit of the holders of shares of
DVN Common Stock and PZE Common Stock, for exchange in accordance with this
Article 4, certificates representing (i) the shares of Newco Common Stock (such
certificates for shares of
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Newco Common Stock, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund") to be issued
pursuant to Section 4.2 in exchange for outstanding shares of DVN Common Stock
and PZE Common Stock and (ii) the shares of Excess Stock (as defined in Section
4.3(e)) to be sold pursuant to Section 4.3(e) in lieu of issuing fractional
shares of Newco Common Stock.
(b) Promptly after the Effective Time, Newco shall cause the Exchange Agent
to mail to each holder of record of one or more Certificates (other than to
holders of DVN Common Stock or PZE Common Stock that, pursuant to Section
4.2(c), are canceled without payment of any consideration therefor): (A) a
letter of transmittal (the "Letter of Transmittal") which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as DVN and PZE may
reasonably specify and (B) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of Newco
Common Stock and cash in lieu of fractional shares. Upon surrender of a
Certificate for cancellation to the Exchange Agent together with such Letter of
Transmittal, duly executed and completed in accordance with the instructions
thereto, the holder of such Certificate shall be entitled to receive in
exchange therefor (x) a certificate representing that number of whole shares of
Newco Common Stock and (y) a check representing the amount of cash in lieu of
fractional shares, if any, and unpaid dividends and distributions, if any, in
respect of the Certificate surrendered pursuant to the provisions of this
Article 4, after giving effect to any required withholding tax, and the
Certificate so surrendered shall forthwith be canceled. No interest will be
paid or accrued on the cash in lieu of fractional shares and unpaid dividends
and distributions, if any, payable to holders of Certificates. In the event of
a transfer of ownership of DVN Common Stock or PZE Common Stock which is not
registered in the transfer records of DVN or PZE, a certificate representing
the proper number of shares of Newco Common Stock, together with a check for
the cash to be paid in lieu of fractional shares, shall be issued to such a
transferee if the Certificate representing such DVN Common Stock or PZE Common
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
(c) Notwithstanding any other provisions of this Agreement, no dividends or
other distributions declared or made after the Effective Time with respect to
Newco Common Stock with a record date after the Effective Time shall be paid
with respect to the shares represented by any Certificate until such
Certificate is surrendered for exchange as provided herein. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the holder of the certificates representing whole shares of
Newco Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to such
whole shares of Newco Common Stock and not paid, less the amount of any
withholding taxes which may be required thereon, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent
to surrender payable with respect to such whole shares of Newco Common Stock,
less the amount of any withholding taxes which may be required thereon.
(d) At or after the Effective Time, there shall be no transfers on the stock
transfer books of DVN or PZE of the shares of DVN Common Stock or PZE Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to Newco, the presented
Certificates shall be canceled and exchanged for certificates for shares of
Newco Common Stock and cash in lieu of fractional shares, if any, deliverable
in respect thereof pursuant to this Agreement in accordance with the procedures
set forth in this Article 4.
(e) No fraction of a share of Newco Common Stock will be issued, but in lieu
thereof each holder of PZE Common Stock otherwise entitled to receive a
fraction of a share of Newco Common Stock will be entitled to receive in
accordance with the provisions of this Section 4.3(e) from the Exchange Agent a
cash payment in lieu of such fraction of a share of Newco Common Stock
representing such holder's proportionate interest in the net proceeds from the
sale by the Exchange Agent on behalf of all such holders of the aggregate of
the fractions of shares of Newco Common Stock which would otherwise be issued
(the "Excess Stock"). The sale of the Excess Stock by the Exchange Agent shall
be executed on the principal national securities exchange on
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which Newco Common Stock is trading immediately after the Effective Time (the
"Principal Exchange") through one or more member firms of the Principal
Exchange and shall be executed in round lots to the extent practicable. Until
the net proceeds of such sale or sales have been distributed to the holders of
PZE Common Stock, the Exchange Agent will hold such proceeds in trust for the
holders of PZE Common Stock (the "Common Stock Trust"). Newco shall pay all
commissions, transfer taxes and other out-of-pocket transactions costs,
including the expenses and compensation, of the Exchange Agent incurred in
connection with such sale of the Excess Stock. The Exchange Agent shall
determine the portion of the Common Stock Trust to which each holder of PZE
Common Stock shall be entitled, if any, by multiplying the amount of the
aggregate net proceeds comprising the Common Stock Trust by a fraction the
numerator of which is the amount of the fractional Newco Common Stock interest
to which such holder of PZE Common Stock is entitled and the denominator of
which is the aggregate amount of fractional share interest to which all holders
of PZE Common Stock are entitled. As soon as practicable after the
determination of the amount of cash, if any, to be paid to holders of PZE
Common Stock in lieu of any fractional Newco Common Stock interests, the
Exchange Agent shall make available such amounts to such holders of PZE Common
Stock without interest.
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Newco Common Stock) and the Common Stock
Trust that remains unclaimed by the former stockholders of the DVN or PZE one
year after the Effective Time shall be delivered to Newco. Any former
stockholders of DVN or PZE who have not theretofore complied with this Article
4 shall thereafter look only to Newco for payment of their shares of Newco
Common Stock, cash in lieu of fractional shares and unpaid dividends and
distributions on the Newco Common Stock deliverable in respect of each
Certificate such former stockholder holds as determined pursuant to this
Agreement.
(g) None of Newco, the Exchange Agent or any other person shall be liable to
any former holder of shares of DVN Common Stock or PZE Common Stock for any
amount properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(h) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by Newco, the
posting by such person of a bond in such reasonable amount as Newco may direct
as indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Newco Common Stock and cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of Newco
Common Stock deliverable in respect thereof pursuant to this Agreement.
(i) Promptly after the Effective Time, Newco shall take all such steps
necessary to issue a new single global stock certificate registered in the name
of Cede & Co., as nominee of The Depository Trust Company ("DTC"), representing
shares of Newco Preferred Stock into which shares of PZE Preferred Stock are
converted in the Merger, and to fully effect the conversion of PZE Preferred
Stock into Newco Preferred Stock in the DTC system for all purposes, including
with respect to payments of dividends and transfers of beneficial ownership.
Without limiting the foregoing, dividends declared or made after the Effective
Time with respect to PZE Preferred Stock or Newco Preferred Stock shall be paid
to Cede & Co., as nominee of DTC, for crediting to accounts of holders of Newco
Preferred Stock.
Section 4.4 Adjustment of Exchange Ratios. In the event that, subsequent to
the date of this Agreement but prior to the Effective Time, PZE changes the
number of shares of PZE Common Stock, or DVN changes the number of shares of
DVN Common Stock, issued and outstanding as a result of a stock split, reverse
stock split, stock dividend, recapitalization or other similar transaction, the
DVN Exchange Ratio or the PZE Exchange Ratio, as the case may be, and other
items dependent thereon shall be appropriately adjusted.
Section 4.5 Rule 16b-3 Approval. Newco agrees that the Newco Board of
Directors or the Compensation Committee of the Newco Board of Directors shall
at or prior to the Effective Time adopt resolutions specifically approving, for
purposes of Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the receipt, pursuant to Section 4.2, of
Newco Common Stock and Newco stock options by officers and directors of the DVN
and PZE who will become officers or directors of the Newco subject to Section
16 of the Exchange Act.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PZE
Except as set forth in the disclosure letter delivered to DVN concurrently
with the execution of the Original Merger Agreement (the "PZE Disclosure
Letter") or as disclosed with reasonable specificity in PZE Reports (as defined
in Section 5.7), PZE represents and warrants to DVN that:
Section 5.1 Existence; Good Standing; Corporate Authority. PZE is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation. PZE is duly qualified to do business
as a foreign corporation and is in good standing under the laws of any
jurisdiction in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except where the failure to be so qualified would not have,
individually or in the aggregate, a PZE Material Adverse Effect (as defined in
Section 10.9). PZE has all requisite corporate power and authority to own,
operate and lease its properties and to carry on its business as now conducted.
The copies of PZE's certificate of incorporation and bylaws previously made
available to DVN are true and correct and contain all amendments as of the date
hereof.
Section 5.2 Authorization, Validity and Effect of Agreements. PZE has the
requisite corporate power and authority to execute and deliver this Agreement,
the Stock Option Agreements and all other agreements and documents contemplated
hereby. The consummation by PZE of the transactions contemplated hereby and by
the Stock Option Agreements has been duly authorized by all requisite corporate
action, other than, with respect to the Merger, the approval and adoption of
this Agreement by PZE's stockholders. This Agreement and the Stock Option
Agreements constitute the valid and legally binding obligations of PZE,
enforceable in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
Section 5.3 Capitalization. The authorized capital stock of PZE consists of
100,000,000 shares of PZE Common Stock, 27,862,924 shares of preference common
stock, par value $0.83 1/3 per share, of PZE ("PZE Preference Stock") and
9,747,720 shares of PZE Preferred Stock. As of May 18, 1999, there were (a)
47,959,145 shares of PZE Common Stock issued and outstanding, (b) 4,796,374
shares of PZE Common Stock reserved for issuance under PZE Stock Option Plans,
(c) no shares of PZE Preference Stock issued and outstanding, (d) 1,500,000
shares of PZE Preferred Stock issued and outstanding and (e) 750,000 unissued
shares of PZE Preferred Stock designated as Series A Junior Participating
Preferred Stock. All issued and outstanding shares of PZE Common Stock and PZE
Preferred Stock (i) are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights, (ii) were not issued in violation
of the terms of any agreement or other understanding binding upon PZE and (iii)
were issued in compliance with all applicable charter documents of PZE and all
applicable federal and state securities laws, rules and regulations. One right
to purchase Series A Junior Participating Preferred Stock of PZE (each, a "PZE
Right") issued pursuant to a Rights Agreement, dated as of October 28, 1994
(the "PZE Rights Agreement"), as amended, between PZE and The Chase Manhattan
Bank, is associated with and attached to each outstanding share of PZE Common
Stock. As of the date of this Agreement, except as set forth in this Section
5.3 or in the Stock Option Agreements and except for any shares of PZE Common
Stock issued pursuant to plans described in PZE Disclosure Letter, there are no
outstanding shares of capital stock and there are no options, warrants, calls,
subscriptions, convertible securities or other rights, agreements or
commitments which obligate PZE or any of its Subsidiaries to issue, transfer or
sell any shares of capital stock or other voting securities of PZE or any of
its Subsidiaries. PZE has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or which are
convertible into or exercisable for securities having the right to vote) with
the stockholders of PZE on any matter.
Section 5.4 Significant Subsidiaries. For purposes of this Agreement,
"Significant Subsidiary" shall mean significant subsidiary as defined in Rule
1-02 of Regulation S-X of the Exchange Act. Each of PZE's Significant
Subsidiaries is a corporation or partnership duly organized, validly existing
and in good standing
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(where applicable) under the laws of its jurisdiction of incorporation or
organization, has the corporate or partnership power and authority to own,
operate and lease its properties and to carry on its business as it is now
being conducted, and is duly qualified to do business and is in good standing
(where applicable) in each jurisdiction in which the ownership, operation or
lease of its property or the conduct of its business requires such
qualification, except for jurisdictions in which such failure to be so
qualified or to be in good standing would not have, individually or in the
aggregate, a PZE Material Adverse Effect. All of the outstanding shares of
capital stock of, or other ownership interests in, each of PZE's Significant
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable,
and is owned, directly or indirectly, by PZE free and clear of all liens,
pledges, security interests, claims, preferential purchase rights or other
rights, interests or encumbrances ("Liens"). Schedule 5.4 to PZE Disclosure
Letter sets forth for each Significant Subsidiary of PZE, its name and
jurisdiction of incorporation or organization.
Section 5.5 No Violation. Neither PZE nor any of its Subsidiaries is, or has
received notice that it would be with the passage of time, in violation of any
term, condition or provision of (a) its charter documents or bylaws, (b) any
loan or credit agreement, note, bond, mortgage, indenture, contract, agreement,
lease, license or other instrument or (c) any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance, governmental
rule or regulation to which PZE or any of its Subsidiaries or any of their
respective properties or assets is subject, or is delinquent with respect to
any report required to be filed with any governmental entity, except, in the
case of matters described in clause (b) or (c), as would not have, individually
or in the aggregate, a PZE Material Adverse Effect. PZE and its Subsidiaries
hold all permits, licenses, variances, exemptions, orders, franchises and
approvals of all governmental authorities necessary for the lawful conduct of
their respective businesses (the "PZE Permits"), except where the failure so to
hold would not have, individually or in the aggregate, a PZE Material Adverse
Effect. PZE and its Subsidiaries are in compliance with the terms of PZE
Permits, except where the failure so to comply would not have, individually or
in the aggregate, a PZE Material Adverse Effect. No investigation by any
governmental authority with respect to PZE or any of its Subsidiaries is
pending or, to the knowledge of PZE, threatened, other than those the outcome
of which would not have, individually or in the aggregate, a PZE Material
Adverse Effect.
Section 5.6 No Conflict.
(a) Neither the execution and delivery by PZE of this Agreement or the Stock
Option Agreements nor the consummation by PZE of the transactions contemplated
hereby or thereby in accordance with the terms hereof or thereof will: (i)
conflict with or result in a breach of any provisions of the articles of
incorporation or bylaws of PZE; (ii) violate, or conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result
in the termination or in a right of termination or cancellation of, or give
rise to a right of purchase under, or accelerate the performance required by,
or result in the creation of any Lien upon any of the properties of PZE or its
Subsidiaries under, or result in being declared void, voidable, or without
further binding effect, or otherwise result in a detriment to PZE or any of its
Subsidiaries under, any of the terms, conditions or provisions of, any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit, lease,
contract, agreement, joint venture or other instrument or obligation to which
PZE or any of its Subsidiaries is a party, or by which PZE or any of its
Subsidiaries or any of their properties is bound or affected; or (iii)
contravene or conflict with or constitute a violation of any provision of any
law, rule, regulation, judgment, order or decree binding upon or applicable to
PZE or any of its Subsidiaries, except, in the case of matters described in
clause (ii) or (iii), as would not have, individually or in the aggregate, a
PZE Material Adverse Effect.
(b) Neither the execution and delivery by PZE of this Agreement or the Stock
Option Agreements nor the consummation by PZE of the transactions contemplated
hereby or thereby in accordance with the terms hereof or thereof will require
any consent, approval or authorization of, or filing or registration with, any
governmental or regulatory authority, other than (i) the filings provided for
in Article 1 and (ii) filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the Exchange Act, the
Securities Act or applicable state securities and "Blue Sky" laws and
applicable foreign competition or
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antitrust laws ((i) and (ii) collectively, the "Regulatory Filings"), and
listing on the New York Stock Exchange ("NYSE") of PZE Common Stock to be
issued upon exercise of the option granted to DVN pursuant to the applicable
Stock Option Agreement, except for any consent, approval or authorization the
failure of which to obtain and for any filing or registration the failure of
which to make would not prevent or materially delay the consummation of the
Merger or otherwise prevent PZE from performing its obligations under this
Agreement and would not have, individually or in the aggregate, a PZE Material
Adverse Effect.
(c) Other than as contemplated by Section 5.6(b), no consents, assignments,
waivers, authorizations or other certificates are necessary in connection with
the transactions contemplated hereby to provide for the continuation in full
force and effect of all of PZE's material contracts or leases or for PZE to
consummate the transactions contemplated hereby, except when the failure to
receive such consents or other certificates would not have, individually or in
the aggregate, a PZE Material Adverse Effect.
(d) Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will: (a) result in any payment from
PZE or its Subsidiaries (including severance, unemployment compensation,
parachute payment, bonus or otherwise) becoming due to any director, employee
or independent contractor of PZE or any of its Subsidiaries under any PZE Plan
(as defined in Section 5.11) or otherwise; (b) materially increase any benefits
otherwise payable under any PZE Plan or otherwise; or (c) result in the
acceleration of the time of payment or vesting of any such benefits.
Section 5.7 SEC Documents. PZE has made available to DVN each registration
statement, report, proxy statement or information statement (other than
preliminary materials) filed by PZE with the SEC since January 1, 1998, each in
the form (including exhibits and any amendments thereto) filed with the SEC
prior to the date hereof (collectively, the "PZE Reports"), and PZE has filed
all forms, reports and documents required to be filed by it with the SEC
pursuant to relevant securities statutes, regulations, policies and rules since
such time. As of their respective dates, PZE Reports (i) were prepared in all
material respects in accordance with the applicable requirements of the
Securities Act, the Exchange Act, and the rules and regulations thereunder and
complied in all material respects with the then applicable accounting
requirements and (ii) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading except for such statements, if any, as have been
modified by subsequent filings with the SEC prior to the date hereof. Each of
the consolidated balance sheets included in or incorporated by reference into
PZE Reports (including the related notes and schedules) fairly presents in all
material respects the consolidated financial position of PZE and its
Subsidiaries as of its date and each of the consolidated statements of income,
comprehensive income, cash flows and stockholders' equity included in or
incorporated by reference into PZE Reports (including any related notes and
schedules) fairly presents in all material respects the results of operations,
cash flows or changes in stockholders' equity, as the case may be, of PZE and
its Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to such exceptions as may be permitted by Form 10-Q of
the SEC), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may be
noted therein. Since December 31, 1998, neither PZE nor any of its Subsidiaries
had any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise), other than liabilities or obligations disclosed in
PZE Reports or which would not have, individually or in the aggregate, a PZE
Material Adverse Effect.
Section 5.8 Litigation. There are no actions, suits or proceedings pending
against PZE or any of its Subsidiaries or, to PZE's knowledge, threatened
against PZE or any of its Subsidiaries, at law or in equity, or before or by
any federal, state or foreign commission, board, bureau, agency or
instrumentality, that are likely to have, individually or in the aggregate, a
PZE Material Adverse Effect. There are no outstanding judgments, decrees,
injunctions, awards or orders against PZE or any of its Subsidiaries that are
likely to have, individually or in the aggregate, a PZE Material Adverse
Effect.
Section 5.9 Absence of Certain Changes. Since December 31, 1998, there has
not been (i) an event that would have a PZE Material Adverse Effect; (ii) any
material change by PZE or any of its Subsidiaries, when taken as a whole, in
any of its accounting methods, principles or practices or any of its tax
methods, practices
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or elections; (iii) any material damage, destruction, or loss to the business
or properties of PZE and its Subsidiaries, taken as a whole, not covered by
insurance; (iv) any declaration, setting aside or payment of any dividend or
other distribution in respect of the capital stock of PZE, or any direct or
indirect redemption, purchase or any other acquisition by PZE of any such stock
(except for, and provided that PZE may continue to pay, dividends upon the
shares of PZE Common Stock and PZE Preferred Stock at a rate not greater than
$0.0625 per share and $1.6225 per share, respectively, in any quarter); (v) any
change in the capital stock or in the number of shares or classes of PZE's
authorized or outstanding capital stock (other than as a result of exercises of
options to purchase PZE Common Stock outstanding or issued as permitted
hereunder); (vi) any increase in or establishment of any bonus, insurance,
severance, deferred compensation, pension, retirement, profit sharing, stock
option, stock purchase or other employee benefit plan, except in the ordinary
course of business; or (vii) any other event or condition known to PZE
particularly pertaining to and adversely affecting the operations, assets or
business of PZE or any of its Subsidiaries (other than events or conditions
which are of a general or industry-wide nature and of general public knowledge)
which would constitute, individually or in the aggregate, a PZE Material
Adverse Effect.
Section 5.10 Taxes.
(a) Each of PZE, its Subsidiaries and each affiliated, consolidated,
combined, unitary or similar group of which any such corporation is or was a
member has (i) duly filed (or there has been filed on its behalf) on a timely
basis (taking into account any extensions of time to file before the date
hereof) with appropriate governmental authorities all tax returns, statements,
reports, declarations, estimates and forms ("Returns") required to be filed by
or with respect to it, except to the extent that any failure to file would not
have, individually or in the aggregate, a PZE Material Adverse Effect, and (ii)
duly paid or deposited in full on a timely basis or made adequate provisions in
accordance with generally accepted accounting principles (or there has been
paid or deposited or adequate provision has been made on its behalf) for the
payment of all taxes required to be paid by it other than those being contested
in good faith by PZE or a Subsidiary of PZE and except to the extent that any
failure to pay or deposit or make adequate provision for the payment of such
taxes would not have, individually or in the aggregate, a PZE Material Adverse
Effect.
(b) (i) The federal income tax returns of PZE and each of its Subsidiaries
have been examined by the Internal Revenue Service (the "IRS") (or the
applicable statutes of limitation for the assessment of federal income taxes
for such periods have expired) for all periods; (ii) except to the extent being
contested in good faith, all material deficiencies asserted as a result of such
examinations and any other examinations of PZE and its Subsidiaries by any
taxing authority have been paid fully, settled or adequately provided for in
the financial statements contained in PZE Reports; (iii) as of the date hereof,
neither PZE nor any of its Subsidiaries has granted any requests, agreements,
consents or waivers to extend the statutory period of limitations applicable to
the assessment of any taxes with respect to any Returns of PZE or any of its
Subsidiaries; (iv) neither PZE nor any of its Subsidiaries is a party to, is
bound by or has any obligation under any tax sharing, allocation or indemnity
agreement or any similar agreement or arrangement that would have, individually
or in the aggregate, a PZE Material Adverse Effect; (v) there are no tax liens
on any assets of PZE or its Subsidiaries except for taxes not yet currently due
and those which could not reasonably be expected, individually or in the
aggregate, to result in a PZE Material Adverse Effect; and (vi) neither PZE nor
any of its Subsidiaries is a party to an agreement that provides for the
payment of any amount that would constitute a "parachute payment" within the
meaning of Section 280G of the Code.
For purposes of this Agreement, "tax" or "taxes" means all federal, state,
county, local, foreign or other net income, gross income, gross receipts,
sales, use, ad valorem, transfer, accumulated earnings, personal holding,
excess profits, franchise, profits, license, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, disability, capital
stock, or windfall profits taxes, customs duties or other taxes, fees,
assessments or governmental charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority (domestic or foreign).
Section 5.11 Employee Benefit Plans. For purposes of this Section 5.11, PZE
Subsidiaries shall include any enterprise which, with PZE, forms or formed a
controlled group of corporations, a group of trades or
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business under common control or an affiliated service group, within the
meaning of Section 414(b), (c) or (m) of the Code. All employee benefits plans,
programs, arrangements and agreements covering active, former or retired
employees of PZE and PZE Subsidiaries which provide material benefits to such
employees are listed in PZE Disclosure Letter (the "PZE Plans"). PZE has made
available to DVN true, complete and correct copies of each PZE Plan, any
related trust agreement, annuity or insurance contract or other funding
vehicle, and: (a) each PZE Plan has been maintained and administered in
material compliance with its terms and is, to the extent required by applicable
law or contract, fully funded without having any deficit or unfunded actuarial
liability or adequate provision has been made therefor; (b) all required
employer contributions under any such plans have been made and the applicable
funds have been funded in accordance with the terms thereof, (c) each PZE Plan
that is required or intended to be qualified under applicable law or registered
or approved by a governmental agency or authority has been so qualified,
registered or approved by the appropriate governmental agency or authority, and
nothing has occurred since the date of the last qualification, registration or
approval to adversely affect, or cause, the appropriate governmental agency or
authority to revoke such qualification, registration or approval; (d) to the
extent applicable, PZE Plans comply, in all material respects, with the
requirements of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the Code and any other applicable tax act and other laws, and any
PZE Plan intended to be qualified under Section 401(a) of the Code has been
determined by the Internal Revenue Service to be so qualified and nothing has
occurred to cause the loss of such qualified status; (e) no PZE Plan is covered
by Title IV of ERISA or Section 412 of the Code; (f) there are no pending or
anticipated material claims against or otherwise involving any of PZE Plans and
no suit, action or other litigation (excluding claims for benefits incurred in
the ordinary course of PZE Plan activities) has been brought against or with
respect to any PZE Plan; (g) all material contributions, reserves or premium
payments, required to be made as of the date hereof to PZE Plans have been made
or provided for; (h) neither PZE nor any PZE Subsidiary has incurred or
reasonably expects to incur any liability under subtitle C or D of Title IV of
ERISA with respect to any "single-employer plan," within the meaning of Section
4001(a)(15) of ERISA, currently or formerly maintained by PZE, any PZE
Subsidiary or any entity which is considered one employer with PZE under
Section 4001 of ERISA; (i) neither PZE nor any PZE Subsidiary has incurred or
reasonably expects to incur any withdrawal liability under Subtitle E of Title
IV of ERISA with respect to any "multi-employer plan," within the meaning of
Section 4001(a)(3) of ERISA; and (j) neither PZE nor any PZE Subsidiary has any
material obligations for retiree health and life benefits under any PZE Plan.
Section 5.12 Labor Matters.
(a) Neither PZE nor any of its Subsidiaries is a party to, or bound by,
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization.
(b) Neither PZE nor any of its Subsidiaries is subject to a dispute,
strike or work stoppage with respect to any collective bargaining
agreement, contract or other agreement or understanding with a labor union
or labor organization to which it is a party or by which it is bound which
would have, individually or in the aggregate, a PZE Material Adverse
Effect.
(c) To PZE's knowledge, there are no organizational efforts with respect
to the formation of a collective bargaining unit presently being made or
threatened involving employees of PZE or any of its Subsidiaries except for
those the formation of which would not have, individually or in the
aggregate, a PZE Material Adverse Effect.
Section 5.13 Environmental Matters. Except as would not have, individually or
in the aggregate, a PZE Material Adverse Effect:
(a) there are not any present or, to the knowledge of PZE, past conditions or
circumstances that interfere with the conduct of the business of PZE and each
of its Subsidiaries in the manner now conducted or which interfere with
compliance with any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or regulation
related to human health or the environment ("Environmental Law");
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(b) there are not any present or, to the knowledge of PZE, past conditions or
circumstances at, or arising out of, any current or, to the knowledge of PZE,
former businesses, assets or properties of PZE or any Subsidiary of PZE,
including but not limited to on-site or off-site disposal or release of any
chemical substance, product or waste, which constitute a violation under any
Environmental Law or could reasonably be expected to give rise to: (i)
liabilities or obligations for any cleanup, remediation, disposal or corrective
action under any Environmental Law or (ii) claims arising for personal injury,
property damage, or damage to natural resources;
(c) neither PZE nor any of its Subsidiaries has (i) received any written
notice of noncompliance with, violation of, or liability or potential liability
under any Environmental Law, (ii) received any written notice regarding any
existing, pending or threatened investigation or inquiry related to alleged
violations under any Environmental Laws or regarding any claims for remedial
obligations or contribution under any Environmental Laws or (iii) entered into
any consent decree or order or is subject to any order of any court or
governmental authority or tribunal under any Environmental Law or relating to
the cleanup of any hazardous materials contamination;
(d) PZE and its Subsidiaries have in full force and effect all material
environmental permits, licenses, approvals and other authorizations required to
conduct their operations and are operating in material compliance thereunder;
and
(e) PZE does not know of any reason that would preclude it from renewing or
obtaining a reissuance of the material permits, licenses or other
authorizations required pursuant to any applicable Environmental Laws to
operate and use any of PZE's or its Subsidiaries' assets for their current
purposes and uses.
Section 5.14 Intellectual Property. PZE and its Subsidiaries own or possess
adequate licenses or other valid rights to use all patents, patent rights,
trademarks, trademark rights and proprietary information used or held for use
in connection with their respective businesses as currently being conducted,
free and clear of material Liens, except where the failure to own or possess
such licenses and other rights would not have, individually or in the
aggregate, a PZE Material Adverse Effect, and there are no assertions or claims
challenging the validity of any of the foregoing which are likely to have,
individually or in the aggregate, a PZE Material Adverse Effect. Except in the
ordinary course of business, neither PZE nor any of its Subsidiaries has
granted to any other person any license to use any of the foregoing. The
conduct of PZE's and its Subsidiaries' respective businesses as currently
conducted does not conflict with any patents, patent rights, licenses,
trademarks, trademark rights, trade names, trade name rights or copyrights of
others in any way likely to have, individually or in the aggregate, a PZE
Material Adverse Effect. There is no material infringement of any proprietary
right owned by or licensed by or to PZE or any of its Subsidiaries which is
likely to have, individually or in the aggregate, a PZE Material Adverse
Effect. PZE has initiated a review of the implications of the Year 2000 on its
business and processes, including an evaluation of key operating and
information systems, field operations and third parties and confirms the public
disclosure provided by it in respect thereof.
Section 5.15 Title to Properties. Except for goods and other property sold,
used or otherwise disposed of since December 31, 1998 in the ordinary course of
business for fair value, PZE has defensible title for oil and gas purposes to
all its properties, interests in properties and assets, real and personal,
reflected in its December 31, 1998 financial statements, free and clear of any
Lien, except: (a) Liens reflected in the balance sheet of PZE as of December
31, 1998; (b) Liens for current taxes not yet due and payable and (c) such
imperfections of title, easements and Liens as would not have, individually or
in the aggregate, a PZE Material Adverse Effect. All leases and other
agreements pursuant to which PZE or any of its Subsidiaries leases or otherwise
acquires or obtains operating rights affecting any real or personal property
are in good standing, valid, and effective; and there is not, under any such
leases, any existing or prospective default or event of default or event which
with notice or lapse of time, or both, would constitute a default by PZE or any
of its Subsidiaries which, individually or in the aggregate, would have a PZE
Material Adverse Effect and in respect to which PZE or any of its Subsidiaries
has not taken adequate steps to prevent a default from occurring. All major
items of operating equipment of PZE and its Subsidiaries are in good operating
condition and in a state of reasonable maintenance and repair, ordinary wear
and tear excepted. Without limiting the generality of the foregoing, PZE's
interest in production of hydrocarbons from each well, unit or property
described in the report of Ryder Scott PZE Petroleum Engineers dated February
19, 1999 and delivered to DVN (after deducting all
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applicable royalties, overriding royalties and other payments out of
production) is not materially less than the interest shown under the heading
"Net Revenue Interest" for such well, unit on property, and PZE's share of
exploration, development and operation costs for each such well, unit or
property is not materially greater than the percentage shown under the heading
"Working Interest" for such well, unit or property. PZE has not received any
material advance, take-or-pay or other similar payments that entitle purchasers
of production to receive deliveries of hydrocarbons without paying therefor,
and has not taken or received any hydrocarbons under any gas balancing or
similar arrangements that permit any person to receive any portion of PZE's
interest in such hydrocarbons.
Section 5.16 Insurance. PZE and its Subsidiaries maintain insurance coverage
reasonably adequate for the operation of their respective businesses (taking
into account the cost and availability of such insurance).
Section 5.17 No Brokers. PZE has not entered into any contract, arrangement
or understanding with any person or firm which may result in the obligation of
Newco, PZE or DVN to pay any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except
that PZE has retained J. P. Morgan Securities Inc. as its financial advisor,
the arrangements with which have been disclosed in writing to DVN prior to the
date hereof.
Section 5.18 Opinion of Financial Advisor. The Board of Directors of PZE has
received the opinion of J. P. Morgan Securities Inc. to the effect that, as of
the date of this Agreement, the consideration to be received by PZE
stockholders in the Merger is fair, from a financial point of view, to such
stockholders; it being understood and acknowledged by DVN that such opinion has
been rendered for the benefit of the Board of Directors of PZE, and is not
intended to, and may not, be relied upon by DVN, its affiliates or their
respective Subsidiaries.
Section 5.19 DVN Stock Ownership. Neither PZE nor any of its Subsidiaries
owns any shares of capital stock of DVN or any other securities convertible
into or otherwise exercisable to acquire capital stock of DVN.
Section 5.20 Reorganization. Neither PZE nor any of its Subsidiaries has
taken or failed to take any action, as a result of which the Merger would not
qualify as a reorganization within the meaning of Section 368(a) of the Code.
Section 5.21 Vote Required. The affirmative vote of holders of a majority of
the outstanding shares of PZE Common Stock required by the DGCL is the only
vote necessary to approve this Agreement and the transactions contemplated
hereby.
Section 5.22 PZE Rights Agreement. PZE has taken all required action under
PZE Rights Agreement so that none of the execution and delivery of this
Agreement or the Stock Option Agreements, the conversion of shares of PZE
Common Stock into Newco Common Stock in accordance with Article 4 of this
Agreement, the issuance of shares of PZE Common Stock upon exercise of the
option granted to DVN pursuant to the applicable Stock Option Agreement, and
the consummation of the Merger or any other transaction contemplated hereby or
by the Stock Option Agreement, will cause (i) PZE Rights to become exercisable
under PZE Rights Agreement, (ii) Newco or DVN or any of their Subsidiaries to
be deemed an "Acquiring Person" (as defined in PZE Rights Agreement), (iii) any
such event to be an event described in Section 11(a)(ii) or 13 of PZE Rights
Agreement or (iv) the "Stock Acquisition Date" or the "Distribution Date" (each
as defined in PZE Rights Agreement) to occur upon any such event, and so that
PZE Rights will expire immediately prior to the Effective Time. PZE has
delivered to DVN a true and complete copy of PZE Rights Agreement, as amended
to date.
Section 5.23 Certain Approvals. PZE's Board of Directors has taken any and
all necessary and appropriate action to render inapplicable to the Merger and
the transactions contemplated by this Agreement and the Stock Option Agreements
the provisions of Section 203 of the DGCL.
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Section 5.24 Certain Contracts. Neither PZE nor any of its Subsidiaries is a
party to or bound by (i) any non-competition agreement or any other agreement
or obligation which purports to limit the manner in which, or the localities in
which, the current business of PZE and its Subsidiaries, taken as a whole, or
the DVN and its Subsidiaries, taken as a whole, is conducted or (ii) any
executory agreement or obligation which pertains to the acquisition or
disposition of any asset, or which provides any third party any lien, claim or
preferential right with regard thereto, except in each case for any such
agreements or obligations which would not have, individually or in the
aggregate, a PZE Material Adverse Effect.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF DVN,
NEWCO AND DEVON OKLAHOMA
Except as set forth in the disclosure letter delivered to PZE concurrently
with the execution of the Original Merger Agreement (the "DVN Disclosure
Letter") or as disclosed with reasonable specificity in the DVN Reports (as
defined in Section 6.7), DVN, Newco and Devon Oklahoma, jointly and severally,
represent and warrant to PZE that:
Section 6.1 Existence; Good Standing; Corporate Authority. DVN, Newco and
Devon Oklahoma are corporations duly incorporated, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation. DVN
is duly qualified to do business as a foreign corporation and is in good
standing under the laws of any jurisdiction in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be so
qualified would not have, individually or in the aggregate, a DVN Material
Adverse Effect (as defined in Section 10.9). DVN has all requisite corporate
power and authority to own, operate and lease its properties and to carry on
its business as now conducted. The copies of DVN's certificate of incorporation
and bylaws previously made available to PZE are true and correct and contain
all amendments as of the date hereof.
Section 6.2 Authorization, Validity and Effect of Agreements. Each of DVN,
Newco and Devon Oklahoma has the requisite corporate power and authority to
execute and deliver this Agreement, the Stock Option Agreements and all other
agreements and documents contemplated hereby to which it is a party. The
consummation by each of DVN, Newco and Devon Oklahoma of the transactions
contemplated hereby including the issuance and delivery by Newco of shares of
Newco Common Stock pursuant to the Merger, and the consummation by DVN of the
transactions contemplated by the Stock Option Agreements, has been duly
authorized by all requisite corporate action, other than, with respect to the
Merger, approval and adoption of this Agreement by DVN's stockholders. This
Agreement and the Stock Option Agreements constitute the valid and legally
binding obligations of each of DVN, Newco and Devon Oklahoma to the extent it
is a party, enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
Section 6.3 Capitalization. The authorized capital stock of DVN consists of
400,000,000 shares of DVN Common Stock, one share of DVN Special Voting Stock
and 3,000,000 shares of preferred stock, par value $1.00 per share, of DVN
("DVN Preferred Stock"). As of April 30, 1999, there were (a) 43,148,097 shares
of DVN Common Stock issued and outstanding, (b) one share of DVN Special Voting
Stock issued and outstanding, (c) 4,949,708 shares of DVN Common Stock reserved
for issuance under DVN Stock Option Plans, (d) 5,495,401 shares reserved for
issuance upon exchange of outstanding exchangeable shares ("Northstar
Exchangeable Shares") issued by Northstar, (e) 4,901,504 shares of DVN Common
Stock reserved for issuance upon conversion of outstanding trust convertible
preferred securities issued by DVN's wholly owned affiliate, Devon Financing
Trust, (f) no shares of DVN Preferred Stock issued and outstanding and (g)
300,000 unissued shares of DVN Preferred Stock designated as Series A Junior
Participating Preferred Stock. All issued and outstanding shares of DVN Common
Stock (i) are duly authorized, validly issued, fully paid, nonassessable and,
except as set forth in the DVN Disclosure Letter, free of preemptive rights,
(ii) were not
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issued in violation of the terms of any agreement or other understanding
binding upon DVN and (iii) were issued in compliance with all applicable
charter documents of DVN and all applicable federal and state securities laws,
rules and regulations. One right to purchase Series A Junior Participating
Preferred Stock of DVN (each, a "DVN Right") issued pursuant to a Rights
Agreement, dated as of April 17, 1995 (the "DVN Rights Agreement"), as amended,
between DVN and The First National Bank of Boston, is associated with and
attached to each outstanding share of DVN Common Stock. The shares of Newco
Common Stock to be issued in connection with the Merger, when issued in
accordance with this Agreement, will be validly issued, fully paid and
nonassessable. As of the date of this Agreement, except as set forth in this
Section 6.3 or in the Stock Option Agreements and except for any shares of DVN
Common Stock issued pursuant to the plans described in the DVN Disclosure
Letter, there are no outstanding shares of capital stock and there are no
options, warrants, calls, subscriptions, convertible securities, or other
rights, agreements or commitments which obligate DVN or any of its Subsidiaries
to issue, transfer or sell any shares of capital stock or other voting
securities of DVN or any of its Subsidiaries. DVN has no outstanding bonds,
debentures, notes or other obligations the holders of which have the right to
vote (or which are convertible into or exercisable for securities having the
right to vote) with the stockholders of DVN on any matter.
Section 6.4 Significant Subsidiaries.
(a) Each of DVN's Significant Subsidiaries is a corporation or partnership
duly organized, validly existing and in good standing (where applicable) under
the laws of its jurisdiction of incorporation or organization, has the
corporate or partnership power and authority to own, operate and lease its
properties and to carry on its business as it is now being conducted, and is
duly qualified to do business and is in good standing (where applicable) in
each jurisdiction in which the ownership, operation or lease of its property or
the conduct of its business requires such qualification, except for
jurisdictions in which such failure to be so qualified or to be in good
standing would not have, individually or in the aggregate, a DVN Material
Adverse Effect. All of the outstanding shares of capital stock of, or other
ownership interests in, each of DVN's Significant Subsidiaries is duly
authorized, validly issued, fully paid and nonassessable, and is owned,
directly or indirectly, by DVN free and clear of all Liens. Schedule 6.4 to the
DVN Disclosure Letter sets forth for each Significant Subsidiary of DVN its
name and jurisdiction of incorporation or organization.
(b) All of the outstanding shares of capital stock of Newco are owned
directly by DVN. Newco was formed solely for the purpose of engaging in the
transactions contemplated hereby and has not engaged in any activities other
than in connection with the transactions contemplated by this Agreement.
(c) All of the outstanding shares of capital stock of Devon Oklahoma are
owned directly by Newco. Devon Oklahoma was formed solely for the purpose of
engaging in the transactions contemplated hereby and has not engaged in any
activities other than in connection with the transactions contemplated by this
Agreement.
Section 6.5 No Violation. Neither DVN nor any of its Subsidiaries is, or has
received notice that it would be with the passage of time, in violation of any
term, condition or provision of (a) its charter documents or bylaws, (b) any
loan or credit agreement, note, bond, mortgage, indenture, contract, agreement,
lease, license or other instrument or (c) any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance, governmental
rule or regulation to which DVN or any of its Subsidiaries or any of their
respective properties or assets is subject, or is delinquent with respect to
any report required to be filed with any governmental entity, except, in the
case of matters described in clause (b) or (c), as would not have, individually
or in the aggregate, a DVN Material Adverse Effect. DVN and its Subsidiaries
hold all permits, licenses, variances, exemptions, orders, franchises and
approvals of all governmental authorities necessary for the lawful conduct of
their respective businesses (the "DVN Permits"), except where the failure so to
hold would not have, individually or in the aggregate, a DVN Material Adverse
Effect. DVN and its Subsidiaries are in compliance with the terms of the DVN
Permits, except where the failure so to comply would not have, individually or
in the aggregate, a DVN Material Adverse Effect. No investigation by any
governmental authority with respect to DVN or any of its Subsidiaries is
pending or, to the knowledge of DVN, threatened, other than those the outcome
of which would not have, individually or in the aggregate, a DVN Material
Adverse Effect.
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Section 6.6 No Conflict.
(a) Neither the execution and delivery by DVN, Newco and Devon Oklahoma of
this Agreement, the execution and delivery by DVN of the Stock Option
Agreements nor the consummation by DVN, Newco and Devon Oklahoma of the
transactions contemplated hereby or thereby in accordance with the terms hereof
or thereof will: (i) conflict with or result in a breach of any provisions of
the charter documents or bylaws of DVN, Newco or Devon Oklahoma; (ii) violate,
or conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination or in a right of
termination or cancellation of, or give rise to a right of purchase under or
accelerate the performance required by, or result in the creation of any Lien
upon any of the properties of DVN and its Subsidiaries under, or result in
being declared void, voidable, or without further binding effect, or otherwise
result in a detriment to DVN or any of its Subsidiaries under any of the terms,
conditions or provisions of, any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, lease, contract, agreement, joint venture or
other instrument or obligation to which DVN or any of its Subsidiaries is a
party, or by which DVN or any of its Subsidiaries or any of their properties is
bound or affected; or (iii) contravene or conflict with or constitute a
violation of any provision of any law, rule, regulation, judgment, order or
decree binding upon or applicable to DVN or any of its Subsidiaries, except, in
the case of matters described in clause (ii) or (iii), as would not have,
individually or in the aggregate, a DVN Material Adverse Effect.
(b) Neither the execution and delivery by DVN, Newco or Devon Oklahoma of
this Agreement, the execution and delivery by DVN of the Stock Option
Agreements nor the consummation by DVN, Newco or Devon Oklahoma of the
transactions contemplated hereby or thereby in accordance with the terms hereof
or thereof will require any consent, approval or authorization of, or filing or
registration with, any governmental or regulatory authority, other than
Regulatory Filings, and listing of the Newco Common Stock to be issued in the
Merger on the Principal Exchange and the listing on the DVN Common Stock upon
exercise of the option granted to PZE pursuant to the applicable Stock Option
Agreement under the rules of the American Stock Exchange ("AMEX"), except for
any consent, approval or authorization the failure of which to obtain and for
any filing or registration the failure of which to make would not prevent or
materially delay the consummation of the Merger or otherwise prevent DVN from
performing its obligations under this Agreement and would not have,
individually or in the aggregate, a DVN Material Adverse Effect.
(c) Other than as contemplated by Section 6.6(b), no consents, assignments,
waivers, authorizations or other certificates are necessary in connection with
the transactions contemplated hereby to provide for the continuation in full
force and effect of all of DVN's material contracts or leases or for DVN to
consummate the transactions contemplated hereby, except when the failure to
receive such consents or other certificates would not have, individually or in
the aggregate, a DVN Material Adverse Effect.
(d) Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will: (a) result in any payment from
DVN or its Subsidiaries (including severance, unemployment compensation,
parachute payment, bonus or otherwise) becoming due to any director, employee
or independent contractor of DVN or any of its Subsidiaries under any DVN Plan
(as defined in Section 6.11) or otherwise; (b) materially increase any benefits
otherwise payable under any DVN Plan or otherwise; or (c) result in the
acceleration of the time of payment or vesting of any such benefits.
Section 6.7 SEC Documents. DVN has made available to PZE each registration
statement, report, proxy statement or information statement (other than
preliminary materials) filed by DVN with the SEC since January 1, 1998, each in
the form (including exhibits and any amendments thereto) filed with the SEC
prior to the date hereof (collectively, the "DVN Reports"), and DVN has filed
all forms, reports and documents required to be filed by it with the SEC
pursuant to relevant securities statutes, regulations, policies and rules since
such time. As of their respective dates, the DVN Reports (i) were prepared in
all material respects in accordance with the applicable requirements of the
Securities Act, the Exchange Act, and the rules and regulations thereunder and
complied in all material respects with the then applicable accounting
requirements and (ii) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in the light of the circumstances under which
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they were made, not misleading except for such statements, if any, as have been
modified by subsequent filings with the SEC prior to the date hereof. Each of
the consolidated balance sheets included in or incorporated by reference into
the DVN Reports (including the related notes and schedules) fairly presents in
all material respects the consolidated financial position of DVN and its
Subsidiaries as of its date and each of the consolidated statements of
operations, cash flows and shareholders' equity included in or incorporated by
reference into the DVN Reports (including any related notes and schedules)
fairly presents in all material respects the results of operations, cash flows
or changes in stockholders' equity, as the case may be, of DVN and its
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to such exceptions as may be permitted by Form 10-Q of
the SEC), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may be
noted therein. Since December 31, 1998, neither DVN nor any of its Subsidiaries
had any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise), other than liabilities or obligations disclosed in
the DVN Reports or which would not have, individually or in the aggregate, a
DVN Material Adverse Effect.
Section 6.8 Litigation. There are no actions, suits or proceedings pending
against DVN or any of its Subsidiaries or, to DVN's knowledge, threatened
against DVN or any of its Subsidiaries, at law or in equity, or before or by
any federal, state or foreign commission, board, bureau, agency or
instrumentality, that are likely to have, individually or in the aggregate, a
DVN Material Adverse Effect. There are no outstanding judgments, decrees,
injunctions, awards or orders against DVN or any of its Subsidiaries that are
likely to have, individually or in the aggregate, a DVN Material Adverse
Effect.
Section 6.9 Absence of Certain Changes. Since December 31, 1998, there has
not been (i) an event that would have a DVN Material Adverse Effect; (ii) any
material change by DVN or any of its Subsidiaries, when taken as a whole, in
any of its accounting methods, principles or practices or any of its tax
methods, practices or elections; (iii) any material damage, destruction, or
loss to the business or properties of DVN and its Subsidiaries, taken as a
whole, not covered by insurance; (iv) any declaration, setting aside or payment
of any dividend or other distribution in respect of the capital stock of DVN,
or any direct or indirect redemption, purchase or any other acquisition by DVN
of any such stock (except for, and provided that DVN may continue to pay or
cause to be paid, dividends upon the shares of DVN Common Stock and the
Northstar Exchangeable Shares at a rate not greater than $.05 per share in any
quarter); (v) any change in the capital stock or in the number of shares or
classes of DVN's authorized or outstanding capital stock (other than as a
result of exercises of options to purchase DVN Common Stock outstanding or
issued as permitted hereunder); (vi) any increase in or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option, stock purchase or other employee benefit plan, except in
the ordinary course of business; or (vii) any other event or condition known to
DVN particularly pertaining to and adversely affecting the operations, assets
or business of DVN or any of its Subsidiaries (other than events or conditions
which are of a general or industry-wide nature and of general public knowledge)
which would constitute, individually or in the aggregate, a DVN Material
Adverse Effect.
Section 6.10 Taxes.
(a) Each of DVN, its Subsidiaries and each affiliated, consolidated,
combined, unitary or similar group of which any such corporation is or was a
member has (i) duly filed (or there has been filed on its behalf) on a timely
basis (taking into account any extensions of time to file before the date
hereof) with appropriate governmental authorities all Returns required to be
filed by or with respect to it, except to the extent that any failure to file
would not have, individually or in the aggregate, a DVN Material Adverse
Effect, and (ii) duly paid or deposited in full on a timely basis or made
adequate provisions in accordance with generally accepted accounting principles
(or there has been paid or deposited or adequate provision has been made on its
behalf) for the payment of all taxes required to be paid by it other than those
being contested in good faith by DVN or a Subsidiary of DVN and except to the
extent that any failure to pay or deposit or make adequate provision for the
payment of such taxes would not have, individually or in the aggregate, a DVN
Material Adverse Effect.
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(b) (i) The federal income tax returns of DVN and each of its Subsidiaries
have been examined by the IRS (or the applicable statutes of limitation for the
assessment of federal income taxes for such periods have expired) for all
periods; (ii) except to the extent being contested in good faith, all material
deficiencies asserted as a result of such examinations and any other
examinations of DVN and its Subsidiaries by any taxing authority have been paid
fully, settled or adequately provided for in the financial statements contained
in the DVN Reports; (iii) as of the date hereof, neither DVN nor any of its
Subsidiaries has granted any requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
taxes with respect to any Returns of DVN or any of its Subsidiaries; (iv)
neither DVN nor any of its Subsidiaries is a party to, is bound by or has any
obligation under any tax sharing, allocation or indemnity agreement or any
similar agreement or arrangement that would have, individually or in the
aggregate, a DVN Material Adverse Effect; (v) there are no tax liens on any
assets of DVN or its Subsidiaries except for taxes not yet currently due and
those which could not reasonably be expected, individually or in the aggregate,
to result in a DVN Material Adverse Effect; and (vi) neither DVN nor any of its
Subsidiaries is a party to an agreement that provides for the payment of any
amount that would constitute a "parachute payment" within the meaning of
Section 280G of the Code.
Section 6.11 Employee Benefit Plans. For purposes of this Section 6.11, DVN
Subsidiaries shall include any enterprise which, with DVN, forms or formed a
controlled group of corporations, a group of trades or business under common
control or an affiliated service group, within the meaning of Section 414(b),
(c) or (m) of the Code. All employee benefits plans, programs, arrangements and
agreements covering active, former or retired employees of DVN and DVN
Subsidiaries which provide material benefits to such employees are listed in
the DVN Disclosure Letter (the "DVN Plans"). DVN has made available to PZE
true, complete and correct copies of each DVN Plan, any related trust
agreement, annuity or insurance contract or other funding vehicle, and: (a)
each DVN Plan has been maintained and administered in material compliance with
its terms and is, to the extent required by applicable law or contract, fully
funded without having any deficit or unfunded actuarial liability or adequate
provision has been made therefor; (b) all required employer contributions under
any such plans have been made and the applicable funds have been funded in
accordance with the terms thereof, (c) each DVN Plan that is required or
intended to be qualified under applicable law or registered or approved by a
governmental agency or authority has been so qualified, registered or approved
by the appropriate governmental agency or authority, and nothing has occurred
since the date of the last qualification, registration or approval to adversely
affect, or cause, the appropriate governmental agency or authority to revoke
such qualification, registration or approval; (d) to the extent applicable, the
DVN Plans comply, in all material respects, with the requirements of ERISA, the
Code and any other applicable tax act and other laws, and any DVN Plan intended
to be qualified under Section 401(a) of the Code has been determined by the
Internal Revenue Service to be so qualified and nothing has occurred to cause
the loss of such qualified status; (e) no DVN Plan is covered by Title IV of
ERISA or Section 412 of the Code; (f) there are no pending or anticipated
material claims against or otherwise involving any of the DVN Plans and no
suit, action or other litigation (excluding claims for benefits incurred in the
ordinary course of DVN Plan activities) has been brought against or with
respect to any DVN Plan; (g) all material contributions, reserves or premium
payments, required to be made as of the date hereof to the DVN Plans have been
made or provided for; (h) neither DVN nor any DVN Subsidiary has incurred or
reasonably expects to incur any liability under subtitle C or D of Title IV of
ERISA with respect to any "single-employer plan," within the meaning of Section
4001(a)(15) of ERISA, currently or formerly maintained by DVN, any DVN
Subsidiary or any entity which is considered one employer with DVN under
Section 4001 of ERISA; (i) neither DVN nor any DVN Subsidiary has incurred or
reasonably expects to incur any withdrawal liability under Subtitle E of Title
IV of ERISA with respect to any "multi-employer plan," within the meaning of
Section 4001(a)(3) of ERISA; and (j) neither DVN nor any DVN Subsidiary has any
material obligations for retiree health and life benefits under any DVN Plan.
Section 6.12 Labor Matters.
(a) Neither DVN nor any of its Subsidiaries is a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization.
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(b) Neither DVN nor any of its Subsidiaries is subject to a dispute, strike
or work stoppage with respect to any collective bargaining agreement, contract
or other agreement or understanding with a labor union or labor organization to
which it is a party or by which it is bound which would have, individually or
in the aggregate, a DVN Material Adverse Effect.
(c) To DVN's knowledge, there are no organizational efforts with respect to
the formation of a collective bargaining unit presently being made or
threatened involving employees of DVN or any of its Subsidiaries, except for
those the formation of which would not have, individually or in the aggregate,
a DVN Material Adverse Effect.
Section 6.13 Environmental Matters. Except as would not have, individually or
in the aggregate, a DVN Material Adverse Effect:
(a) there are not any present or, to the knowledge of DVN, past conditions or
circumstances that interfere with the conduct of the business of DVN and each
of its Subsidiaries in the manner now conducted or which interfere with
compliance with any order of any court, governmental authority or arbitration
board or tribunal, or any Environmental Law;
(b) there are not any present or, to the knowledge of DVN, past conditions or
circumstances at, or arising out of, any current or, to the knowledge of DVN,
former businesses, assets or properties of DVN or any Subsidiary of DVN,
including but not limited to on-site or off-site disposal or release of any
chemical substance, product or waste, which constitute a violation under any
Environmental Law or could reasonably be expected to give rise to: (i)
liabilities or obligations for any cleanup, remediation, disposal or corrective
action under any Environmental Law or (ii) claims arising for personal injury,
property damage, or damage to natural resources;
(c) neither DVN nor any of its Subsidiaries has (i) received any written
notice of noncompliance with, violation of, or liability or potential liability
under any Environmental Law, (ii) received any written notice regarding any
existing, pending or threatened investigation or inquiry related to alleged
violations under any Environmental Laws or regarding any claims for remedial
obligations or contribution under any Environmental Laws or (iii) entered into
any consent decree or order or is subject to any order of any court or
governmental authority or tribunal under any Environmental Law or relating to
the cleanup of any hazardous materials contamination;
(d) DVN and its Subsidiaries have in full force and effect all material
environmental permits, licenses, approvals and other authorizations required to
conduct their operations and are operating in material compliance thereunder;
and
(e) DVN does not know of any reason that would preclude it from renewing or
obtaining a reissuance of the material permits, licenses or other
authorizations required pursuant to any applicable Environmental Laws to
operate and use any of DVN's or its Subsidiaries' assets for their current
purposes and uses.
Section 6.14 Intellectual Property. DVN and its Subsidiaries own or possess
adequate licenses or other valid rights to use all patents, patent rights,
trademarks, trademark rights and proprietary information used or held for use
in connection with their respective businesses as currently being conducted,
free and clear of material Liens, except where the failure to own or possess
such licenses and other rights would not have, individually or in the
aggregate, a DVN Material Adverse Effect, and there are no assertions or claims
challenging the validity of any of the foregoing which are likely to have,
individually or in the aggregate, a DVN Material Adverse Effect. Except in the
ordinary course of business, neither DVN nor any of its Subsidiaries has
granted to any other person any license to use any of the foregoing. The
conduct of DVN's and its Subsidiaries' respective businesses as currently
conducted does not conflict with any patents, patent rights, licenses,
trademarks, trademark rights, trade names, trade name rights or copyrights of
others in any way likely to have, individually or in the aggregate, a DVN
Material Adverse Effect. There is no material infringement of any proprietary
right owned by or licensed by or to DVN or any of its Subsidiaries which is
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likely to have, individually or in the aggregate, a DVN Material Adverse
Effect. DVN has initiated a review of the implications of the Year 2000 on its
business and processes, including an evaluation of key operating and
information systems, field operations and third parties and confirms the public
disclosure provided by it in respect thereof.
Section 6.15 Title to Properties. Except for goods and other property sold,
used or otherwise disposed of since December 31, 1998 in the ordinary course of
business for fair value, DVN has defensible title for oil and gas purposes to
all its properties, interests in properties and assets, real and personal,
reflected in its December 31, 1998 financial statements, free and clear of any
Lien, except: (a) Liens reflected in the balance sheet of DVN as of December
31, 1998; (b) Liens for current taxes not yet due and payable and (c) such
imperfections of title, easements and Liens as would not have, individually or
in the aggregate, a DVN Material Adverse Effect. All leases and other
agreements pursuant to which DVN or any of its Subsidiaries leases or otherwise
acquires or obtains operating rights affecting any real or personal property
are in good standing, valid, and effective; and there is not, under any such
leases, any existing or prospective default or event of default or event which
with notice or lapse of time, or both, would constitute a default by DVN or any
of its Subsidiaries which, individually or in the aggregate, would have a DVN
Material Adverse Effect and in respect to which DVN or any of its Subsidiaries
has not taken adequate steps to prevent a default from occurring. All major
items of operating equipment of DVN and its Subsidiaries are in good operating
condition and in a state of reasonable maintenance and repair, ordinary wear
and tear excepted. Without limiting the generality of the foregoing, DVN's
interest in production of hydrocarbons from each well, unit or property
described in the reports of (i) LaRoche Petroleum Consultants, Ltd. dated
January 25, 1999, (ii) Paddock Lindstrom & Associates, Ltd. dated January 13,
1999, (iii) AMH Group Ltd. dated January 18, 1999 and (iv) DVN dated February
8, 1999 and delivered to PZE (after deducting all applicable royalties,
overriding royalties and other payments out of production) is not materially
less than the interest shown under the heading "Net Revenue Interest" for such
well, unit on property, and DVN's share of exploration, development and
operation costs for each such well, unit or property is not materially greater
than the percentage shown under the heading "Working Interest" for such well,
unit or property. DVN has not received any material advance, take-or-pay or
other similar payments that entitle purchasers of production to receive
deliveries of hydrocarbons without paying therefor, and has not taken or
received any hydrocarbons under any gas balancing or similar arrangements that
permit any person to receive any portion of DVN's interest in such
hydrocarbons.
Section 6.16 Insurance. DVN and its Subsidiaries maintain insurance coverage
reasonably adequate for the operation of their respective businesses (taking
into account the cost and availability of such insurance).
Section 6.17 No Brokers. DVN has not entered into any contract, arrangement
or understanding with any person or firm which may result in the obligation of
Newco, PZE or DVN to pay any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except
that DVN has retained PaineWebber Incorporated as its financial advisor, the
arrangements with which have been disclosed in writing to PZE prior to the date
hereof.
Section 6.18 Opinion of Financial Advisor. The Board of Directors of DVN has
received the opinion of PaineWebber Incorporated to the effect that, as of the
date of this Agreement, the DVN Exchange Ratio is fair, from a financial point
of view, to the holders of DVN Common Stock; it being understood and
acknowledged by PZE that such opinion has been rendered for the benefit of the
Board of Directors of DVN, and is not intended to, and may not, be relied upon
by PZE, its affiliates or their respective Subsidiaries.
Section 6.19 PZE Stock Ownership. Neither DVN nor any of its Subsidiaries
owns any shares of capital stock of PZE or any other securities convertible
into or otherwise exercisable to acquire capital stock of PZE.
Section 6.20 Reorganization. Neither DVN nor any of its Subsidiaries has
taken or failed to take any action, as a result of which the Merger would not
qualify as a reorganization within the meaning of Section 368(a) of the Code.
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Section 6.21 Vote Required. The affirmative vote of the holders of a majority
of the outstanding shares of DVN Common Stock and the outstanding Northstar
Exchangeable Shares, voting as a single class with the DVN Special Voting Share
voting for the Northstar Exchangeable Shares as provided in DVN's charter, is
the only vote of the holders of any class or series of DVN capital stock
necessary to approve this Agreement and the transactions contemplated hereby.
Section 6.22 DVN Rights Agreement. DVN has taken all required action under
the DVN Rights Agreement so that none of the execution and delivery of this
Agreement or the Stock Option Agreements, the conversion of shares of DVN
Common Stock into Newco Common Stock in accordance with Article 4 of this
Agreement, the issuance of shares of DVN Common Stock upon exercise of the
option granted to PZE pursuant to the applicable Stock Option Agreement, and
the consummation of the Merger or any other transaction contemplated hereby or
by the Stock Option Agreement, will cause (i) the DVN Rights to become
exercisable under the DVN Rights Agreement, (ii) Newco or PZE or any of their
Subsidiaries to be deemed an "Acquiring Person" (as defined in the DVN Rights
Agreement), (iii) any such event to be an event described in Section 11(a)(ii)
or 13 of the DVN Rights Agreement or (iv) the "Stock Acquisition Date" or the
"Distribution Date" (each as defined in the DVN Rights Agreement) to occur upon
any such event, and so that the DVN Rights will expire immediately prior to the
Effective Time. DVN has delivered to PZE a true and complete copy of the DVN
Rights Agreement, as amended to date.
Section 6.23 Certain Approvals. Section 1090.3 of the OGCA is inapplicable to
the Merger and the transactions contemplated by this Agreement and the Stock
Option Agreements.
Section 6.24 Certain Contracts. Neither DVN nor any of its Subsidiaries is a
party to or bound by (i) any non-competition agreement or any other agreement
or obligation which purports to limit the manner in which, or the localities in
which, the current business of DVN and its Subsidiaries, taken as a whole, or
PZE and its Subsidiaries, taken as a whole, is conducted or (ii) any executory
agreement or obligation which pertains to the acquisition or disposition of any
asset, or which provides any third party any lien, claim or preferential right
with regard thereto, except in each case for any such agreements or obligations
which would not have, individually or in the aggregate, a DVN Material Adverse
Effect.
ARTICLE 7
Covenants
Section 7.1 Conduct of Businesses. Prior to the Effective Time, except as set
forth in the DVN Disclosure Letter or PZE Disclosure Letter or as expressly
contemplated by any other provision of this Agreement or the Stock Option
Agreements, unless DVN or PZE, respectively, has consented in writing thereto,
each of PZE and DVN:
(a) shall, and shall cause each of its Subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(b) shall use its commercially reasonable best efforts, and shall cause each
of its Subsidiaries to use its commercially reasonable best efforts, to
preserve intact their business organizations and goodwill, keep available the
services of their respective officers and employees and maintain satisfactory
relationships with those persons having business relationships with them;
(c) shall not amend its certificate of incorporation or bylaws;
(d) shall promptly notify the other of any material change in its condition
(financial or otherwise) or business or any material litigation or material
governmental complaints, investigations or hearings (or communications in
writing indicating that such litigation, complaints, investigations or hearings
may be contemplated), or the breach in any material respect of any
representation or warranty contained herein;
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(e) shall promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of this
Agreement;
(f) shall not (i) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on the date hereof, or
referred to in clause (ii) below and disclosed pursuant to this Agreement or in
connection with transactions permitted by Section 7.1(i), issue any shares of
its capital stock, effect any stock split or otherwise change its
capitalization as it existed on the date hereof; (ii) grant, confer or award
any option, warrant, conversion right or other right not existing on the date
hereof to acquire any shares of its capital stock except (x) the grant of
options to new employees consistent with past practice in an amount not to
exceed 100,000 shares of PZE Common Stock, in the case of PZE, and 100,000
shares of DVN Common Stock, in the case of DVN or pursuant to contractual
commitments existing on the date of this Agreement; (iii) increase any
compensation or benefits, except in the ordinary course of business consistent
with past practice, or enter into or amend any employment agreement with any of
its present or future officers or directors, except with new employees
consistent with past practice, or (iv) adopt any new employee benefit plan
(including any stock option, stock benefit or stock purchase plan) or amend
(except as required by law) any existing employee benefit plan in any material
respect, except for changes which are less favorable to participants in such
plans;
(g) shall not (i) declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock or (ii)
redeem, purchase or otherwise acquire any shares of its capital stock or
capital stock of any of its Subsidiaries, or make any commitment for any such
action, except for, and provided that PZE may continue to pay, dividends upon
the shares of PZE Common Stock and PZE Preferred Stock at a rate not greater
than $0.0625 per share and $1.6225 per share, respectively, in any quarter, and
that DVN may continue to pay or cause to be paid, dividends upon the shares of
DVN Common Stock and the Northstar Exchangeable Shares at a rate not greater
than $.05 per share in any quarter;
(h) shall not, and shall not permit any of its Subsidiaries to, sell, lease
or otherwise dispose of any of its assets (including capital stock of
Subsidiaries) which are material to PZE or DVN, as the case may be,
individually or in the aggregate, except in the ordinary course of business;
(i) shall not, and shall not permit any of its Subsidiaries to, except
pursuant to contractual commitments in effect on the date hereof and disclosed
in the DVN Disclosure Letter or PZE Disclosure Letter, as the case may be,
acquire or agree to acquire by merging or consolidating with, or by purchasing
a substantial equity interest in or a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof or otherwise acquire or
agree to acquire any assets or securities in each case (i) for an aggregate
consideration for all such acquisitions in excess of $3 million (excluding
acquisitions approved in writing by DVN and PZE) and (ii) where a filing under
the HSR Act is required, except where DVN and PZE have agreed in writing that
such action is not likely to (x) have a material adverse effect on the ability
of the parties to consummate the transactions contemplated by this Agreement or
(y) delay materially the Effective Time;
(j) except as may be required as a result of a change in law or in generally
accepted accounting principles, change any of the accounting principles or
practices used by it;
(k) shall, and shall cause any of its Subsidiaries to, use reasonable efforts
to maintain with financially responsible insurance companies insurance in such
amounts and against such risks and losses as are customary for such party;
(l) shall not, and shall not permit any of its Subsidiaries to, (i) make or
rescind any material express or deemed election relating to taxes unless it is
reasonably expected that such action will not, individually or in the
aggregate, materially and adversely affect DVN or PZE, including elections for
any and all joint ventures, partnerships, limited liability companies, working
interests or other investments where it has the capacity to make such binding
election, (ii) settle or compromise any material claim, action, suit,
litigation, proceeding,
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arbitration, investigation, audit or controversy relating to taxes, except
where such settlement or compromise will not, individually or in the aggregate,
materially and adversely affect DVN or PZE or (iii) change in any material
respect any of its methods of reporting any item for federal income tax
purposes from those employed in the preparation of its federal income tax
return for the most recent taxable year for which a return has been filed,
except as may be required by applicable law or except for such changes that are
reasonably expected not to, individually or in the aggregate, materially and
adversely affect DVN or PZE;
(m) shall not, nor shall it permit any of its Subsidiaries to, (i) incur any
indebtedness for borrowed money (except (x) under existing credit lines, (y)
refinancings of existing debt and (z) other immaterial borrowings that, in the
case of (x), (y) or (z), permit prepayment of such debt without penalty (other
than LIBOR breakage costs)) or guarantee any such indebtedness or issue or sell
any debt securities or warrants or rights to acquire any debt securities of
such party or any of its Subsidiaries or guarantee any debt securities of
others, (ii) except in the ordinary course of business, enter into any material
lease (whether such lease is an operating or capital lease) or create any
material mortgages, liens, security interests or other encumbrances on the
property of DVN or PZE or any of their Subsidiaries in connection with any
indebtedness thereof, or (iii) make or commit to make aggregate capital
expenditures in excess of $3 million over the fiscal 1999 capital expenditures
budget disclosed in reasonable detail on the DVN Disclosure Letter or PZE
Disclosure Letter, as the case may be;
(n) shall not purchase any shares of DVN Common Stock or PZE Common Stock;
(o) shall not, nor shall it permit any of its Subsidiaries to, agree in
writing or otherwise to take any of the foregoing actions;
(p) subject to Section 7.5, shall not take any action that is likely to delay
materially or adversely affect the ability of any of the parties hereto to
obtain any consent, authorization, order or approval of any governmental
commission, board or other regulatory body or the expiration of any applicable
waiting period required to consummate the Merger;
(q) shall not terminate, amend, modify or waive any provision of any
confidentiality or standstill agreement to which it or any of its respective
Subsidiaries is a party; and during such period shall enforce, to the fullest
extent permitted under applicable law, the provisions of such agreement,
including by obtaining injunctions to prevent any breaches of such agreements
and to enforce specifically the terms and provisions thereof in any court of
the United States of America or any state having jurisdiction;
(r) shall not enter into or amend any agreement with any holder of shares of
DVN Common Stock or PZE Common Stock with respect to holding, voting or
disposing of shares; and
(s) shall not by resolution of its Board of Directors cause the acceleration
of rights, benefits or payments under any PZE Plans or DVN Plans.
Section 7.2 No Solicitation by PZE.
(a) PZE agrees that (i) neither it nor any of its Subsidiaries shall, and
shall not knowingly permit any of its officers, directors, employees, agents or
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) to, solicit, initiate
or knowingly encourage (including by way of furnishing material non-public
information) any inquiry, proposal or offer (including, without limitation, any
proposal or offer to its stockholders) with respect to a third party tender
offer, merger, consolidation, business combination or similar transaction
involving, any assets or class of capital stock of PZE (any such proposal,
offer or transaction being hereinafter referred to as a "PZE Acquisition
Proposal") or participate or engage in any discussions or negotiations
concerning a PZE Acquisition Proposal; and (ii) it will immediately cease and
cause to be terminated any existing negotiations with any third parties
conducted heretofore with respect to any of the foregoing; provided that,
subject to Section 7.4(b), nothing contained in this Agreement shall prevent
PZE or its Board of Directors from (A) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to a PZE Acquisition Proposal or (B) prior
to the Cutoff Date, providing
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information (pursuant to a confidentiality agreement in reasonably customary
form) to or engaging in any negotiations or discussions with any person or
entity who has made an unsolicited bona fide PZE Acquisition Proposal with
respect to all the outstanding PZE Common Stock or all or substantially all the
assets of PZE that, in the good faith judgment of PZE's Board of Directors,
taking into account the likelihood of consummation, after consultation with its
financial advisors, is superior to the Merger (a "PZE Superior Proposal"), if
the Board of Directors of PZE, after consultation with its outside legal
counsel, determines that the failure to do so would be inconsistent with its
fiduciary obligations.
(b) PZE will immediately notify DVN of any such requests for such information
or the receipt of any PZE Acquisition Proposal, including the identity of the
person or group engaging in such discussions or negotiations, requesting such
information or making such PZE Acquisition Proposal, and the material terms and
conditions of any PZE Acquisition Proposal, and shall keep the DVN informed on
a timely basis of any material changes with respect thereto. Prior to taking
any action referred to in Section 7.2(a), if PZE intends to participate in any
such discussions or negotiations or provide any such information to any such
third party, PZE shall give prompt prior notice to DVN of each such action.
(c) Nothing in this Section 7.2 shall permit PZE to enter into any agreement
with respect to a PZE Acquisition Proposal during the term of this Agreement,
it being agreed that during the term of this Agreement, PZE shall not enter
into any agreement with any person that provides for, or in any way
facilitates, a PZE Acquisition Proposal, other than a confidentiality agreement
in reasonably customary form.
(d) For purposes hereof, the "Cutoff Date" means the date the conditions set
forth in Section 8.1(a) are satisfied.
Section 7.3 No Solicitation by DVN.
(a) DVN agrees that (i) neither it nor any of its Subsidiaries shall, and
shall not knowingly permit any of its officers, directors, employees, agents or
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) to, solicit, initiate
or knowingly encourage (including by way of furnishing material non-public
information) any inquiry, proposal or offer (including, without limitation, any
proposal or offer to its stockholders) with respect to a third party tender
offer, merger, consolidation, business combination or similar transaction
involving any assets or class of capital stock of DVN (any such proposal, offer
or transaction being hereinafter referred to as a "DVN Acquisition Proposal")
or participate or engage in any discussions or negotiations concerning a DVN
Acquisition Proposal; and (ii) it will immediately cease and cause to be
terminated any existing negotiations with any third parties conducted
heretofore with respect to any of the foregoing; provided that, subject to
Section 7.4(b), nothing contained in this Agreement shall prevent DVN or its
Board of Directors from (A) complying with Rule 14e-2 promulgated under the
Exchange Act with regard to a DVN Acquisition Proposal or (B) prior to the
Cutoff Date, providing information (pursuant to a confidentiality agreement in
reasonably customary form) to or engaging in any negotiations or discussions
with any person or entity who has made an unsolicited bona fide DVN Acquisition
Proposal with respect to all the outstanding DVN Common Stock or all or
substantially all the assets of DVN that, in the good faith judgment of DVN's
Board of Directors, taking into account the likelihood of consummation, after
consultation with its financial advisors, is superior to the Merger (a "DVN
Superior Proposal"), if the Board of Directors of DVN, after consultation with
its outside legal counsel, determines that the failure to do so would be
inconsistent with its fiduciary obligations.
(b) DVN will immediately notify PZE of any such requests for such information
or the receipt of any DVN Acquisition Proposal, including the identity of the
person or group engaging in such discussions or negotiations, requesting such
information or making such DVN Acquisition Proposal, and the material terms and
conditions of any DVN Acquisition Proposal, and shall keep PZE informed on a
timely basis of any material changes with respect thereto. Prior to taking any
action referred to in Section 7.3(a), if DVN intends to participate in any such
discussions or negotiations or provide any such information to any such third
party, DVN shall give prompt prior notice to PZE of each such action.
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(c) Nothing in this Section 7.3 shall permit DVN to enter into any agreement
with respect to a DVN Acquisition Proposal during the term of this Agreement,
it being agreed that during the term of this Agreement, DVN shall not enter
into any agreement with any person that provides for, or in any way
facilitates, a DVN Acquisition Proposal, other than a confidentiality agreement
in reasonably customary form.
Section 7.4 Meetings of Stockholders.
(a) Each of DVN and PZE will take all action necessary in accordance with
applicable law and its certificate of incorporation and bylaws to convene a
meeting of its stockholders as promptly as practicable to consider and vote
upon the approval of this Agreement and the Merger. PZE and DVN shall
coordinate and cooperate with respect to the timing of such meetings and shall
use their reasonable best efforts to hold such meetings on the same day.
(b) PZE and DVN, through their respective Boards of Directors, shall
recommend approval of such matters; provided that the Board of Directors of PZE
or the Board of Directors of DVN may at any time prior to the Effective Time
withdraw, modify, or change any recommendation and declaration regarding this
Agreement or the Merger, or recommend and declare advisable any other offer or
proposal, if and only if, after receipt of a PZE Superior Proposal or a DVN
Superior Proposal, as the case may be, in the opinion of such Board of
Directors after consultation with its counsel the failure to so withdraw,
modify, or change its recommendation and declaration would be inconsistent with
its fiduciary obligations.
Section 7.5 Filings; Reasonable Best Efforts.
(a) Subject to the terms and conditions herein provided, PZE and DVN shall:
(i) promptly (but in not more than 35 business days from the date hereof)
make their respective filings under the HSR Act with respect to the Merger
and thereafter shall promptly make any other required submissions under the
HSR Act;
(ii) use their reasonable best efforts to cooperate with one another in
(a) determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from
governmental or regulatory authorities of the United States, the several
states, and foreign jurisdictions in connection with the execution and
delivery of this Agreement and the consummation of the Merger and the
transactions contemplated hereby; and (b) timely making all such filings
and timely seeking all such consents, approvals, permits or authorizations;
(iii) promptly notify each other of any communication concerning this
Agreement or the Merger to that party from any governmental authority and
permit the other party to review in advance any proposed communication
concerning this Agreement or the Merger to any governmental entity;
(iv) not agree to participate in any meeting or discussion with any
governmental authority in respect of any filings, investigation or other
inquiry concerning this Agreement or the Merger unless it consults with the
other party in advance and, to the extent permitted by such governmental
authority, gives the other party the opportunity to attend and participate
thereat;
(v) furnish the other party with copies of all correspondence, filings
and communications (and memoranda setting forth the substance thereof)
between them and their affiliates and their respective representatives on
the one hand, and any government or regulatory authority or members or
their respective staffs on the other hand, with respect to this Agreement
and the Merger; and
(vi) furnish the other party with such necessary information and
reasonable assistance as such other parties and their respective affiliates
may reasonably request in connection with their preparation of necessary
filings, registrations or submissions of information to any governmental or
regulatory authorities, including without limitation, any filings necessary
or appropriate under the provisions of the HSR Act.
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(b) Without limiting Section 7.5(a), DVN and PZE shall:
(i) each use its reasonable best efforts to avoid the entry of, or to
have vacated or terminated, any decree, order or judgment that would
restrain, prevent or delay the Closing, including without limitation
defending through litigation on the merits any claim asserted in any court
by any party; and
(ii) each use reasonable best efforts to avoid or eliminate each and
every impediment under any antitrust, competition or trade regulation law
that may be asserted by any governmental entity with respect to the Merger
so as to enable the Closing to occur as soon as reasonably possible (and in
any event no later than 60 days following the termination of all applicable
waiting periods under the HSR Act, unless the parties are in litigation
with the government in which case at the conclusion of such litigation).
Section 7.6 Inspection. From the date hereof to the Effective Time, each of
PZE and DVN shall allow all designated officers, attorneys, accountants and
other representatives of DVN or PZE, as the case may be, access at all
reasonable times upon reasonable notice to the records and files,
correspondence, audits and properties, as well as to all information relating
to commitments, contracts, titles and financial position, or otherwise
pertaining to the business and affairs of DVN and PZE and their respective
Subsidiaries, including inspection of such properties; provided that no
investigation pursuant to this Section 7.6 shall affect any representation or
warranty given by any party hereunder, and provided further that
notwithstanding the provision of information or investigation by any party, no
party shall be deemed to make any representation or warranty except as
expressly set forth in this Agreement. Notwithstanding the foregoing, no party
shall be required to provide any information which it reasonably believes it
may not provide to the other party by reason of applicable law, rules or
regulations, which constitutes information protected by attorney/client
privilege, or which it is required to keep confidential by reason of contract
or agreement with third parties. The parties hereto will make reasonable and
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply. Each of DVN and PZE agrees that
it will not, and will cause its respective representatives not to, use any
information obtained pursuant to this Section 7.6 for any purpose unrelated to
the consummation of the transactions contemplated by this Agreement.
Section 7.7 Publicity. The parties will consult with each other and will
mutually agree upon any press releases or public announcements pertaining to
this Agreement or the transactions contemplated hereby and shall not issue any
such press releases or make any such public announcements prior to such
consultation and agreement, except as may be required by applicable law or by
obligations pursuant to any listing agreement with any national securities
exchange, in which case the party proposing to issue such press release or make
such public announcement shall use its reasonable best efforts to consult in
good faith with the other party before issuing any such press releases or
making any such public announcements.
Section 7.8 Registration Statement.
(a) Each of DVN and PZE shall cooperate and promptly prepare and Newco shall
file with the SEC as soon as practicable a Registration Statement on Form S-4
(the "Form S-4") under the Securities Act and a registration statement on Form
10 under the Exchange Act (or such other appropriate form) (the Form S-4 and
such appropriate form under the Exchange Act are collectively referred to as
the "Registration Statements"), with respect to the Newco Common Stock issuable
in the Merger. A portion of the Form S-4 shall also serve as the joint proxy
statement with respect to the meetings of the stockholders of DVN and of PZE in
connection with the Merger (the "Proxy Statement/Prospectus"). The respective
parties will cause the Proxy Statement/Prospectus and the Registration
Statements to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and
regulations thereunder. Each of DVN and Newco shall use its reasonable best
efforts, and PZE will cooperate with DVN and Newco, to have the Registration
Statements declared effective by the SEC as promptly as practicable. Each of
DVN and Newco shall use its reasonable best efforts to obtain, prior to the
effective date of the Form S-4, all necessary state securities law or "Blue
Sky" permits or approvals required to carry out the transactions contemplated
by this Agreement and will pay all expenses incident thereto. DVN will advise
PZE, promptly after it receives notice thereof, of the time when either or both
of the Registration Statements have become effective or any
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supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the Newco Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction, or any
request by the SEC for amendment of the Proxy Statement/Prospectus or the
Registration Statements or comments thereon and responses thereto or requests
by the SEC for additional information.
(b) Each of DVN and PZE will use its reasonable best efforts to cause the
Proxy Statement/Prospectus to be mailed to its stockholders as promptly as
practicable after the date hereof.
(c) Each of DVN and PZE agrees that the information provided by it for
inclusion in the Proxy Statement/Prospectus and each amendment or supplement
thereto, at the time of mailing thereof and at the time of the respective
meetings of stockholders of DVN and of PZE, or, in the case of information
provided by it for inclusion in the Registration Statements or any amendment or
supplement thereto, at the time it is filed or becomes effective, (i) will not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and (ii)
will comply as to form in all material respects with the provisions of the
Exchange Act.
Section 7.9 Listing Application. PZE and DVN shall each use their reasonable
best efforts to cause the Newco Common Stock to be issued in the Merger to be
approved for listing on the NYSE prior to the Effective Time, subject to
official notice of issuance. DVN shall promptly prepare and submit to the NYSE
a listing application covering the shares of Newco Common Stock issuable in the
Merger. If, for any reason, Newco Common Stock is not approved for listing on
the NYSE, PZE and DVN shall each use their reasonable best efforts to cause
Newco Common Stock to be issued in the Merger to be approved for listing on
AMEX prior to the Effective Time, subject to official notice of issuance.
Section 7.10 Letters of Accountants.
(a) If requested to do so by DVN, PZE shall use its reasonable best efforts
to cause to be delivered to DVN "comfort" letters of Arthur Andersen LLP, PZE's
independent public accountants, dated the effective date of the Form S-4 and
the Closing Date, respectively, and addressed to DVN with regard to certain
financial information regarding PZE included in the Form S-4, in form
reasonably satisfactory to DVN and customary in scope and substance for
"comfort" letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
(b) If requested to do so by PZE, DVN shall use its reasonable best efforts
to cause to be delivered to PZE "comfort" letters of KPMG LLP, DVN's
independent public accountants, dated the effective date of the Form S-4 and
the Closing Date, respectively, and addressed to PZE, with regard to certain
financial information regarding DVN included in the Form S-4, in form
reasonably satisfactory to PZE and customary in scope and substance for
"comfort" letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
Section 7.11 Agreements of Rule 145 Affiliates. Prior to the Effective Time,
DVN and PZE shall cause to be prepared and delivered to Newco a list
identifying all persons who, at the time of the meeting or the meeting of DVN's
and PZE's stockholders pursuant to Section 7.4, DVN or PZE believes may be
deemed to be "affiliates" of DVN or PZE, as that term is used in paragraphs (c)
and (d) of Rule 145 under the Securities Act (the "Rule 145 Affiliates"). Newco
shall be entitled to place restrictive legends on any shares of Newco Common
Stock received by such Rule 145 Affiliates. DVN and PZE shall use its
reasonable best efforts to cause each person who is identified as a Rule 145
Affiliate in such list to deliver to Newco, at or prior to the Effective Time,
a written agreement, in the form to be approved by the parties hereto, that
such Rule 145 Affiliate will not sell, pledge, transfer or otherwise dispose of
any shares of Newco Common Stock issued to such Rule 145 Affiliate pursuant to
the Merger, except pursuant to an effective registration statement or in
compliance with Rule 145 or an exemption from the registration requirements of
the Securities Act.
Section 7.12 Expenses. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, except
as expressly provided in Section 9.5.
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Section 7.13 Indemnification and Insurance.
(a) From and after the Effective Time, Newco shall indemnify, defend and hold
harmless to the fullest extent permitted under applicable law each person who
is, or has been at any time prior to the Effective Time, an officer or director
of PZE or DVN (or any Subsidiary or division thereof) and each person who
served at the request of PZE or DVN as a director, officer, trustee or
fiduciary of another corporation, partnership, joint venture, trust, pension or
other employee benefit plan or enterprise (individually, an "Indemnified Party"
and, collectively, the "Indemnified Parties") against all losses, claims,
damages, liabilities, costs or expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement in connection with any claim,
action, suit, proceeding or investigation arising out of or pertaining to acts
or omissions, or alleged acts or omissions, by them in their capacities as
such, whether commenced, asserted or claimed before or after the Effective
Time. In the event of any such claim, action, suit, proceeding or investigation
(an "Action"), (i) Newco shall pay, as incurred, the fees and expenses of
counsel selected by the Indemnified Party, which counsel shall be reasonably
acceptable to Newco, in advance of the final disposition of any such Action to
the fullest extent permitted by applicable law, and, if required, upon receipt
of any undertaking required by applicable law, and (ii) Newco will cooperate in
the defense of any such matter; provided, however, Newco shall not be liable
for any settlement effected without its written consent (which consent shall
not be unreasonably withheld or delayed), and provided further, that Newco
shall not be obligated pursuant to this Section 7.13 to pay the fees and
disbursements of more than one counsel for all Indemnified Parties in any
single Action, unless, in the good faith judgment of any of the Indemnified
Parties, there is or may be a conflict of interests between two or more of such
Indemnified Parties, in which case there may be separate counsel for each
similarly situated group.
(b) The parties agree that the rights to indemnification, including
provisions relating to advances of expenses incurred in defense of any action
or suit, in the certificate of incorporation, bylaws and any indemnification
agreement of DVN and PZE and their Subsidiaries with respect to matters
occurring through the Effective Time, shall survive the Merger and shall
continue in full force and effect for a period of seven years from the
Effective Time; provided, however, that all rights to indemnification in
respect of any Action pending or asserted or claim made within such period
shall continue until the disposition of such Action or resolution of such
claim.
(c) For a period of seven years after the Effective Time, Newco shall cause
to be maintained officers' and directors' liability insurance covering the
Indemnified Parties who are or at any time prior to the Effective Time were
covered by DVN's and PZE's existing officers' and directors' liability
insurance policies on terms substantially no less advantageous to the
Indemnified Parties than such existing insurance with respect to acts or
omissions, or alleged acts or omissions, prior to the Effective Time (whether
claims, actions or other proceedings relating thereto are commenced, asserted
or claimed before or after the Effective Time); provided, that after the
Effective Time, Newco shall not be required to pay annual premiums in excess of
250% of the last annual premium paid by DVN or in excess of 250% of the last
annual premium paid by PZE, as the case may be, prior to the date hereof (the
amount of which premiums are set forth in the DVN Disclosure Letter and PZE
Disclosure Letter), but in such case shall purchase as much coverage as
reasonably practicable for such amount.
(d) The rights of each Indemnified Party hereunder shall be in addition to
any other rights such Indemnified Party may have under the certificate of
incorporation or bylaws of DVN and PZE or any of their Subsidiaries, under the
DGCL, OGCA or otherwise. The provisions of this Section 7.13 shall survive the
consummation of the Merger and expressly are intended to benefit each of the
Indemnified Parties.
(e) In the event Newco or any of its successors or assigns (i) consolidates
with or merges into any other person and shall not be the continuing or
surviving corporation or entity in such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in either such case, proper provision shall be made so that
the successors and assigns of Newco, as the case may be, shall assume the
obligations set forth in this Section 7.13.
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Section 7.14 Certain Benefits. Schedule 7.14 sets forth certain agreements of
Newco, DVN and PZE with respect to employee benefit matters.
Section 7.15 Reorganization. From and after the date hereof and until the
Effective Time, none of DVN, PZE or any of their respective Subsidiaries shall
knowingly (i) take any action, or fail to take any reasonable action, as a
result of which the Merger would fail to qualify as a reorganization within the
meaning of section 368(a) of the Code or (ii) enter into any contract,
agreement, commitment or arrangement to take or fail to take any such action.
Each of the parties shall use its reasonable best efforts to obtain the
opinions of counsel referred to in Sections 8.2(b) and 8.3(b).
Following the Effective Time, Newco shall not knowingly take any action or
knowingly cause any action to be taken which would cause the Merger to fail to
qualify as a reorganization within the meaning of section 368(a) of the Code
(and any comparable provisions of applicable state or local law).
Section 7.16 Rights Agreement. (a) Prior to the Delaware Effective Time, the
Board of Directors of PZE shall take any action (including, if necessary,
amending or terminating (but with respect to termination, only as of
immediately prior to the Delaware Effective Time) the PZE Rights Agreement)
necessary so that none of the execution and delivery of this Agreement, the
Stock Option Agreements, the conversion of shares of PZE Common Stock into
Newco Common Stock in accordance with Article 4 of this Agreement, the issuance
of PZE Common Stock upon exercise of the option granted to DVN pursuant to the
applicable Stock Option Agreement, the consummation of the Merger, or any other
transaction contemplated hereby or by the Stock Option Agreements will cause
(i) PZE Rights to become exercisable under PZE Rights Agreement, (ii) Newco or
DVN or any of their Subsidiaries to be deemed an "Acquiring Person" (as defined
in PZE Rights Agreement), (iii) any such event to be an event described in
Section 11(a)(ii) or 13 of PZE Rights Agreement or (iv) the "Stock Acquisition
Date" or the "Distribution Date" (each as defined in PZE Rights Agreement) to
occur upon any such event, and so that PZE Rights will expire immediately prior
to the Effective Time. Neither the Board of Directors of PZE nor PZE shall take
any other action to terminate PZE Rights Agreement, redeem PZE Rights, cause
any person not to be or become an "Acquiring Person" or otherwise amend PZE
Rights Agreement in a manner adverse to DVN, unless otherwise ordered by a
court of competent jurisdiction.
(b) Prior to the Oklahoma Effective Time, the Board of Directors of DVN shall
take any action (including, if necessary, amending or terminating (but with
respect to termination, only as of immediately prior to the Oklahoma Effective
Time) the DVN Rights Agreement) necessary so that none of the execution and
delivery of this Agreement, the Stock Option Agreements, the conversion of
shares of DVN Common Stock into Newco Common Stock in accordance with Article 4
of this Agreement, the issuance of DVN Common Stock upon exercise of the option
granted to PZE pursuant to the applicable Stock Option Agreement, the
consummation of the Merger, or any other transaction contemplated hereby or by
the Stock Option Agreements will cause (i) the DVN Rights to become exercisable
under the DVN Rights Agreement, (ii) Newco or PZE or any of their Subsidiaries
to be deemed an "Acquiring Person" (as defined in the DVN Rights Agreement),
(iii) any such event to be an event described in Section 11(a)(ii) or 13 of the
DVN Rights Agreement or (iv) the "Stock Acquisition Date" or the "Distribution
Date" (each as defined in the DVN Rights Agreement) to occur upon any such
event, and so that the DVN Rights will expire immediately prior to the
Effective Time. Neither the Board of Directors of DVN nor DVN shall take any
other action to terminate the DVN Rights Agreement, redeem the DVN Rights,
cause any person not to be or become an "Acquiring Person" or otherwise amend
the DVN Rights Agreement in a manner adverse to PZE, unless otherwise ordered
by a court of competent jurisdiction.
(c) Any Rights Agreement approved or adopted by the Board of Directors of
Newco prior to or as of the Effective Time shall be subject to the approval of
DVN and PZE.
Section 7.17 Transition Agreement Termination. PZE will use its reasonable
best efforts to obtain the termination as of the Effective Time of (i) the
Transition Services Agreement dated as of December 2, 1998 between PZE and
Pennzoil-Quaker State Company and (ii) any similar agreements or arrangements
involving sharing of costs under which PZE receives and/or pays for any
services, facilities or property from or to any affiliated or formerly
affiliated entity.
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ARTICLE 8
CONDITIONS
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the Merger shall have been adopted and approved by
the affirmative vote of holders of (i) a majority of the outstanding shares
of PZE Common Stock; and (ii) a majority of the outstanding shares of DVN
Common Stock and the Northstar Exchangeable Shares voting as a single class
with the DVN Special Voting Stock voting for the Northstar Exchangeable
Shares as provided in DVN's charter.
(b) The waiting period applicable to the consummation of the Merger shall
have expired or been terminated under (i) the HSR Act and (ii) any
mandatory waiting period under any applicable foreign competition or
antitrust law or regulation where the failure to observe such waiting
period referred to in this clause (ii) would have, individually or in the
aggregate, a DVN Material Adverse Effect or a PZE Material Adverse Effect.
(c) None of the parties hereto shall be subject to any decree, order or
injunction of a court of competent jurisdiction, U.S. or foreign, which
prohibits the consummation of the Merger; provided, however, that prior to
invoking this condition each party agrees to comply with Section 7.5, and
with respect to other matters not covered by Section 7.5, to use its
commercially reasonable best efforts to have any such decree, order or
injunction lifted or vacated; and no statute, rule or regulation shall have
been enacted by any governmental authority which prohibits or makes
unlawful the consummation of the Merger.
(d) The Form S-4 shall have become effective and no stop order with
respect thereto shall be in effect.
(e) The shares of Newco Common Stock to be issued pursuant to the Merger
shall have been authorized for listing on the NYSE or the AMEX, subject to
official notice of issuance.
Section 8.2 Conditions to Obligation of PZE to Effect the Merger. The
obligation of PZE to effect the Merger shall be subject to the fulfillment at
or prior to the Closing Date of the following conditions:
(a) DVN shall have performed in all material respects its covenants and
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of DVN and Newco
contained in this Agreement and in any document delivered in connection
herewith (i) to the extent qualified by DVN Material Adverse Effect or any
other materiality qualification shall be true and correct and (ii) to the
extent not qualified by DVN Material Adverse Effect or any other materiality
qualification shall be true and correct so long as any failures of such
representations and warranties to be true and correct, individually or in the
aggregate, do not have a DVN Material Adverse Effect, as of the date of this
Agreement and as of the Closing Date (except for representations and warranties
made as of a specified date, which need be true and correct only as of the
specified date), and PZE shall have received a certificate of the DVN, executed
on its behalf by its President or a Vice President of DVN, dated the Closing
Date, certifying to such effect.
(b) PZE shall have received the opinion of Baker & Botts, L.L.P., counsel to
PZE, in form and substance reasonably satisfactory to PZE, dated the Closing
Date, a copy of which shall be furnished to DVN, to the effect that (i) the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of section 368(a) of the Code and (ii) no gain or loss will
be recognized by PZE or the stockholders of PZE who exchange all of their PZE
Common Stock solely for Newco Common Stock pursuant to the Merger (except with
respect to cash received in lieu of a fractional share interest in Newco Common
Stock). In rendering such opinion, such counsel shall be entitled to receive
and rely upon representations of officers of PZE and DVN as to such matters as
such counsel may reasonably request.
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(c) At any time after the date of this Agreement, there shall not have been
any event or occurrence, individually or in the aggregate with all such events
or occurrences, that have had or is likely to have a DVN Material Adverse
Effect.
Section 8.3 Conditions to Obligation of DVN and Newco to Effect the Merger.
The obligations of DVN and Newco to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) PZE shall have performed in all material respects its covenants and
agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of PZE contained
in this Agreement and in any document delivered in connection herewith (i)
to the extent qualified by PZE Material Adverse Effect or any other
materiality qualification shall be true and correct and (ii) to the extent
not qualified by PZE Material Adverse Effect or any other materiality
qualification shall be true and correct so long as any failures of such
representations and warranties to be true and correct, individually or in
the aggregate, do not have a PZE Material Adverse Effect, as of the date of
this Agreement and as of the Closing Date (except for representations and
warranties made as of a specified date, which need be true and correct only
as of the specified date), and DVN shall have received a certificate of
PZE, executed on its behalf by its President or a Vice President of PZE,
dated the Closing Date, certifying to such effect.
(b) DVN shall have received the opinion of McAfee & Taft A Professional
Corporation, counsel to DVN, in form and substance reasonably satisfactory
to DVN, dated the Closing Date, a copy of which will be furnished to PZE,
to the effect that the (i) Merger will be treated for federal income tax
purposes as a reorganization within the meaning of section 368(a) of the
Code and (ii) no gain or loss will be recognized by DVN or the stockholders
of DVN who exchange all of their DVN Common Stock solely for Newco Common
Stock pursuant to the Merger (except with respect to cash received in lieu
of a fractional share interest in Newco Common Stock). In rendering such
opinion, such counsel shall be entitled to receive and rely upon
representations of officers of PZE and DVN as to such matters as such
counsel may reasonably request.
(c) At any time after the date of this Agreement, there shall not have
been any event or occurrence, individually or the in aggregate, with all
such events or occurrences that have had or is likely to have a PZE
Material Adverse Effect.
ARTICLE 9
TERMINATION
Section 9.1 Termination by Mutual Consent. This Agreement may be terminated
at any time prior to the Effective Time by the mutual written consent of PZE
and DVN.
Section 9.2 Termination by DVN or PZE. This Agreement may be terminated by
action of the Board of Directors of DVN or of PZE if:
(a) the Merger shall not have been consummated by December 31, 1999;
provided, however, that the right to terminate this Agreement pursuant to
this clause (a) shall not be available to any party whose failure to
perform or observe in any material respect any of its obligations under
this Agreement in any manner shall have been the cause of, or resulted in,
the failure of the Merger to occur on or before such date;
(b) a meeting (including adjournments and postponements) of PZE's
stockholders for the purpose of obtaining the approval required by Section
8.1(a)(i) shall have been held and such stockholder approval shall not have
been obtained; or
(c) a meeting (including adjournments and postponements) of the DVN's
stockholders for the purpose of obtaining the approval required by Section
8.1(a)(ii) shall have been held and such stockholder approval shall not
have been obtained; or
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(d) a United States federal or state court of competent jurisdiction or
United States federal or state governmental, regulatory or administrative
agency or commission shall have issued an order, decree or ruling or taken
any other action permanently restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action shall
have become final and non-appealable; provided, however, that the party
seeking to terminate this Agreement pursuant to this clause (d) shall have
complied with Section 7.5 and with respect to other matters not covered by
Section 7.5 shall have used its commercially reasonable best efforts to
remove such injunction, order or decree.
Section 9.3 Termination by PZE. This Agreement may be terminated prior to the
Effective Time, by action of the Board of Directors of PZE after consultation
with its legal advisors, if
(a) the Board of Directors of PZE determines that proceeding with the Merger
would be inconsistent with its fiduciary obligations by reason of a PZE
Superior Proposal and elects to terminate this Agreement effective prior to the
Cutoff Date; provided that PZE may not effect such termination pursuant to this
Section 9.3(a) unless and until (i) DVN receives at least one week's prior
written notice from PZE of its intention to effect such termination pursuant to
this Section 9.3(a); (ii) during such week, PZE shall, and shall cause its
respective financial and legal advisors to, consider any adjustment in the
terms and conditions of this Agreement that DVN may propose; and provided,
further, that any termination of this Agreement pursuant to this Section 9.3(a)
shall not be effective until PZE has made the $22,000,000 payment required by
Section 9.5(a)(i); or
(b) (i) there has been a breach by DVN or Newco of any representation,
warranty, covenant or agreement set forth in this Agreement or if any
representation or warranty of DVN or Newco shall have become untrue, in either
case such that the conditions set forth in Section 8.2(a) would not be
satisfied and (ii) such breach is not curable, or, if curable, is not cured
within 30 days after written notice of such breach is given to DVN by PZE;
provided, however, that the right to terminate this Agreement pursuant to
Section 9.3(b) shall not be available to PZE if it, at such time, is in
material breach of any representation, warranty, covenant or agreement set
forth in this Agreement such that the condition set forth in Section 8.3(a)
shall not be satisfied; or
(c) the Board of Directors of DVN shall have withdrawn or materially
modified, in a manner adverse to PZE, its approval or recommendation of the
Merger or recommended a DVN Acquisition Proposal, or resolved to do so.
Section 9.4 Termination by DVN. This Agreement may be terminated at any time
prior to the Effective Time, by action of the Board of Directors of DVN after
consultation with its legal advisors, if:
(a) the Board of Directors of DVN determines that proceeding with the
Merger would be inconsistent with its fiduciary obligations by reason of a
DVN Superior Proposal and elects to terminate this Agreement effective
prior to the Cutoff Date; provided that DVN may not effect such termination
pursuant to this Section 9.4(a) unless and until (i) PZE receives at least
one week's prior written notice from DVN of its intention to effect such
termination pursuant to this Section 9.4(a); (ii) during such week, DVN
shall, and shall cause its respective financial and legal advisors to,
consider any adjustment in the terms and conditions of this Agreement that
PZE may propose; and provided, further, that any termination of this
Agreement pursuant to this Section 9.4(a) shall not be effective until DVN
has made the $22,000,000 payment required by Section 9.5(b)(i); or
(b) (i) there has been a breach by PZE of any representation, warranty
covenant or agreement set forth in this Agreement or if any representation
or warranty of PZE shall have become untrue, in either case such that the
conditions set forth in Section 8.3(a) would not be satisfied and (ii) such
breach is not curable, or, if curable, is not cured within 30 days after
written notice of such breach is given by DVN to PZE; provided, however,
that the right to terminate this Agreement pursuant to Section 9.4(b) shall
not be available to DVN if it, at such time, is in material breach of any
representation, warranty, covenant or agreement set forth in this Agreement
such that the conditions set forth in Section 8.2(a) shall not be
satisfied; or
(c) the Board of Directors of PZE shall have withdrawn or materially
modified, in a manner adverse to DVN, its approval or recommendation of the
Merger or recommended a PZE Acquisition Proposal, or resolved to do so.
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Section 9.5 Effect of Termination.
(a) If this Agreement is terminated
(i) by PZE pursuant to Section 9.3(a); or
(ii) after the public announcement of a PZE Acquisition Proposal, by PZE
or DVN pursuant to Section 9.2(b); or
(iii) after the public announcement or receipt by PZE's Board of
Directors of a PZE Acquisition Proposal, by DVN pursuant to Section 9.4(c);
then PZE shall pay DVN the PZE Termination Amount (subject to reduction
pursuant to Section 6 of the applicable Stock Option Agreement) at the time of
such termination in cash by wire transfer to an account designated by DVN. The
term "PZE Termination Amount" shall mean, in the case of termination pursuant
to clause (i) or clause (iii) of the preceding sentence, $22,000,000 or, in the
case of termination pursuant to clause (ii) of the preceding sentence, "PZE
Termination Amount" shall mean $10,000,000 plus, if (x) PZE executes and
delivers an agreement with respect to any PZE Acquisition or (y) a PZE
Acquisition is consummated, in any such case, within 12 months from the date of
termination pursuant to clause (ii), an additional $12,000,000 (which
additional amount shall be paid promptly by wire transfer to an account
designated by DVN). In the event that the board of directors of PZE recommends
the acceptance by the stockholders of PZE of a third-party tender or exchange
offer for PZE Common Stock, such recommendation shall be treated for purposes
of this paragraph as though an agreement with respect to a PZE Acquisition had
been executed and delivered. For purposes hereof, "PZE Acquisition" means (i) a
consolidation, exchange of shares or merger of PZE with any person, other than
DVN or one of its Subsidiaries, and, in the case of a merger, in which PZE
shall not be the continuing or surviving corporation, (ii) a merger of PZE with
a person, other than DVN or one of its Subsidiaries, in which PZE shall be the
continuing or surviving corporation but the then outstanding shares of PZE
Common Stock shall be changed into or exchanged for stock or other securities
of PZE or any other person or cash or any other property or the shares of PZE
Common Stock outstanding immediately before such merger shall after such merger
represent less than 50% of the voting stock of PZE outstanding immediately
after the merger, (iii) the acquisition of beneficial ownership of 50% or more
of the voting stock of PZE by any person (as such term is used under Section
13(d) of the Exchange Act), or (iv) a sale, lease or other transfer of 50% or
more of the assets of PZE to any person, other than DVN or one of its
Subsidiaries. PZE acknowledges that the agreements contained in this Section
9.5(a) are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, DVN would not enter into this Agreement;
accordingly, if PZE fails promptly to pay any amount due pursuant to this
Section 9.5(a), and, in order to obtain such payment, DVN commences a suit
which results in a judgment against PZE for the payment set forth in this
Section 9.5(a), PZE shall pay to DVN its costs and expenses (including
attorneys' fees) in connection with such suit, together with interest on PZE
Termination Amount from each date for payment until the date of such payment at
the prime rate of The Chase Manhattan Bank in effect on the date such payment
was required to be made plus 2 percent.
(b) If this Agreement is terminated
(i) by DVN pursuant to Section 9.4(a); or
(ii) after the public announcement of a DVN Acquisition Proposal, by PZE
or DVN pursuant to Section 9.2(c); or
(iii) after the public announcement or receipt by DVN's Board of
Directors of a DVN Acquisition Proposal, by PZE pursuant to Section 9.3(c);
then DVN shall pay PZE the DVN Termination Amount (subject to reduction
pursuant to Section 6 of the applicable Stock Option Agreement) at the time of
such termination in cash by wire transfer to an account designated by PZE. The
term "DVN Termination Amount" shall mean, in the case of termination pursuant
to clause (i) or clause (iii) of the preceding sentence, $22,000,000 or, in the
case of termination pursuant to clause
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(ii) of the preceding sentence, "DVN Termination Amount" shall mean $10,000,000
plus, if (x) DVN executes and delivers an agreement with respect to any DVN
Acquisition or (y) a DVN Acquisition is consummated, in any such case, within
12 months from the date of termination pursuant to clause (ii), an additional
$12,000,000 (which additional amount shall be paid promptly by wire transfer to
an account designated by PZE). In the event that the board of directors of DVN
recommends the acceptance by the stockholders of DVN of a third-party tender or
exchange offer for the DVN Common Stock, such recommendation shall be treated
for purposes of this paragraph as though an agreement with respect to a DVN
Acquisition had been executed and delivered. For purposes hereof, "DVN
Acquisition" means (i) a consolidation, exchange of shares or merger of DVN
with any person, other than PZE or one of its Subsidiaries, and, in the case of
a merger, in which DVN shall not be the continuing or surviving corporation,
(ii) a merger of DVN with a person, other than PZE or one of its Subsidiaries,
in which DVN shall be the continuing or surviving corporation but the then
outstanding shares of DVN Common Stock shall be changed into or exchanged for
stock or other securities of DVN or any other person or cash or any other
property or the shares of DVN Common Stock outstanding immediately before such
merger shall after such merger represent less than 50% of the voting stock of
DVN outstanding immediately after the merger, (iii) the acquisition of
beneficial ownership of 50% or more of the voting stock of DVN by any person
(as such term is used under Section 13(d) of the Exchange Act), or (iv) a sale,
lease or other transfer of 50% or more of the assets of DVN to any person,
other than PZE or one of its Subsidiaries. DVN acknowledges that the agreements
contained in this Section 9.5(a) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, PZE would
not enter into this Agreement; accordingly, if DVN fails promptly to pay any
amount due pursuant to this Section 9.5(a), and, in order to obtain such
payment, PZE commences a suit which results in a judgment against DVN for the
payment set forth in this Section 9.5(a), DVN shall pay to PZE its costs and
expenses (including attorneys' fees) in connection with such suit, together
with interest on the DVN Termination Amount from each date for payment until
the date of such payment at the prime rate of The Chase Manhattan Bank in
effect on the date such payment was required to be made plus 2 percent.
(c) In the event of termination of this Agreement and the abandonment of the
Merger pursuant to this Article 9, all obligations of the parties hereto shall
terminate, except the obligations of the parties pursuant to this Section 9.5
and Section 7.12 and except for the provisions of Sections 10.3, 10.4, 10.6,
10.8, 10.9, 10.12, 10.13 and 10.14, provided that nothing herein shall relieve
any party from any liability for any willful and material breach by such party
of any of its covenants or agreements set forth in this Agreement and all
rights and remedies of such nonbreaching party under this Agreement in the case
of such a willful and material breach, at law or in equity, shall be preserved.
Section 9.6 Extension; Waiver. At any time prior to the Effective Time, each
party may by action taken by its Board of Directors, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed on behalf of such
party.
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ARTICLE 10
GENERAL PROVISIONS
Section 10.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Article 3, Article 4 and in
Sections 7.11, 7.12, 7.13, 7.14, 7.15 and this Article 10 and the agreements
delivered pursuant to this Agreement shall survive the Merger.
Section 10.2 Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission or by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
(a) if to DVN, Newco or Devon Oklahoma:
Devon Energy Corporation
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102-8260
Facsimile: (405) 552-8171
Attn: J. Larry Nichols
with a copy to:
McAfee & Taft
10th Floor
Two Leadership Square
211 North Robinson
Oklahoma City, Oklahoma 73102
Facsimile: (405) 235-0439
Attn: Gary F. Fuller
(b) if to PZE:
PennzEnergy Company
Pennzoil Place
P.O. Box 4616
Houston, Texas 77210-4616
Facsimile: (713) 546-6050
Attn: James L. Pate
with a copy to:
Baker & Botts, L.L.P.
One Shell Plaza
910 Louisiana
Houston, Texas 77002-4995
Facsimile: (713) 229-1522
Attn: Moulton Goodrum, Jr.
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
Section 10.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective
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successors and assigns. Notwithstanding anything contained in this Agreement to
the contrary, except for the provisions of Article 4 and Section 7.13, nothing
in this Agreement, expressed or implied, is intended to confer on any person
other than the parties hereto or their respective heirs, successors, executors,
administrators and assigns any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
Section 10.4 Entire Agreement. This Agreement, the exhibits to this
Agreement, PZE Disclosure Letter, the DVN Disclosure Letter and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
Section 10.5 Amendments. This Agreement may be amended by the parties hereto,
by action taken or authorized by their Boards of Directors, at any time before
or after approval of matters presented in connection with the Merger by the
stockholders of PZE or DVN, but after any such stockholder approval, no
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 10.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to its
rules of conflict of laws. Each of PZE and DVN hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Delaware and of the United States of America located in the
State of Delaware (the "Delaware Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Delaware
Courts and agrees not to plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum.
Section 10.7 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
Section 10.8 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretative effect whatsoever. All references in this
Agreement to "the date hereof" shall be deemed to mean May 19, 1999.
Section 10.9 Interpretation. In this Agreement:
(a) Unless the context otherwise requires, words describing the singular
number shall include the plural and vice versa, and words denoting any
gender shall include all genders and words denoting natural persons shall
include corporations and partnerships and vice versa.
(b) The phrase "to the knowledge of" and similar phrases relating to
knowledge of PZE or DVN, as the case may be, shall mean the actual
knowledge of its executive officers.
(c) "Material Adverse Effect" with respect to PZE or DVN shall mean a
material adverse effect or change on (a) the business or financial
condition of a party and its Subsidiaries on a consolidated basis, except
for such changes or effects in general economic, capital market, regulatory
or political conditions or changes that affect generally the oil and gas
industry or (b) the ability of the party to consummate the transactions
contemplated by this Agreement or fulfill the conditions to closing. "PZE
Material Adverse Effect" and "DVN Material Adverse Effect" mean a Material
Adverse Effect with respect to PZE and DVN, respectively.
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Section 10.10 Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
Section 10.11 Incorporation of Exhibits. PZE Disclosure Letter, the DVN
Disclosure Letter and all exhibits attached hereto and referred to herein are
hereby incorporated herein and made a part hereof for all purposes as if fully
set forth herein.
Section 10.12 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broadly as is enforceable.
Section 10.13 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware Court,
this being in addition to any other remedy to which they are entitled at law or
in equity.
Section 10.14 Obligation of Newco and Devon Oklahoma. Whenever this Agreement
requires Newco or Devon Oklahoma (or their successors) to take any action prior
to Effective Time, such requirement shall be deemed to include an undertaking
on the part of DVN to cause Newco or Devon Oklahoma to take such action and a
guarantee of the performance thereof.
Section 10.15 Subsidiaries. As used in this Agreement, the word "Subsidiary"
when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities
or other interests having by their terms ordinary voting power to elect a
majority of the board of directors or others performing similar functions with
respect to such corporation or other organization, or any organization of which
such party is a general partner.
[SIGNATURE PAGE TO FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
DEVON ENERGY CORPORATION
By: /s/ H. Allen Turner
---------------------------------
Name: H. Allen Turner
Title: Vice President
DEVON DELAWARE CORPORATION
By: /s/ H. Allen Turner
---------------------------------
Name: H. Allen Turner
Title: Vice President
DEVON OKLAHOMA CORPORATION
By: /s/ H. Allen Turner
---------------------------------
Name: H. Allen Turner
Title: Vice President
PENNZENERGY COMPANY
By: /s/ James L. Pate
---------------------------------
Name: James L. Pate
Title: Chairman of the Board
[SIGNATURE PAGE TO AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER]
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<PAGE>
EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
OF
DEVON ENERGY CORPORATION
(Originally incorporated under the name
"Devon Delaware Corporation" on May 18, 1999)
ARTICLE I
Name
The name of this corporation (the "Corporation") is Devon Energy Corporation.
ARTICLE II
Registered Office
The address of the registered office of the Corporation in the State of
Delaware is at 1209 Orange Street, in the City of Wilmington, County of New
Castle, and the name of its registered agent at that address is The Corporation
Trust Company.
ARTICLE III
Business
The purpose of the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware (the "General Corporation Law").
ARTICLE IV
Authorized Capital Stock
A. The Corporation shall be authorized to issue a total of 404,500,001 shares
of capital stock divided into classes as follows:
(1) 400,000,000 shares of Common Stock, par value $0.10 per share
("Common Stock"),
(2) 4,500,000 shares of Preferred Stock, par value $1.00 per share
("Preferred Stock"), and
(3) one share of Special Voting Stock, par value $.10 per share.
B. Shares of Preferred Stock may be issued from time to time in one or more
series as may from time to time be determined by the Board of Directors of the
Corporation (the "Board"), each of said series to be distinctly designated. The
voting powers, preferences and relative, participating, optional and other
special rights, and the qualifications, limitations or restrictions thereof, if
any, of each such series may differ from those of any and all other series of
Preferred Stock at any time outstanding, and the Board is hereby expressly
granted authority to fix or alter, by resolution or resolutions, the
designation, number, voting powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, of each such series, including, but without limiting the
generality of the foregoing, the following:
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(1) The distinctive designation of, and the number of shares of Preferred
Stock that shall constitute, such series, which number (except where
otherwise provided by the Board in the resolution establishing such series)
may be increased or decreased (but not below the number of shares of such
series then outstanding) from time to time by action of the Board;
(2) The rights in respect of dividends, if any, of such series of
Preferred Stock, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes or any
other series of the same or other class or classes of capital stock of the
Corporation, and whether or in what circumstances such dividends shall be
cumulative;
(3) The right, if any, of the holders of such series of Preferred Stock
to convert the same into, or exchange the same for, shares of any other
class or classes or of any other series of the same or any other class or
classes of capital stock or other securities of the Corporation or any
other person, and the terms and conditions of such conversion or exchange;
(4) Whether or not shares of such series of Preferred Stock shall be
subject to redemption, and, if so, the terms and conditions of such
redemption (including whether such redemption shall be optional or
mandatory), including the date or dates or event or events upon or after
which they shall be redeemable, and the amount and type of consideration
payable upon redemption, which may vary under different conditions and at
different redemption dates;
(5) The rights, if any, of the holders of such series of Preferred Stock
upon the voluntary or involuntary liquidation, dissolution or winding-up of
the Corporation or in the event of any merger or consolidation of or sale
of assets by the Corporation;
(6) The terms of any sinking fund or redemption or purchase account, if
any, to be provided for shares of such series of the Preferred Stock;
(7) The voting powers, if any, of the holders of any series of Preferred
Stock generally or with respect to any particular matter, which may be less
than, equal to or greater than one vote per share, and which may, without
limiting the generality of the foregoing, include the right, voting as a
series by itself or together with the holders of any other series of
Preferred Stock or all series of Preferred Stock as a class, to elect one
or more directors of the Corporation generally or under such specific
circumstances and on such conditions, as shall be provided in the
resolution or resolutions of the Board adopted pursuant hereto, including,
without limitation, in the event there shall have been a default in the
payment of dividends on or redemption of any one or more series of
Preferred Stock; and
(8) Any other powers, preferences and relative, participating, optional
or other rights, and qualifications, limitations or restrictions of shares
of such series of Preferred Stock.
C. (1) After the provisions with respect to preferential dividends on any
series of Preferred Stock (fixed in accordance with the provisions of
Paragraph B of this Article IV), if any, shall have been satisfied and
after the Corporation shall have complied with all the requirements, if
any, with respect to redemption of, or the setting aside of sums as sinking
funds or redemption or purchase accounts with respect to, any series of
Preferred Stock (fixed in accordance with the provisions of Paragraph B of
this Article IV), and subject further to any other conditions that may be
fixed in accordance with the provisions of Paragraph B of this Article IV,
then and not otherwise the holders of Common Stock shall be entitled to
receive such dividends as may be declared from time to time by the Board.
(2) In the event of the voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation, after distribution in full of the
preferential amounts, if any (fixed in accordance with the provisions of
Paragraph B of this Article IV), to be distributed to the holders of
Preferred Stock by reason thereof, the holders of Common Stock shall,
subject to the additional rights, if any (fixed in accordance with the
provisions of Paragraph B of this Article IV), of the holders of any
outstanding shares of Preferred Stock, be entitled to receive all of the
remaining assets of the Corporation, tangible and intangible, of whatever
kind available for distribution to stockholders ratably in proportion to
the number of shares of Common Stock held by them respectively.
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(3) Except as may otherwise be required by law, and subject to the
provisions of such resolution or resolutions as may be adopted by the Board
pursuant to Paragraph B of this Article IV granting the holders of one or
more series of Preferred Stock exclusive voting powers with respect to any
matter, each holder of Common Stock shall have one vote in respect of each
share of Common Stock held on all matters voted upon by the stockholders.
(4) The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased from
time to time by the affirmative vote of the holders of a majority of the
combined voting power of the then-outstanding shares of Voting Stock,
voting together as a single class.
1,500,000 shares of Preferred Stock are designated 6.49% Cumulative Preferred
Stock, Series A, and have the voting powers, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions thereof set forth in Exhibit 1.
D. Each outstanding share of Special Voting Stock shall be entitled, on all
matters presented to the stockholders of the Corporation, to that number of
votes equal to the number of Exchangeable Shares of Northstar Energy
Corporation, an Alberta corporation, outstanding from time to time not owned by
the Corporation or any of its wholly owned subsidiaries. No dividend or
distribution of assets shall be paid to the holders of Special Voting Stock.
The Special Voting Stock is not convertible into any other class or series of
the capital stock of the Corporation or into cash, property or other rights,
and may not be redeemed. Any shares of Special Voting Stock purchased or
otherwise acquired by the Corporation shall be deemed retired and shall be
canceled and may not thereafter be reissued or otherwise disposed of by the
Corporation. At such time as the Special Voting Stock has no votes attached to
it because there are no Exchangeable Shares outstanding, the Special Voting
Stock shall be canceled. In respect of all matters concerning the voting of
shares, the Common Stock and the Special Voting Stock shall vote as a single
class and such voting rights shall be identical in all respects.
E. No stockholder of the Corporation shall by reason of his holding shares of
any class or series of stock of the Corporation have any preemptive or
preferential right to purchase, acquire, subscribe for or otherwise receive any
additional, unissued or treasury shares (whether now or hereafter acquired) of
any class or series of stock of the Corporation now or hereafter to be
authorized, or any notes, debentures, bonds or other securities convertible
into or carrying any right, option or warrant to purchase, acquire, subscribe
for or otherwise receive shares of any class or series of stock of the
Corporation now or hereafter to be authorized, whether or not the issuance of
any such shares, or such notes, debentures, bonds or other securities, would
adversely affect the dividends or voting or other rights of such stockholder,
and the Board may issue or authorize the issuance of shares of any class or
series of stock of the Corporation, or any notes, debentures, bonds or other
securities convertible into or carrying rights, options or warrants to
purchase, acquire, subscribe for or otherwise receive shares of any class or
series of stock of the Corporation, without offering any such shares of any
such class, either in whole or in part, to the existing stockholders of any
class.
F. Cumulative voting of shares of any class or series of capital stock of the
Corporation having voting rights is not permitted.
G. The holders of Convertible Debentures (as hereinafter defined) shall have
the right to convert such Convertible Debentures into Common Stock, subject to
the terms of the Indenture (as hereinafter defined) and the Supplemental
Indenture (as hereinafter defined). "Indenture" means the Indenture, dated as
of July 3, 1996, between Devon Energy Corporation and The Bank of New York, and
"Supplemental Indenture" means, collectively, the First Supplemental Indenture,
dated as of July 3, 1996, between Devon Energy Corporation and The Bank of New
York, and the Second Supplemental Indenture, dated as of , 1999,
by and among the Corporation, Devon Energy Corporation and the Bank of New
York. "Convertible Debentures" has the meaning assigned to such term in the
Supplemental Indenture.
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The Corporation shall make any further conversion adjustments as may be
required from time to time by the Indenture and the Supplemental Indenture.
ARTICLE V
Election of Directors
A. The business and affairs of the Corporation shall be conducted and managed
by, or under the direction of, the Board. The number of directors which shall
constitute the entire Board shall not be less than three nor more than twenty,
and, except as provided in Paragraph D of this Article V, shall be determined
by resolution adopted by a majority of the entire Board. No reduction in number
shall have the effect of removing any director prior to the expiration of his
or her term.
B. The Board, other than those directors elected by the holders of any series
of Preferred Stock as provided for or fixed pursuant to the provisions of
Article IV, shall be divided into three classes, Class I, Class II and Class
III, and the Board shall designate the directors who shall first serve in Class
I, Class II and Class III. Such classes shall be as nearly equal in number as
possible. Each director shall serve for a term ending on the third annual
meeting following the annual meeting at which such director was elected;
provided, however, that the directors first designated to Class I shall serve
for a term expiring at the annual meeting next following the date of their
designation as Class I Directors, the directors first designated to Class II
shall serve for a term expiring at the second annual meeting next following the
date of their designation as Class II Directors, and the directors first
designated to Class III shall serve for a term expiring at the third annual
meeting next following the date of their designation as Class III Directors. At
each annual election of directors, the directors chosen to succeed those whose
terms then expire shall be of the same class as the directors of the
Corporation they succeed, unless, by reason of any intervening changes in the
authorized number of directors, the Board of Directors shall designate one or
more directorships whose term then expires as directorships of another class in
order more nearly to achieve equality of number of directors among the classes.
In the event of any change in the authorized number of Directors of the
Corporation, each Director of the Corporation then continuing to serve as such
shall nevertheless continue as a Director of the class of which he is a member
until the expiration of his current term, or his prior death, resignation or
removal.
C. Except as otherwise provided for or fixed pursuant to the provisions of
Article IV relating to the rights of the holders of any series of Preferred
Stock to elect additional directors, except as provided in Paragraph D of this
Article V, and subject to the provisions hereof, newly created directorships
resulting from any increase in the authorized number of directors, and any
vacancies on the Board resulting from death, resignation, disqualification,
removal, or other cause, may be filled only by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum of the Board. Any director elected in accordance with the preceding
sentence or Paragraph D of this Article V shall hold office for the remainder
of the full term of the class of directors in which the new directorship was
created or in which the vacancy occurred, and until such director's successor
shall have been duly elected and qualified, subject to his earlier death,
disqualification, resignation or removal. Except as otherwise provided pursuant
to Article IV of this Certificate of Incorporation relating to additional
directors elected by the holders of one or more series of Preferred Stock, no
decrease in the number of directors constituting the Board shall shorten the
term of any incumbent director.
D. There shall be a "Balance Period" during which the number of directors
constituting the whole Board shall at all times be an even number and vacancies
and newly created directorships resulting from any increase in the authorized
number of directors shall be filled, and nominations by the Board shall be
made, as follows:
(a) Any vacancy on the Board resulting from the death, resignation,
disqualification or removal of a Continuing Director (hereinafter defined)
shall be filled only by the affirmative vote of a majority of the remaining
Continuing Directors then in office. Nominations of the Board to fill the
positions of Continuing Directors whose terms are about to expire shall
likewise be made by the affirmative vote of a majority of the Continuing
Directors then in office.
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(b) Any vacancy on the Board resulting from the death, resignation,
disqualification or removal of a New Director (hereinafter defined) shall
be filled only by the affirmative vote of a majority of the remaining New
Directors then in office. Nominations of the Board to fill the positions of
New Directors whose terms are about to expire shall likewise be made by the
affirmative vote of a majority of the New Directors then in office.
Notwithstanding the foregoing provisions of this paragraph (b), throughout
the Balance Period at least one New Director shall be a person who shall
have been mutually approved (prior to his or her initial election to the
Board) by the Chairman and the President of the Corporation.
(c) Any newly created directorship or directorships resulting from an
increase in the authorized number of directors shall be allocated so that
the aggregate number of board positions to be filled by Continuing
Directors shall be equal to the number of Board positions to be filled by
New Directors. Such newly created directorships to be filled by Continuing
Directors shall be filled, or nominations therefor made, in the same manner
as is provided in paragraph (a) above and such newly created directorships
to be filled, or nominations therefor made, by New Directors shall be
filled in the same manner as is provided in paragraph (b) above.
The number of directors which shall constitute the entire Board shall be
expanded if necessary to comply with the foregoing provision of this Section D.
The Balance Period shall begin on the date this Amended and Restated
Certificate of Incorporation becomes effective and shall end on the date of the
annual meeting of stockholders in the year 2000.
"Continuing Director" shall mean a director who was a director of Devon
Energy Corporation, an Oklahoma corporation, immediately prior to the Closing
under the Amended and Restated Agreement and Plan of Merger by and among the
Corporation, Devon Energy Corporation, Devon Oklahoma Corporation and
PennzEnergy Company dated as of May 19, 1999, or who subsequently became a
director as a result of the filing of a newly created directorship or vacancy
by the Continuing Directors as aforesaid or as a result of his or her election
as a director having been nominated by the Continuing Directors as herein
provided. "New Director" shall mean any director other than a Continuing
Director.
E. During any period when the holders of any series of Preferred Stock have
the right to elect additional directors as provided for or fixed pursuant to
the provisions of Article IV, then upon commencement and for the duration of
the period during which such right continues (i) the then otherwise total
authorized number of directors of the Corporation shall automatically be
increased by such specified number of directors, and the holders of such
Preferred Stock shall be entitled to elect the additional directors so provided
for or fixed pursuant to said provisions, and (ii) each such additional
director shall serve until such director's successor shall have been duly
elected and qualified, or until such director's right to hold such office
terminates pursuant to said provisions, whichever occurs earlier, subject to
his earlier death, disqualification, resignation or removal. Except as
otherwise provided by the Board in the resolution or resolutions establishing
such series, whenever the holders of any series of Preferred Stock having such
right to elect additional directors are divested of such right pursuant to the
provisions of such stock, the terms of office of all such additional directors
elected by the holders of such stock, or elected to fill any vacancies
resulting from the death, resignation, disqualification or removal of such
additional directors, shall forthwith terminate and the total and authorized
number of directors of the Corporation shall be reduced accordingly.
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<PAGE>
ARTICLE VI
Meetings of Stockholders
A. Meetings of stockholders of the Corporation may be held within or without
the State of Delaware, as the By-laws of the Corporation may provide. Except as
otherwise provided for or fixed pursuant to the provisions of Article IV
relating to the rights of the holders of any series of Preferred Stock, special
meetings of stockholders of the Corporation may be called only (i) pursuant to
a resolution adopted by a majority of the then-authorized number of directors
of the Corporation and (ii) if permitted by the By-laws of the Corporation, by
the Chairman of the Board or the President of the Corporation as and in the
manner provided in the By-laws of the Corporation. Special meetings of
stockholders may not be called by any other person or persons or in any other
manner. The ability of the stockholders of the Corporation to call a special
meeting of stockholders is hereby specifically denied. Elections of directors
need not be by written ballot unless the By-laws of the Corporation shall so
provide.
B. In addition to the powers conferred on the Board by this Certificate of
Incorporation and by the General Corporation Law, and without limiting the
generality thereof, the Board is specifically authorized from time to time, by
resolution of the Board without additional authorization by the stockholders of
the Corporation, to adopt, amend or repeal the By-laws of the Corporation, in
such form and with such terms as the Board may determine, including, without
limiting the generality of the foregoing, By-laws relating to (i) regulation of
the procedure for submission by stockholders of nominations of persons to be
elected to the Board, (ii) regulation of the attendance at annual or special
meetings of the stockholders of persons other than holders of record or their
proxies, and (iii) regulation of the business that may properly be brought by a
stockholder of the Corporation before an annual or special meeting of
stockholders of the Corporation.
ARTICLE VII
Stockholder Consent
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation, and the ability of the stockholders of the
Corporation to consent in writing to the taking of any action is hereby
specifically denied.
ARTICLE VIII
Limitation of Liability
A director of this Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the General Corporation Law as the same exists or may hereafter
be amended. Any repeal or modification of the foregoing paragraph shall not
adversely affect any right or protection of a director of the Corporation
existing hereunder with respect to any act or omission occurring prior to such
repeal or modification.
ARTICLE IX
Executive Committee
The Board, pursuant to the By-laws of the Corporation or by resolution passed
by a majority of the then-authorized number of directors, may designate any of
their number to constitute an Executive Committee, which Executive Committee,
to the fullest extent permitted by law and provided for in said resolution or
in the By-laws of the Corporation, shall have and may exercise all of the
powers of the Board in the management of the business and affairs of the
Corporation, and shall have power to authorize the seal of the Corporation to
be affixed to all papers that may require it.
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<PAGE>
ARTICLE X
Indemnification
A. The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture or other enterprise against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the Corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent
shall not of itself create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interest of the Corporation and with respect to any criminal action or
proceeding had reasonable cause to believe that his conduct was unlawful.
B. The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another Corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the court in which
such action or suit was brought shall determine, upon application, that despite
the adjudication of liability, but in the view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
C. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized herein.
D. The Corporation may purchase (upon resolution duly adopted by the board of
directors) and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability.
E. To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to herein or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
F. Every such person shall be entitled, without demand by him upon the
Corporation or any action by the Corporation, to enforce his right to such
indemnity in an action at law against the Corporation. The right of
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indemnification and advancement of expenses hereinabove provided shall not be
deemed exclusive of any rights to which any such person may now or hereafter be
otherwise entitled and specifically, without limiting the generality of the
foregoing, shall not be deemed exclusive of any rights pursuant to statute or
otherwise, of any such person in any such action, suit or proceeding to have
assessed or allowed in his favor against the Corporation or otherwise, his
costs and expenses incurred therein or in connection therewith or any part
thereof.
ARTICLE XI
Amendment Of Corporate Documents
A. Certificate of Incorporation
In addition to any affirmative vote required by applicable law and in
addition to any vote of the holders of any series of Preferred Stock provided
for or fixed pursuant to the provisions of Article IV, any alteration,
amendment, repeal or rescission (a "Change") of any provision of this
Certificate of Incorporation must be approved by at least a majority of the
then-authorized number of directors and by the affirmative vote of the holders
of at least a majority of the combined voting power of the then-outstanding
shares of Voting Stock, voting together as a single class; provided, however,
that if any such Change relates to Article V, VI, VII, VIII, X or XII hereof or
to this Article XI, such Change must also be approved by the affirmative vote
of the holders of at least 66 2/3% of the combined voting power of the then-
outstanding shares of Voting Stock, voting together as a single class. Subject
to the provisions hereof, the Corporation reserves the right at any time, and
from time to time, to amend, alter, repeal or rescind any provision contained
in this Certificate of Incorporation in the manner now or hereafter prescribed
by law, and other provisions authorized by the laws of the State of Delaware at
the time in force may be added or inserted, in the manner now or hereafter
prescribed by law; and all rights, preferences and privileges of whatsoever
nature conferred upon stockholders, directors or any other persons whomsoever
by and pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the rights reserved in this article.
B. By-Laws
In addition to any affirmative vote required by law, any Change of the By-
laws of the Corporation may be adopted either (i) by the Board by the
affirmative vote of at least a majority of the then-authorized number of
directors or (ii) by the stockholders by the affirmative vote of the holders of
at least 66 2/3% of the combined voting power of the then-outstanding shares of
Voting Stock, voting together as a single class.
ARTICLE XII
Definitions
For the purposes of this Certificate of Incorporation:
A. A "person" shall mean any individual, firm, corporation, partnership,
limited liability company, trust, unincorporated organization or other entity.
B. "Voting Stock" means all outstanding shares of capital stock of the
Corporation that pursuant to or in accordance with this Certificate of
Incorporation are entitled to vote generally in the election of directors of
the Corporation, and each reference herein, where appropriate, to a percentage
or portion of shares of Voting Stock shall refer to such percentage or portion
of the voting power of such shares entitled to vote.
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IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which
restates and integrates and does further amend the provisions of the
Certificate of Incorporation of the Corporation, and which has been duly
adopted in accordance with the provisions of Sections 242 and 245 of the
Delaware General Corporation Law, has been executed by an authorized officer of
the Corporation on this day of , 1999.
DEVON ENERGY CORPORATION
By:
---------------------------------
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EXHIBIT 1
CERTIFICATE OF DESIGNATIONS
of the
6.49% CUMULATIVE PREFERRED STOCK, SERIES A
of
DEVON ENERGY CORPORATION
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
DEVON ENERGY CORPORATION, a Delaware corporation (the "Corporation"), HEREBY
CERTIFIES that resolutions were duly adopted by the Board of Directors of the
Corporation in accordance with Section 151(g) of the General Corporation Law of
the State of Delaware pursuant to the authority conferred upon the Board of
Directors of the Corporation by the provisions of the Restated Certificate of
Incorporation of the Corporation as follows:
RESOLVED, that a series of the Corporation's Preferred Stock, par value $1.00
per share ("Preferred Stock"), designated as 6.49% Cumulative Preferred Stock,
Series A be and hereby is created and that the designation and number of shares
thereof and the powers, preferences and rights thereof are as follows:
6.49% Cumulative Preferred Stock, Series A
1. Designation and Amount; No Fractional Shares. There shall be a series of
Preferred Stock designated as "6.49% Cumulative Preferred Stock, Series A" (the
"Series A Preferred Stock") and the authorized number of shares constituting
such series shall be 1,500,000. The Series A Preferred Stock is issuable in
whole shares only.
2. Dividends. Holders of shares of Series A Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors or a duly
authorized committee thereof out of funds of the Corporation legally available
for payment of dividends, cumulative cash dividends at the rate of 6.49% per
annum per share on the initial liquidation preference of $100.00 per share
(equivalent to $6.49 per annum per share of Series A Preferred Stock).
Dividends on the Series A Preferred Stock shall be payable quarterly in arrears
on March 31, June 30, September 30 and December 31 of each year, commencing
[September 30, 1999] (each a "Dividend Payment Date"). If any date on which
dividends would otherwise be payable is a Saturday, Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by
law or executive order to close, then the dividends otherwise payable on such
date shall instead be payable on the next succeeding business day. Dividends on
shares of the Series A Preferred Stock shall be fully cumulative and shall
accumulate (whether or not earned or declared and whether or not the
Corporation has funds legally available for the payment of dividends), on a
daily basis, without interest, from the previous Dividend Payment Date, except
that the first dividend shall accrue, without interest, from the date of
initial issuance of the Series A Preferred Stock. Accumulated and unpaid
dividends shall not bear interest. Dividends shall be payable, in arrears, to
holders of record as they appear in the records of the Corporation at the close
of business on the applicable record date, which shall be the 15th day of the
calendar month in which the applicable Dividend Payment Date falls or such
other date designated by the Board of Directors of the Corporation for the
payment of dividends that is not more than 30 nor less than 10 days prior to
such Dividend Payment Date. Any dividend payable on the Series A Preferred
Stock for any dividend period that is shorter or longer than a full quarterly
period shall be computed on the basis of a 360-day year consisting of twelve
30-day months.
A-49
<PAGE>
If, prior to 18 months after the date of the original issuance of the Series
A Preferred Stock, one or more amendments to the Internal Revenue Code of 1986,
as amended (the "Code"), are enacted that change the percentage of the
dividends received deduction (currently 70%) as specified in section 243(a)(1)
of the Code or any successor provision (the "Dividends Received Percentage"),
the amount of each dividend payable (if declared) per share of Series A
Preferred Stock for dividend payments made on or after the effective date of
such change in the Code will be adjusted by multiplying the amount of the
dividend payable described above (before adjustment) by the factor determined
by the following formula (the "DRD Formula"), and rounding the result to the
nearest cent (with one-half cent rounded up):
1- .35(1-.70)
----------
1- .35(1-DRP)
For the purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage (expressed as a decimal) applicable to the dividend in question;
provided, however, that if the Dividends Received Percentage applicable to the
dividend in question shall be less than 50%, then the DRP shall equal .50. No
amendment to the Code, other than a change in the percentage of the dividends
received deduction set forth in section 243(a)(1) of the Code or any successor
provision thereto, will give rise to such an adjustment. Notwithstanding the
foregoing provisions, if, with respect to any such amendment, the Corporation
receives either an unqualified opinion of nationally recognized independent tax
counsel selected by the Corporation or a private letter ruling or similar form
of authorization from the Internal Revenue Service ("IRS") to the effect that
such amendment does not apply to a dividend payable on the Series A Preferred
Stock, then such amendment will not result in the adjustment provided for
pursuant to the DRD Formula with respect to such dividend (including, if
applicable, any adjustment that would otherwise result in the payment of Post-
Declaration Date Dividends or Additional Dividends as defined below). Any such
opinion shall be based upon the legislation amending or establishing the
Dividends Received Percentage or upon a published pronouncement of the IRS
addressing such legislation. Unless the context otherwise requires, references
to dividends in this Certificate of Designations will mean dividends as
adjusted by the DRD Formula. The Corporation's calculation of the dividends
payable, as so adjusted and as certified accurate as to calculation and
reasonable as to method by the independent certified public accountants then
regularly engaged by the Corporation, shall be final and not subject to review
absent manifest error.
Notwithstanding anything contained in the preceding paragraph, if any such
amendment to the Code which reduces the Dividends Received Percentage is
enacted after the dividend payable on a Dividend Payment Date has been declared
but before such Dividend Payment Date, the amount of the dividend payable on
such Dividend Payment Date will not be increased; instead, an additional
dividend (a "Post-Declaration Date Dividend") equal to the excess, if any, of
(x) the product of the dividend paid by the Corporation on such Dividend
Payment Date and the factor determined in accordance with the DRD Formula (with
the DRP used in the DRD Formula equal to the greater of the Dividend Received
Percentage applicable to the dividend in question and .50) over (y) the
dividend paid by the Corporation on such Dividend Payment Date, will accrue and
will be payable (if declared) on the next succeeding Dividend Payment Date to
holders of Series A Preferred Stock on the record date applicable to the next
succeeding Dividend Payment Date or, if the Series A Preferred Stock is called
for redemption prior to such record date, to holders of Series A Preferred
Stock on the applicable redemption date, as the case may be, in addition to any
other amounts payable on such date.
If any such amendment to the Code is enacted that reduces the Dividends
Received Percentage and the reduction in the Dividends Received Percentage
retroactively applies to a Dividend Payment Date as to which the Corporation
previously paid dividends on the Series A Preferred Stock (each, an "Affected
Dividend Payment Date"), additional dividends (the "Additional Dividends") will
accrue and will be payable (if declared) on the next succeeding Dividend
Payment Date (or, if such amendment is enacted after the dividend payable on
such Dividend Payment Date has been declared, on the second succeeding Dividend
Payment Date following the date of enactment) to holders of record on the
record date applicable to such succeeding Dividend Payment Date or, if the
Series A Preferred Stock is called for redemption prior to such record date, to
holders
A-50
<PAGE>
of Series A Preferred Stock on the applicable redemption date, as the case may
be, in an amount equal to the sum, for all Affected Dividend Payment Dates, of
the excess of (x) the product of the dividend paid by the Corporation on such
Affected Dividend Payment Date and the factor determined in accordance with the
DRD Formula (with the DRP used in the DRD Formula equal to the greater of the
Dividends Received Percentage and .50 applied to such Affected Dividend Payment
Date) over (y) the dividend paid by the Corporation on such Affected Dividend
Payment Date. The Corporation will only make one payment of Additional
Dividends for any such amendment.
Notwithstanding the foregoing, no adjustment in the dividends payable by the
Corporation shall be made, and no Post-Declaration Date Dividends or Additional
Dividends shall be payable by the Corporation, in respect of the enactment of
any amendment to the Code 18 months or more after the date of original issuance
of the Series A Preferred Stock.
In the event that the amount of dividends payable per share of the Series A
Preferred Stock is adjusted pursuant to the DRD Formula and/or Post-Declaration
Date Dividends or Additional Dividends are to be paid, the Corporation shall
give notice of each such adjustment and, if applicable, any Post-Declaration
Date Dividends and Additional Dividends to the holders of Series A Preferred
Stock.
No dividends may be declared or paid or set apart for payment on any stock of
the Company ranking on a parity with the Series A Preferred Stock with respect
to the payment of dividends unless there shall also be or have been declared
and paid or set apart for payment on the Series A Preferred Stock dividends for
all dividend payment periods of the Series A Preferred Stock ending on or
before the dividend payment date of such parity stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such parity stock, on the one hand, and (y) accumulated and unpaid through the
dividend payment period or periods of the Series A Preferred Stock next
preceding such dividend payment date, on the other hand.
Except as set forth in the preceding paragraph, unless full cumulative
dividends on the Series A Preferred Stock have been paid through the most
recently completed quarterly dividend period for the Series A Preferred Stock,
no dividends (other than in Common Stock of the Corporation) may be paid or
declared and set apart for payment or other distribution made upon the Common
Stock or on any other stock of the Corporation ranking junior to or on a parity
with the Series A Preferred Stock as to dividends, nor may any Common Stock or
any other stock of the Corporation ranking junior to or on a parity with the
Series A Preferred Stock as to dividends be redeemed, purchased or otherwise
acquired for any consideration (or any payment be made to or available for a
sinking fund for the redemption of any shares of such stock; provided, however,
that any moneys theretofore deposited in any sinking fund with respect to any
such stock in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such stock in accordance
with the terms of such sinking fund, regardless of whether at the time of such
application full cumulative dividends upon shares of the Series A Preferred
Stock outstanding to the most recent Dividend Payment Date shall have been paid
or declared and set apart for payment) by the Corporation; provided that any
such junior or parity stock or Common Stock may be converted into or exchanged
for stock of the Corporation ranking junior to the Series A Preferred Stock as
to dividends.
3. Liquidation Preference. The shares of Series A Preferred Stock shall rank,
as to rights to distributions on liquidation, dissolution or winding up of the
Corporation, prior to the shares of Common Stock and any other stock of the
Corporation ranking junior to the Series A Preferred Stock as to rights upon
liquidation, dissolution or winding up of the Corporation, so that in the event
of any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of the Series A Preferred Stock shall be
entitled to receive out of the assets of the Corporation legally available for
distribution to its stockholders, an amount equal to $100 per share, plus an
amount equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid on the shares of Series A Preferred Stock to the date of
payment (including any Post-Declaration Date Dividends and Additional
Dividends), before any distribution of assets is made to holders of shares of
Common Stock or any other class or series of stock of the Corporation that
ranks junior to the Series A Preferred Stock as to rights to distributions upon
liquidation, dissolution or winding up.
A-51
<PAGE>
The holders of the Series A Preferred Stock shall not be entitled to receive
the preferential amounts as aforesaid until the liquidation preference of any
other stock of the Corporation ranking senior to the Series A Preferred Stock
as to rights to distributions upon liquidation, dissolution or winding up shall
have been paid (or a sum set aside therefor sufficient to provide for payment)
in full. After payment of the full amount of the preferential amounts as
aforesaid, the holders of shares of Series A Preferred Stock will not be
entitled to any further participation in any distribution of assets by the
Corporation. If, upon any liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation, or proceeds thereof, distributable
among the holders of shares of Series A Preferred Stock and any stock ranking
on a parity with the Series A Preferred Stock as to rights to distributions on
liquidation, dissolution or winding up of the Corporation shall be insufficient
to pay in full the preferential amounts to which such stock would be entitled,
then such assets, or the proceeds thereof, shall be distributable among such
holders ratably in accordance with the respective amounts which would be
payable on such shares if all amounts payable thereon were paid in full. For
the purposes hereof, neither a consolidation or merger of the Corporation with
or into any other corporation, nor a merger of any one or more other
corporations with or into the Corporation, nor a sale, lease, exchange or
transfer of all or substantially all of the Corporation's assets shall be
considered a liquidation, dissolution or winding up of the Corporation.
4. Conversion. The Series A Preferred Stock is not convertible into, or
exchangeable for, other securities or property.
5. Voting Rights. The Series A Preferred Stock, except as provided herein or
as otherwise from time to time required by law, shall have no voting rights.
Whenever, at any time or times, the equivalent of six quarterly dividends,
whether or not consecutive, on the outstanding shares of Series A Preferred
Stock or on any stock ranking on a parity with the Series A Preferred Stock
with respect to the payments of dividends shall be in arrears, the number of
directors of the Corporation shall be increased by two (without duplication of
any increase made pursuant to the terms of any other series of Preferred Stock)
and the holders of the Series A Preferred Stock shall have the right, with
holders of shares of any one or more other series of Preferred Stock
outstanding at the time upon which like voting rights have been conferred and
are exercisable ("Voting Parity Stock"), voting together as a class, to vote
for the election of two directors (hereinafter the "Preferred Directors" and
each a "Preferred Director") to fill such newly created directorships at a
special meeting called at the request of holders of Series A Preferred Stock
and/or Voting Parity Stock entitled to cast not less than 25% of the votes
entitled to be cast by all such Series A Preferred Stock and Voting Parity
Stock outstanding (provided that no such special meeting shall be called during
the period within 60 days immediately prior to the date fixed for the next
annual meeting of stockholders) or at the Corporation's next annual meeting of
stockholders, and at each subsequent annual meeting of stockholders until such
right shall terminate as hereinafter provided. Such voting right shall continue
until all dividends accumulated on such shares of Preferred Stock on which
voting rights have been conferred, including the Series A Preferred Stock, for
the past dividend periods and the then current dividend period shall have been
fully paid or declared and a sum sufficient for the payment thereof set aside
for payment, whereupon such right shall terminate, subject to revesting in the
event of each and every subsequent default of the character above mentioned.
Upon any termination of the right of the holders of shares of Series A
Preferred Stock and Voting Parity Stock as a class to vote for directors as
provided above, the term of office of all Preferred Directors then in office
shall terminate immediately and the authorized number of directors shall be
reduced by the number of Preferred Directors elected pursuant hereto. Any
vacancy created by the removal of any Preferred Director may be filled only by
the affirmative vote of the holders of shares of Series A Preferred Stock
voting separately as a class (together with the holders of shares of Voting
Parity Stock). If the office of any Preferred Director becomes vacant for any
reason other than removal from office, the remaining Preferred Director may
choose a successor who shall hold office for the unexpired term in respect of
which such vacancy occurred. At elections for such directors, each holder of
shares of Series A Preferred Stock shall be entitled to one vote for each share
held (the holders of shares of any other class or series of Voting Parity Stock
being entitled to such number of votes, if any, for each share of such stock
held as may be granted to them).
A-52
<PAGE>
So long as any shares of any Series A Preferred Stock remain outstanding, the
Corporation shall not, without the affirmative vote of the holders of at least
66 2/3% of the shares of such Series A Preferred Stock:
(i) authorize, create or issue any capital stock of the Corporation
ranking, as to dividends or upon liquidation, dissolution or winding up,
prior to such Series A Preferred Stock, or reclassify any authorized
capital stock of the Corporation into any such shares of such capital stock
or issue any obligation or security convertible into or evidencing the
right to purchase any such shares of capital stock, or
(ii) amend, alter or repeal the certificate of designations for such
Series A Preferred Stock, or the Restated Certificate of Incorporation of
the Corporation, whether by merger, consolidation or otherwise, so as to
adversely affect the powers, preferences or special rights of such Series A
Preferred Stock (provided that no such adverse effect shall be deemed to
result if the Series A Preferred Stock is converted or exchanged in a
merger or consolidation into preferred stock of the corporation surviving
such merger or consolidation or of the corporation issuing any securities
into which Common Stock is converted or exchanged in such transaction if
the powers, preferences and rights of such preferred stock are not
different in an adverse respect from those of the Series A Preferred
Stock).
Any increase in the amount of authorized Common Stock, Preference Common Stock
or Preferred Stock, or any increase or decrease in the number of shares of any
series of Preference Common Stock or Preferred Stock or the authorization,
creation and issuance of other classes or series of Common Stock or other
stock, in each case ranking on a parity with or junior to the shares of Series
A Preferred Stock with respect to the payment of dividends and distributions
upon liquidation, dissolution or winding up, shall not be deemed to adversely
affect such powers, preferences or special rights.
The foregoing voting provisions shall not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required or
upon which the holders of Series A Preferred Stock shall be entitled to vote
shall be effected, all outstanding shares of Series A Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
6. Redemption. The shares of Series A Preferred Stock shall not be redeemable
prior to June 2, 2008. On and after such date, the Corporation, at its option,
may redeem shares of the Series A Preferred Stock, as a whole or in part, at
any time or from time to time, at a redemption price equal to $100 per share,
plus, in each case, an amount equal to all dividends (whether or not earned or
declared) accrued and accumulated and unpaid (including any Post-Declaration
Date Dividends and Additional Dividends) to the date fixed for redemption,
without interest.
If full cumulative dividends on the Series A Preferred Stock have not been
paid or set apart for payment with respect of all prior dividend periods, the
Series A Preferred Stock may not be redeemed in part and the Corporation may
not purchase or acquire any shares of the Series A Preferred Stock otherwise
than pursuant to a purchase or exchange offer made on the same terms to all
holders of the Series A Preferred Stock. If fewer than all the outstanding
shares of Series A Preferred Stock are to be redeemed, the number of shares to
be redeemed shall be determined by the Board of Directors and the shares to be
redeemed shall be selected by lot or pro rata or by any other means determined
by the Board of Directors in its sole discretion to be equitable.
In the event the Corporation shall redeem shares of Series A Preferred Stock,
written notice of such redemption shall be given by first class mail, postage
prepaid, mailed not less than 30 days nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed at such
holder's address as the same appears on the stock books of the Corporation and
notice shall also be given by publication during the aforesaid period prior to
the redemption date in a newspaper of general circulation in the Borough of
Manhattan, the City of New York; provided, however, that no failure to give
such notice nor any defect therein shall affect the validity of the proceedings
for the redemption of any shares of Series A Preferred Stock to be redeemed
except as to the holder to whom the Corporation has failed to mail said notice
or except as to the holder whose notice was defective. Each such notice shall
state: (a) the redemption date; (b) the number of
A-53
<PAGE>
shares of Series A Preferred Stock to be redeemed and, if less than all the
shares held by such holder are to be redeemed from such holder, the number of
shares to be redeemed from such holder; (c) the redemption price and any
accumulated and unpaid dividends to the redemption date; (d) the place or
places where certificates for such shares are to be surrendered for payment of
the redemption price; and (e) that dividends on the shares to be redeemed will
cease to accrue on such redemption date (unless the Corporation shall default
in providing funds for the payment of the redemption price of the shares called
for redemption at the time and place specified in such notice).
If a notice of redemption has been given pursuant to this Paragraph 6 and if,
on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart
from its other funds, in trust for the pro rata benefit of the holders of the
shares of Series A Preferred Stock so called for redemption, then,
notwithstanding that any certificates for such shares have not been surrendered
for cancellation, on the redemption date dividends shall cease to accrue on the
shares to be redeemed, and at the close of business on the redemption date the
holders of such shares shall cease to be stockholders with respect to such
shares and shall have no interest in or claims against the Corporation by
virtue thereof and shall have no voting or other rights with respect to such
shares, except the right to receive the moneys payable upon surrender (and
endorsement, if required by the Corporation) of their certificates, and the
shares evidenced thereby shall no longer be outstanding. The Corporation's
obligation to provide funds for the payment of the redemption price (and any
accumulated and unpaid dividends to the redemption date) of the shares called
for redemption shall be deemed fulfilled if, on or before a redemption date,
the Corporation shall deposit, with a bank or trust company, or an affiliate of
a bank or trust company, having an office or agency in New York City and having
a capital and surplus of at least $50,000,000, such funds sufficient to pay the
redemption price (and any accumulated and unpaid dividends to the redemption
date) of the shares called for redemption, in trust for the account of the
holders of the shares to be redeemed (and so as to be and continue to be
available therefor), with irrevocable instructions and authority to such bank
or trust company that such funds be delivered upon redemption of the shares of
Series A Preferred Stock so called for redemption.
Subject to applicable escheat laws, any moneys so set aside by the
Corporation and unclaimed at the end of two years from the redemption date
shall revert to the general funds of the Corporation, after which reversion the
holders of such shares so called for redemption shall look only to the general
funds of the Corporation for the payment of the amounts payable upon such
redemption. Any interest accrued on funds so deposited shall be paid to the
Corporation from time to time.
Shares of Series A Preferred Stock that have been issued and reacquired in
any manner, including shares purchased or redeemed, shall (upon compliance with
any applicable provisions of the laws of the State of Delaware) have the status
of authorized and unissued shares of the class of Preferred Stock undesignated
as to series and may be redesignated and reissued as part of any series of the
preferred stock.
7. Amendment of Resolution. The Board reserves the right from time to time to
increase or decrease the number of shares that constitute the Series A
Preferred Stock (but not below the number of shares thereof then outstanding)
and in other respects to amend this Certificate of Designations within the
limitations provided by law, this resolution and the Restated Certificate of
Incorporation.
8. Rank. Any stock of any class or classes or series of the Corporation shall
be deemed to rank:
(a) prior to shares of the Series A Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes or series shall be entitled by
the terms thereof to the receipt of dividends or of amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in
preference or priority to the holders of shares of the Series A Preferred
Stock;
(b) on a parity with shares of the Series A Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, whether
or not the dividend rates, dividend payment dates, or redemption or
liquidation prices per share thereof are different from those of the Series
A Preferred Stock,
A-54
<PAGE>
if the holders of stock of such class or classes or series shall be
entitled by the terms thereof to the receipt of dividends or of amounts
distributed upon liquidation, dissolution or winding up, as the case may
be, in proportion to their respective dividend rates or liquidation prices,
without preference or priority of one over the other as between the holders
of such stock and the holders of shares of Series A Preferred Stock; and
(c) junior to shares of the Series A Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such
class or classes or series shall be Common Stock or if the holders of the
Series A Preferred Stock shall be entitled to the receipt of dividends or
of amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in preference or priority to the holders of stock of such
class or classes or series.
The Series A Preferred Stock shall rank, as to dividends and upon
liquidation, dissolution or winding up, senior to the Corporation's Series A
Junior Participating Preferred Stock.
A-55
<PAGE>
EXHIBIT B
Director Designees
<TABLE>
<CAPTION>
Expiration of
Name of Director Initial Term Remarks
---------------- ------------- -------
<C> <C> <S>
John W. Nichols.................. To resign and become Chairman Emeritus honorary, non-voting director
<CAPTION>
DVN Designees
-------------
<C> <C> <S>
1. J. Larry Nichols............. May-00 President and Chief Executive Officer
2. Thomas E. Ferguson........... May-01
3. John A. Hagg................. May-00
4. David M. Gavrin.............. May-01
5. Michael M. Kanovsky.......... May-02
6. H.R. Sanders, Jr............. May-02
7. Michael E. Gellert........... May-02
<CAPTION>
PZE Designees
-------------
<C> <C> <S>
1. Henry R. Hamman.............. May-00
2. Robert B. Weaver............. May-00
3. Brent Scowcroft.............. May-01
4. Terry L. Savage.............. May-01
5. James L. Pate................ May-02 Chairman of the Board
6. Robert Mosbacher, Jr......... May-02
7. New director................. May-02 Mutually approved by Chairman and President
</TABLE>
A-56
<PAGE>
Schedule 3.1
Principal Officers of Newco
Chairman--James L. Pate
President and Chief Executive Officer--J. Larry Nichols
The remaining officers will be designated by DVN.
A-57
<PAGE>
Schedule 7.14
Employee Benefit Matters
1. With respect to an award consisting of a conditional or restricted
share unit award of PZE Common Stock outstanding as of the Effective Time,
such award shall be converted as of the Effective Time into the same
conditional or restricted share unit awards of Newco Common Stock with the
number of shares of Newco Common Stock covered by such award being equal to
the number of shares of PZE Common Stock covered by the award prior to the
Effective Time multiplied by the PZE Exchange Ratio. All vesting conditions
and time periods shall remain the same and apply to the converted awards of
Newco Common Stock.
2. Subsequent to the Effective Time, James L. Pate will receive an annual
salary from Newco of $200,000 payable monthly, plus normal business
expenses, and Newco will make available to Mr. Pate office space in Newco's
corporate headquarters with access to secretarial and administrative
services. Mr. Pate will be issued either (i) 15,000 shares of Newco Common
Stock immediately after the Effective Time or (ii) 33,520 shares of PZE
Common Stock immediately prior the Effective Time. These shares will be
restricted, with restrictions ending for 1/3 of the shares on each of the
first, second and third anniversaries of the Effective Time. Restrictions
end on all shares in the event of death, disability or removal of Mr. Pate
as Chairman of the Board of Newco.
A-58
<PAGE>
ANNEX B
May 19, 1999
Confidential
Board of Directors
Devon Energy Corporation
20 North Broadway, Suite 1500
Oklahoma City, OK 73102
Gentlemen:
Devon Energy Corporation ("Devon") and PennzEnergy Company ("PennzEnergy")
propose to enter into an Agreement and Plan of Merger, dated as of May 19, 1999
(the "Agreement") pursuant to which Devon will become a wholly-owned subsidiary
of a newly formed Delaware corporation ("New Devon") and PennzEnergy will merge
into New Devon in a transaction (the "Merger") in which each share of
PennzEnergy's common stock (the "PennzEnergy Common Stock") will be converted
into 0.4475 shares of New Devon's common stock (the "New Devon Common Stock")
and each share of Devon's common stock (the "Devon Common Stock") will be
converted into one share of New Devon Common Stock (collectively, the
PennzEnergy exchange ratio and the Devon exchange ratio are referred to herein
as the "Effective Exchange Ratio").
You have requested our opinion as to whether the Effective Exchange Ratio is
fair, from a financial point of view, to the holders of Devon Common Stock.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed, among other public information, PennzEnergy's Annual
Reports, Forms 10-K and related financial information for the five fiscal
years ended December 31, 1998 and PennzEnergy's Form 10-Q and the related
unaudited financial information for the three months ended March 31, 1999;
(2) Reviewed, among other public information, Devon's Annual Reports,
Forms 10-K and related financial information for the five fiscal years
ended December 31, 1998 and Devon's Form 10-Q and the related unaudited
financial information for the three months ended March 31, 1999;
(3) Reviewed certain reserve reports as of December 31, 1998 prepared by
PennzEnergy and PennzEnergy's independent petroleum engineers;
(4) Reviewed certain reserve reports as of December 31, 1998 prepared by
Devon and Devon's independent petroleum engineers;
(5) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and prospects of
PennzEnergy and Devon, as well as the amount and timing of the cost savings
and the related expenses and synergies expected to result from the Merger,
furnished to us by or on behalf of PennzEnergy and Devon;
(6) Conducted discussions with members of senior management of
PennzEnergy and Devon concerning their respective businesses and prospects;
(7) Reviewed the historical market prices and trading activity for the
PennzEnergy Common Stock and the Devon Common Stock and compared them with
that of certain publicly traded companies which we deemed to be relevant;
(8) Compared the financial position and results of operations of
PennzEnergy and Devon with that of certain companies which we deemed to be
relevant;
(9) Compared the proposed financial terms of the transactions
contemplated by the Agreement with the financial terms of certain other
business combinations which we deemed to be relevant;
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(10) Considered the pro forma financial impact of the Merger on Devon;
(11) Reviewed a draft of the Agreement dated May 17, 1999; and
(12) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness of
all information that was publicly available, supplied or otherwise communicated
to us by PennzEnergy and Devon, and we have not assumed any responsibility to
independently verify such information. With respect to the financial forecasts
furnished by Devon and examined by us, we have assumed that they were
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of the management of Devon as to the future
performance of Devon and New Devon. We have also relied upon assurances of the
management of Devon and PennzEnergy, respectively, that they are unaware of any
facts that would make the information or financial forecasts provided to us
incomplete or misleading. We have not made any independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Devon or
PennzEnergy nor have we been furnished with any such evaluations or appraisals.
We have also assumed, with your consent, that (i) the Merger will be accounted
for under the purchase method of accounting, (ii) the Merger will be a tax-free
reorganization and (iii) any material liabilities (contingent or otherwise,
known or unknown) of Devon and PennzEnergy are as set forth in the consolidated
financial statements of Devon and PennzEnergy, respectively. Our opinion is
based on economic, monetary and market conditions existing on the date hereof.
This opinion is directed to the Board of Directors of Devon and does not
constitute a recommendation to any shareholder of Devon as to how any such
shareholder should vote on the Merger. This opinion does not address the
relative merits of the Merger and any other transactions or business strategies
discussed by the Board of Directors of Devon as alternatives to the Merger or
the decision of the Board of Directors of Devon to proceed with the Merger. We
were not requested to, and did not, solicit third party indications of interest
in a business combination transaction with Devon. No opinion is expressed
herein as to the price at which the securities to be issued in the Merger may
trade at any time.
In the ordinary course of business, PaineWebber Incorporated may trade in the
securities of Devon and PennzEnergy for our own account and for the accounts of
our customers and, accordingly, may at any time hold long or short positions in
such securities.
PaineWebber Incorporated is currently acting as financial advisor to Devon in
connection with the Merger and will be receiving a fee in connection with the
rendering of this opinion. In the past, PaineWebber Incorporated and its
affiliates have provided investment banking and other financial services to
Devon and to PennzEnergy and have received fees for rendering these services.
On the basis of, and subject to the foregoing, we are of the opinion that the
Effective Exchange Ratio is fair, from a financial point of view, to the
holders of Devon Common Stock.
This opinion has been prepared for the information of the Board of Directors
of Devon in connection with the Merger and shall not be reproduced, summarized,
described or referred to, provided to any person or otherwise made public or
used for any other purpose without the prior written consent of PaineWebber
Incorporated, provided, however, that this letter may be reproduced in full in
the Proxy Statement/Prospectus to be filed with the Securities and Exchange
Commission in connection with the Merger.
Very truly yours,
/s/ PaineWebber Incorporated
-------------------------------------
PAINEWEBBER INCORPORATED
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ANNEX C
May 19, 1999
The Board of Directors
PennzEnergy Company
Pennzoil Place
P.O. Box 4616
Houston, TX 77210-4616
Attention: James L. Pate
Chairman of the Board
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of PennzEnergy Company (the "Company") of the
consideration to be received by them in connection with the proposed merger
(the "Merger") of the Company with Devon Delaware Corporation ("Newco"), a
wholly owned subsidiary of Devon Energy Corporation ("Devon"). Pursuant to the
Amended and Restated Agreement and Plan of Merger, dated as of May 19, 1999
(the "Agreement"), among the Company, Devon, Newco and Devon Oklahoma
Corporation, a wholly owned subsidiary of Newco ("Devon Oklahoma"), Devon
Oklahoma will merge with and into Devon, the Company will merge with and into
Newco, and the separate corporate existences of Devon Oklahoma and the Company
will cease. In addition, each share of common stock, par value $0.83 1/3 per
share (the "Company Common Stock"), of the Company issued and outstanding
immediately prior to the effective time of the Merger (other than such shares
held in the Company's treasury or owned by Devon, Newco, Devon Oklahoma, or any
wholly owned subsidiary of the Company or Devon) will be converted into 0.4475
shares of common stock, par value $.01 per share (the "Newco Common Stock"), of
Newco, subject to adjustment as provided in the Agreement, and each share of
common stock, par value $.10 per share (the "Devon Common Stock"), of Devon
issued and outstanding immediately prior to the effective time of the Merger
(other than such shares held in Devon's treasury or owned by the Company,
Newco, Devon Oklahoma, or any wholly owned subsidiary of Devon or the Company)
will be converted into one share of Newco Common Stock.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) certain
publicly available information concerning the business of the Company and Devon
and of certain other companies engaged in businesses comparable to those of the
Company and Devon, 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 Devon and the
consideration received for such companies; (iv) current and historical market
prices of the Company Common Stock and the Devon Common Stock; (v) the audited
financial statements of the Company and Devon for the fiscal year ended
December 31, 1998, and the unaudited financial statements of the Company and
Devon for the period ended March 31, 1999; (vi) certain internal tax
information provided by representatives of the Company and Devon and
information provided by the Company's and Devon's independent reserve engineers
and Devon's management (including certain estimates of proved oil and natural
gas reserves and projected annual production volumes of such reserves in
certain domestic and international areas); and (vii) the terms of other
business combinations that we deemed relevant.
In addition, we have held discussions with representatives of the Company and
Devon with respect to certain aspects of the Merger, the past and current
business operations of the Company and Devon, the financial condition and
future prospects and operations of the Company and Devon, the effects of the
Merger on the financial condition and future prospects of the Company and
Devon, and certain other matters we believed necessary or appropriate to our
inquiry. We have conducted summary level due diligence with the management of
the Company and considered such other information as we deemed appropriate for
the purposes of this opinion.
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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 and Devon 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 information provided to us, we have assumed that it has been
reasonably prepared based on assumptions reflecting the best currently
available estimates and judgments by management of the Company and Devon. We
have also assumed that the Merger will have the tax consequences described in
discussions with, and materials furnished to us by, representatives of the
Company, and that the other transactions contemplated by the Agreement will be
consummated as described in the Agreement. 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 which the Newco
Common Stock will trade at any future time. Our opinion relates only to the
fairness, from a financial point of view, to the stockholders of the Company of
the consideration to be received by them in the proposed Merger, and we do not
express any opinion as to any other alternative transactions that may have been
considered or available to the management or board of directors of the Company.
We have acted as financial advisor to the Company with respect to the
proposed Merger and have received a fee from the Company for our services. We
will also receive an additional fee if the proposed Merger is consummated. In
the past, we and our affiliates have performed various investment and
commercial banking services for the Company, for which we and our affiliates
have received customary compensation. In the ordinary course of their
businesses, J.P. Morgan Securities Inc. and its affiliates may actively trade
the debt and equity securities of the Company or Devon 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 to be received by the Company's stockholders
in the proposed Merger is fair, from a financial point of view, to such
stockholders.
This letter is provided to the Board of Directors of the Company in
connection with and for the purposes of its evaluation of the Merger. This
opinion does not constitute a recommendation to any stockholder of the Company
as to how such stockholder should vote with respect to the Merger.
Very truly yours,
J.P. MORGAN SECURITIES INC.
/s/ Ferrell P. McClean
Name: Ferrell P. McClean
Title: Managing Director
C-2
<PAGE>
ANNEX D
AMENDED AND RESTATED STOCK OPTION AGREEMENT
This AMENDED AND RESTATED STOCK OPTION AGREEMENT dated as of May 19, 1999 is
by and between Devon Energy Corporation, an Oklahoma corporation (the
"Company"), and PennzEnergy Company, a Delaware corporation (the "Grantee").
RECITALS
The Grantee, the Company and Devon Delaware Corporation, a Delaware
corporation and a wholly owned subsidiary of the Company ("Newco"), entered
into an Agreement and Plan of Merger, as amended, dated as of May 19, 1999 (the
"Original Merger Agreement").
As a condition and inducement to the Grantee's willingness to enter into the
Original Merger Agreement, the Grantee requested that the Company agree, and
the Company agreed, to grant the Grantee an option to purchase shares of DVN
Common Stock (as defined in the Merger Agreement) pursuant to a Stock Option
Agreement, dated as of May 19, 1999 (the "Original Option Agreement").
The Company, the Grantee, Newco and Devon Oklahoma Corporation, an Oklahoma
corporation ("Devon Oklahoma"), are entering into the Merger Agreement and
thereby amending and restating the Original Merger Agreement in its entirety.
In connection with such amendment and restatement of the Original Merger
Agreement, the Company and the Grantee wish to enter into this Agreement and
thereby amend and restate the Original Option Agreement in its entirety.
The Board of Directors of the Company has approved the Merger Agreement, the
Merger and this Agreement and has recommended approval of the Merger Agreement
by the holders of DVN Common Stock.
The Board of Directors of the Grantee has approved the Merger Agreement, the
Merger and this Agreement and has recommended approval of the Merger Agreement
by the holders of PZE Common Stock (as defined in the Merger Agreement).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, the Company and the Grantee agree as follows:
1. Capitalized Terms. Those capitalized terms used but not defined herein
that are defined in the Merger Agreement are used herein with the same meanings
as ascribed to them therein; provided, however, that, as used in this
Agreement, "Person" shall have the meaning specified in Sections 3(a)(9) and
13(d)(3) of the Exchange Act. Those capitalized terms used in this Agreement
that are not defined in the Merger Agreement are defined in Annex A hereto and
are used herein with the meanings ascribed to them therein.
2. The Option.
(a) Grant of Option. Subject to the terms and conditions set forth
herein, the Company hereby grants to the Grantee an irrevocable option to
purchase, out of the authorized but unissued DVN Common Stock, 6,429,066
shares of DVN Common Stock (as adjusted as set forth herein) (the "Option
Shares"), at the Exercise Price.
(b) Exercise Price. The exercise price (the "Exercise Price") of the
Option shall be $32.375 per Option Share.
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(c) Term. The Option shall be exercisable at any time and from time to
time following the occurrence of an Exercise Event and shall remain in full
force and effect until the earliest to occur of (i) the Effective Time,
(ii) the first anniversary of the receipt by Grantee of written notice from
the Company of the occurrence of an Exercise Event and (iii) termination of
the Merger Agreement in accordance with its terms prior to the occurrence
of the later of (x) an Exercise Event and (y) the event giving rise to the
payment of the $12 million fee under Section 9.5 of the Merger Agreement
(the "Option Term"). If the Option is not theretofore exercised, the rights
and obligations set forth in this Agreement shall terminate at the
expiration of the Option Term.
(d) Exercise of Option.
(i) The Grantee may exercise the Option, in whole or in part, at any
time and from time to time during the Option Term. Notwithstanding the
expiration of the Option Term, the Grantee shall be entitled to
purchase those Option Shares with respect to which it has exercised the
Option in accordance with the terms hereof prior to the expiration of
the Option Term.
(ii) If the Grantee wishes to exercise the Option, it shall send a
written notice (an "Exercise Notice") (the date of which being herein
referred to as the "Notice Date") to the Company specifying (i) the
total number of Option Shares it intends to purchase pursuant to such
exercise and (ii) a place and a date (the "Closing Date") not earlier
than three Business Days nor later than 15 Business Days from the
Notice Date for the closing of the purchase and sale pursuant to the
Option (the "Closing").
(iii) If the Closing cannot be effected by reason of the application
of any Law, Regulation or Order, the Closing Date shall be extended to
the tenth Business Day following the expiration or termination of the
restriction imposed by such Law, Regulation or Order. Without limiting
the foregoing, if prior notification to, or Authorization of, any
Governmental Authority is required in connection with the purchase of
such Option Shares by virtue of the application of such Law, Regulation
or Order, the Grantee and, if applicable, the Company shall promptly
file the required notice or application for Authorization and the
Grantee, with the cooperation of the Company, shall expeditiously
process the same.
(e) Payment and Delivery of Certificates.
(i) At each Closing, the Grantee shall pay to the Company in
immediately available funds by wire transfer to a bank account
designated by the Company an amount equal to the Exercise Price
multiplied by the number of Option Shares to be purchased on such
Closing Date.
(ii) At each Closing, simultaneously with the delivery of immediately
available funds as provided above, the Company shall deliver to the
Grantee a certificate or certificates representing the Option Shares to
be purchased at such Closing, which Option Shares shall be duly
authorized, validly issued, fully paid and nonassessable and free and
clear of all Liens, and the Grantee shall deliver to the Company its
written agreement that the Grantee will not offer to sell or otherwise
dispose of such Option Shares in violation of applicable Law or the
provisions of this Agreement.
(f) Certificates. Certificates for the Option Shares delivered at each
Closing shall be endorsed with a restrictive legend that shall read
substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
A new certificate or certificates evidencing the same number of shares of the
DVN Common Stock will be issued to the Grantee in lieu of the certificate
bearing the above legend, and such new certificate shall not bear such legend
if the Grantee shall have delivered to the Company a copy of a letter from the
staff of the Commission, or an opinion of counsel in form and substance
reasonably satisfactory to the Company and its counsel, to the effect that such
legend is not required for purposes of the Securities Act.
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<PAGE>
(g) If at the time of issuance of any DVN Common Stock pursuant to any
exercise of the Option, the Company shall have issued any share purchase
rights or similar securities to holders of DVN Common Stock, then each
Option Share purchased pursuant to the Option shall also include rights
with terms substantially the same as and at least as favorable to the
Grantee as those issued to other holders of DVN Common Stock.
3. Adjustment Upon Changes in Capitalization, Etc.
(a) In the event of any change in the outstanding shares of DVN Common
Stock by reason of a stock dividend, stock split, split-up, merger,
consolidation, recapitalization, combination, conversion, exchange of
shares, extraordinary or liquidating dividend or similar transaction which
would have the effect of diluting the Grantee's rights hereunder, the type
and number of shares or securities purchasable upon the exercise of the
Option and the Exercise Price shall be adjusted appropriately, and proper
provision will be made in the agreements governing such transaction, so
that the Grantee will receive upon exercise of the Option the number and
class of shares or other securities or property that Grantee would have
received in respect of the Option Shares had the Option been exercised
immediately prior to such event or the record date therefor, as applicable.
In no event shall the number of shares of DVN Common Stock subject to the
Option exceed 14.9% of the number of shares of DVN Common Stock issued and
outstanding at the time of exercise.
(b) Without limiting the foregoing, whenever the number of Option Shares
purchasable upon exercise of the Option is adjusted as provided in this
Section 3, the Exercise Price shall be adjusted by multiplying the Exercise
Price by a fraction, the numerator of which is equal to the number of
Option Shares purchasable prior to the adjustment and the denominator of
which is equal to the number of Option Shares purchasable after the
adjustment.
(c) Without limiting the parties' relative rights and obligations under
the Merger Agreement, in the event that the Company enters into an
agreement (i) to consolidate with or merge into any person, other than the
Grantee or one of its subsidiaries, and the Company will not be the
continuing or surviving corporation in such consolidation or merger, (ii)
to permit any person, other than the Grantee or one of its subsidiaries, to
merge into the Company and the Company will be the continuing or surviving
corporation, but in connection with such merger, the shares of Common Stock
outstanding immediately prior to the consummation of such merger will be
changed into or exchanged for stock or other securities of the Company or
any other person or cash or any other property, or the shares of the DVN
Common Stock outstanding immediately prior to the consummation of such
merger will, after such merger, represent less than 50% of the outstanding
voting securities of the merged company, or (iii) to sell or otherwise
transfer all or substantially all of its assets to any person, other than
the Grantee or one of its subsidiaries, then, and in each such case, the
agreement governing such transaction will make proper provision so that the
Option will, upon the consummation of any such transaction and upon the
terms and conditions set forth herein, be converted into, or exchanged for,
an option with identical terms appropriately adjusted to acquire the number
and class of shares or other securities or property that Grantee would have
received in respect of Option Shares had the Option been exercised
immediately prior to such consolidation, merger, sale or transfer or the
record date therefor, as applicable, and will make any other necessary
adjustments and the Company shall take such steps in connection with such
consolidation, merger, liquidation or other such transaction as may be
reasonably necessary to assure that the provisions hereof shall thereafter
apply as nearly as possible to any securities or property thereafter
deliverable upon exercise of the Option.
4. Repurchase at the Option of Grantee.
(a) At the request of the Grantee made at any time and from time to time
after the occurrence of an Exercise Event and prior to 120 days after the
expiration of the Option Term (the "Put Period"), the Company (or any
successor thereto) shall, at the election of the Grantee (the "Put Right"),
repurchase from the Grantee (i) that portion of the Option relating to all
or any part of the Unexercised Option Shares (or as to which the Option has
been exercised but the Closing has not occurred) and (ii) all or any
portion
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of the shares of DVN Common Stock purchased by the Grantee pursuant hereto
and with respect to which the Grantee then has ownership. The date on which
the Grantee exercises its rights under this Section 4 is referred to as the
Put Date. Such repurchase shall be at an aggregate price (the "Put
Consideration") equal to the sum of:
(i) the aggregate Exercise Price paid by the Grantee for any Option
Shares which the Grantee owns and as to which the Grantee is exercising
the Put Right;
(ii) the excess, if any, of the Applicable Price over the Exercise
Price paid by the Grantee for each Option Share as to which the Grantee
is exercising the Put Right multiplied by the number of such shares;
and
(iii) the excess, if any, of (x) the Applicable Price per share of DVN
Common Stock over (y) the Exercise Price multiplied by the number of
Unexercised Option Shares as to which the Grantee is exercising the Put
Right.
(b) If the Grantee exercises its rights under this Section 4, the Company
shall, within five Business Days after the Put Date, pay the Put
Consideration to the Grantee in immediately available funds, and the
Grantee shall surrender to the Company the Option or portion of the Option
and the certificates evidencing the shares of DVN Common Stock purchased
thereunder. The Grantee shall warrant to the Company that, immediately
prior to the repurchase thereof pursuant to this Section 4, the Grantee had
sole record and Beneficial Ownership of the Option or such shares, or both,
as the case may be, and that the Option or such shares, or both, as the
case may be, were then held free and clear of all Liens.
(c) If the Option has been exercised, in whole or in part, as to any
Option Shares subject to the Put Right but the Closing thereunder has not
occurred, the payment of the Put Consideration shall, to that extent,
render such exercise null and void.
(d) Notwithstanding any provision to the contrary in this Agreement, the
Grantee may not exercise its rights pursuant to this Section 4 in a manner
that would result in Total Profit of more than the Profit Cap; provided,
however, that nothing in this sentence shall limit the Grantees ability to
exercise the Option in accordance with its terms.
5. Registration Rights.
(a) The Company shall, if requested by the Grantee at any time and from
time to time during the Registration Period, as expeditiously as
practicable, prepare, file and cause to be made effective up to two
registration statements under the Securities Act if such registration is
required in order to permit the offering, sale and delivery of any or all
shares of DVN Common Stock or other securities that have been acquired by
or are issuable to the Grantee upon exercise of the Option in accordance
with the intended method of sale or other disposition stated by the
Grantee, including, at the sole discretion of the Company, a "shelf"
registration statement under Rule 415 under the Securities Act or any
successor provision, and the Company shall use all reasonable efforts to
qualify such shares or other securities under any applicable state
securities laws. The Company shall use all reasonable efforts to cause each
such registration statement to become effective, to obtain all consents or
waivers of other parties that are required therefor and to keep such
registration statement effective for such period not in excess of 180 days
from the day such registration statement first becomes effective as may be
reasonably necessary to effect such sale or other disposition. The
obligations of the Company hereunder to file a registration statement and
to maintain its effectiveness may be suspended for one or more periods of
time not exceeding 60 days in the aggregate if the Board of Directors of
the Company shall have determined in good faith that the filing of such
registration or the maintenance of its effectiveness would require
disclosure of nonpublic information that would materially and adversely
affect the Company. For purposes of determining whether two requests have
been made under this Section 5, only requests relating to a registration
statement that has become effective under the Securities Act and pursuant
to which the Grantee has disposed of all shares covered thereby in the
manner contemplated therein shall be counted.
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<PAGE>
(b) The Registration Expenses shall be for the account of the Company;
provided, however, that the Company shall not be required to pay any
Registration Expenses with respect to such registration if the registration
request is subsequently withdrawn at the request of the Grantee unless the
Grantee agrees to forfeit its right to request one registration.
(c) The Grantee shall provide all information reasonably requested by the
Company for inclusion in any registration statement to be filed hereunder.
If during the Registration Period the Company shall propose to register
under the Securities Act the offering, sale and delivery of DVN Common
Stock for cash for its own account or for any other stockholder of the
Company pursuant to a firm underwriting, it shall, in addition to the
Company's other obligations under this Section 5, allow the Grantee the
right to participate in such registration provided that the Grantee
participates in the underwriting; provided, however, that, if the managing
underwriter of such offering advises the Company in writing that in its
opinion the number of shares of DVN Common Stock requested to be included
in such registration exceeds the number that can be sold in such offering,
the Company shall, after fully including therein all securities to be sold
by the Company, include the shares requested to be included therein by
Grantee pro rata (based on the number of shares intended to be included
therein) with the shares intended to be included therein by Persons other
than the Company.
(d) In connection with any offering, sale and delivery of DVN Common
Stock pursuant to a registration statement effected pursuant to this
Section 5, the Company and the Grantee shall provide each other and each
underwriter of the offering with customary representations, warranties and
covenants, including covenants of indemnification and contribution.
6. Profit Limitation.
(a) Notwithstanding any other provision of this Agreement, in no event
shall the Grantee's Total Profit exceed the Profit Cap and, if it otherwise
would exceed such amount, the Grantee, at its sole election, shall either
(i) deliver to the Company for cancellation Option Shares previously
purchased by Grantee, (ii) pay cash or other consideration to the Company,
(iii) reduce the amount of the fee payable to Grantee under Section 9.5 of
the Merger Agreement or (iv) undertake any combination thereof, so that the
Grantees Total Profit shall not exceed the Profit Cap after taking into
account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, this Stock
Option may not be exercised for a number of Option Shares that would, as of
the Notice Date, result in a Notional Total Profit of more than the Profit
Cap, and, if exercise of the Option otherwise would exceed the Profit Cap,
the Grantee, at its sole option, may increase the Exercise Price for that
number of Option Shares set forth in the Exercise Notice so that the
Notional Total Profit shall not exceed the Profit Cap; provided, however,
that nothing in this sentence shall restrict any exercise of the Option
otherwise permitted by this Section 6(b) on any subsequent date at the
Exercise Price set forth in Section 2(b) if such exercise would not then be
restricted under this Section 6(b).
7. Listing. If the DVN Common Stock or any other securities then subject to
the Option are then listed on the American Stock Exchange ("AMEX") or any other
national securities exchange, the Company, upon the occurrence of an Exercise
Event, will promptly file an application to list on the AMEX or such other
securities exchange the shares of the DVN Common Stock or other securities then
subject to the Option and will use all reasonable efforts to cause such listing
application to be approved as promptly as practicable.
8. Replacement of Agreement. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, the Company will execute and deliver a new Agreement
of like tenor and date. Any such new Agreement shall constitute an additional
contractual obligation of the Company, whether or not the Agreement so lost,
stolen, destroyed or mutilated shall at any time be enforceable by anyone.
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9. Miscellaneous.
(a) Expenses. Except as otherwise provided in the Merger Agreement or as
otherwise expressly provided herein, each of the parties hereto shall bear
and pay all costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants
and counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be waived
at any time by the party that is entitled to the benefits of such
provision. This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by the parties hereto.
(c) Entire Agreement; No Third Party Beneficiary; Severability. Except as
otherwise set forth in the Merger Agreement, this Agreement (including the
Merger Agreement and the other documents and instruments referred to herein
and therein) (i) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, between the parties
with respect to the subject matter hereof and (ii) is not intended to
confer upon any Person other than the parties hereto any rights or remedies
hereunder.
(d) Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in
any manner materially adverse to any party. Upon such determination that
any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the extent possible.
(e) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the Laws of the State of Delaware, regardless of the Laws
that might otherwise govern under applicable principles of conflicts of
law.
(f) Descriptive Headings. The descriptive headings contained herein are
for convenience or reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
(g) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses or sent by electronic
transmission to the telecopier number specified below:
If to the Company to:
Devon Energy Corporation
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102-8260
Facsimile: (405) 552-8171
Attn: J. Larry Nichols
with a copy to:
McAfee & Taft
10th Floor
Two Leadership Square
211 North Robinson
Oklahoma City, Oklahoma 73102
Facsimile: (405) 235-0439
Attn: Gary F. Fuller
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If to Grantee to:
PennzEnergy Company
Pennzoil Place
P.O. Box 4616
Houston, Texas 77210-4616
Facsimile: (713) 546-6050
Attn: James L. Pate
with a copy to:
Baker & Botts, L.L.P.
One Shell Plaza
910 Louisiana
Houston, Texas 77002-4995
Facsimile: (713) 229-1522
Attn: Moulton Goodrum, Jr.
(h) Counterparts. This Agreement and any amendments hereto may be
executed in counterparts, each of which shall be deemed an original and all
of which taken together shall constitute but a single document.
(i) Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder or under the Option shall be sold, assigned or
otherwise disposed of or transferred by either of the parties hereto
(whether by operation of law or otherwise) without the prior written
consent of the other party, except that the Grantee may assign this
Agreement to a wholly owned Subsidiary of the Grantee; provided, however,
that no such assignment shall have the effect of releasing the Grantee from
its obligations hereunder. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
(j) Further Assurances. In the event of any exercise of the Option by the
Grantee, the Company and the Grantee shall execute and deliver all other
documents and instruments and take all other action that may be reasonably
necessary in order to consummate the transactions provided for by such
exercise.
(k) Specific Performance. The parties hereto hereby acknowledge and agree
that the failure of any party to this Agreement to perform its agreements
and covenants hereunder will cause irreparable injury to the other party to
this Agreement for which damages, even if available, will not be an
adequate remedy. Accordingly, each of the parties hereto hereby consents to
the granting of equitable relief (including specific performance and
injunctive relief) by any court of competent jurisdiction to enforce any
party's obligations hereunder. The parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any
failure to perform this Agreement.
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IN WITNESS WHEREOF, the Company and the Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
DEVON ENERGY CORPORATION
/s/ H. Allen Turner
By:__________________________________
Name: H. Allen Turner
Title: Vice President
PENNZENERGY COMPANY
/s/ James L. Pate
By:__________________________________
Name: James L. Pate
Title: Chairman
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ANNEX A
SCHEDULE OF DEFINED TERMS
The following terms when used in the Stock Option Agreement shall have the
meanings set forth below unless the context shall otherwise require:
"Agreement" shall mean this Stock Option Agreement.
"Applicable Price" means the highest of (i) the highest purchase price per
share paid pursuant to a third party's tender or exchange offer made for shares
of DVN Common Stock after the date hereof and on or prior to the Put Date, (ii)
the price per share to be paid by any third Person for shares of DVN Common
Stock pursuant to an agreement for a Business Combination Transaction entered
into on or prior to the Put Date, and (iii) the Current Market Price. If the
consideration to be offered, paid or received pursuant to either of the
foregoing clauses (i) or (ii) shall be other than in cash, the value of such
consideration shall be determined in good faith by an independent nationally
recognized investment banking firm jointly selected by the Grantee and the
Company, which determination shall be conclusive for all purposes of this
Agreement.
"Authorization" shall mean any and all permits, licenses, authorizations,
orders certificates, registrations or other approvals granted by any
Governmental Authority.
"Beneficial Ownership," "Beneficial Owner" and "Beneficially Own" shall have
the meanings ascribed to them in Rule 13d-3 under the Exchange Act.
"Business Combination Transaction" shall mean (i) a consolidation, exchange
of shares or merger of the Company with any Person, other than the Grantee or
one of its subsidiaries, and, in the case of a merger, in which the Company
shall not be the continuing or surviving corporation, (ii) a merger of the
Company with a Person, other than the Grantee or one of its Subsidiaries, in
which the Company shall be the continuing or surviving corporation but the then
outstanding shares of DVN Common Stock shall be changed into or exchanged for
stock or other securities of the Company or any other Person or cash or any
other property or the shares of DVN Common Stock outstanding immediately before
such merger shall after such merger represent less than 50% of the common
shares and common share equivalents of the Company outstanding immediately
after the merger or (iii) a sale, lease or other transfer of all or
substantially all the assets of the Company to any Person, other than the
Grantee or one of its Subsidiaries.
"Business Day" shall mean a day other than Saturday, Sunday or a federal
holiday.
"Closing" shall have the meaning ascribed to such term in Section 2 herein.
"Closing Date" shall have the meaning ascribed to such term in Section 2
herein.
"Court" shall mean any court or arbitration tribunal of the United States,
any foreign country or any domestic or foreign state, and any political
subdivision thereof, and shall include the European Court of Justice.
"Current Market Price" shall mean, as of any date, the average of the closing
prices (or, if such securities should not trade on any trading day, the average
of the bid and asked prices therefor on such day) of the DVN Common Stock as
reported on the American Stock Exchange during the ten consecutive trading days
ending on (and including) the trading day immediately prior to such date or, if
the shares of DVN Common Stock are not quoted thereon, on The Nasdaq Stock
Market or, if the shares of DVN Common Stock are not quoted thereon, on the
principal trading market (as defined in Regulation M under the Exchange Act) on
which such shares are traded as reported by a recognized source during such ten
Business Day period.
"Exercise Event" shall mean (i) any of the events giving rise to the
obligation of the Company to pay the $22 million fee under Section 9.5 of the
Merger Agreement or (ii) the event giving rise to the obligation to pay the $12
million fee under Section 9.5 of the Merger Agreement after an event giving
rise to the obligation to pay the $10 million fee under Section 9.5 of the
Merger Agreement has already occurred.
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"Exercise Notice" shall have the meaning ascribed to such term in Section
2(d) herein.
"Exercise Price" shall have the meaning ascribed to such term in Section 2
herein.
"Governmental Authority" shall mean any governmental agency or authority
(other than a Court) of the United States, any foreign country, or any domestic
or foreign state, and any political subdivision thereof, and shall include any
multinational authority having governmental or quasi-governmental powers.
"Law" shall mean all laws, statutes and ordinances of the United States, any
state of the United States, any foreign country, any foreign state and any
political subdivision thereof, including all decisions of Courts having the
effect of law in each such jurisdiction.
"Lien" shall mean any mortgage, pledge, security interest, adverse claim,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing), any conditional sale or other title retention agreement, any
lease in the nature thereof or the filing of or agreement to give any financing
statement under the Laws of any jurisdiction.
"Merger Agreement" shall mean that certain Amended and Restated Agreement and
Plan of Merger dated as of the date hereof by and among the Company, Newco,
Devon Oklahoma and Grantee.
"Notice Date" shall have the meaning ascribed to such term in Section 2
herein.
"Notional Total Profit" shall mean, with respect to any number of Option
Shares as to which the Grantee may propose to exercise the Option, the Total
Profit determined as of the date of the Exercise Notice assuming that the
Option were exercised on such date for such number of Option Shares and
assuming such Option Shares, together with all other Option Shares held by the
Grantee and its Affiliates as of such date, were sold for cash at the closing
market price for the DVN Common Stock as of the close of business on the
preceding trading day (less customary brokerage commissions) and including all
amounts theretofore received or concurrently being paid to the Grantee pursuant
to clauses (i), (ii) and (iii) of the definition of Total Profit.
"Option" shall mean the option granted by the Company to Grantee pursuant to
Section 2 herein.
"Option Shares" shall have the meaning ascribed to such term in Section 2
herein.
"Option Term" shall have the meaning ascribed to such term in Section 2
herein.
"Order" shall mean any judgment, order or decree of any Court or Governmental
Authority, federal, foreign, state or local, of competent jurisdiction.
"Profit Cap" shall mean $23 million.
"Put Consideration" shall have the meaning ascribed to such term in Section 4
herein.
"Put Date" shall have the meaning ascribed to such term in Section 4 herein.
"Put Period" shall have the meaning ascribed to such term in Section 4
herein.
"Put Right" shall have the meaning ascribed to such term in Section 4 herein.
"Registration Expenses" shall mean the expenses associated with the
preparation and filing of any registration statement pursuant to Section 5
herein and any sale covered thereby (including any fees related to blue sky
qualifications and filing fees in respect of the National Association of
Securities Dealers, Inc.), but excluding underwriting discounts or commissions
or brokers' fees in respect to shares to be sold by the Grantee and the fees
and disbursements of the Grantee's counsel.
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"Registration Period" shall mean the period of two years following the first
exercise of the Option by the Grantee.
"Regulation" shall mean any rule or regulation of any Governmental Authority
having the effect of Law or of any rule or regulation of any self-regulatory
organization, such as the AMEX.
"Total Profit" shall mean the aggregate (before income taxes) of the
following: (i) all amounts received by the Grantee or concurrently being paid
to the Grantee pursuant to Section 4 for the repurchase of all or part of the
unexercised portion of the Option, (ii) (A) the amounts received by the Grantee
or concurrently being paid to the Grantee pursuant to the sale of Option Shares
(or any other securities into which such Option Shares are converted or
exchanged), including sales made to the Company or pursuant to a registration
statement under the Securities Act or any exemption therefrom, less (B) the
Grantee's purchase price for such Option Shares and (iii) all amounts received
by the Grantee from the Company or concurrently being paid to the Grantee
pursuant to Section 9.5 of the Merger Agreement less (iv) any payments made
pursuant to Section 6(a)(ii).
"Unexercised Option Shares" shall mean, from and after the Exercise Date
until the expiration of the Option Term, those Option Shares as to which the
Option remains unexercised from time to time.
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ANNEX E
AMENDED AND RESTATED STOCK OPTION AGREEMENT
This AMENDED AND RESTATED STOCK OPTION AGREEMENT dated as of May 19, 1999 is
by and between PennzEnergy Company, a Delaware corporation (the "Company"), and
Devon Energy Corporation, an Oklahoma corporation (the "Grantee").
RECITALS
The Grantee, the Company and Devon Delaware Corporation, a Delaware
corporation and a wholly owned subsidiary of the Grantee ("Newco"), entered
into an Agreement and Plan of Merger, as amended, dated as of May 19, 1999 (the
"Original Merger Agreement").
As a condition and inducement to the Grantee's willingness to enter into the
Original Merger Agreement, the Grantee requested that the Company agree, and
the Company agreed, to grant the Grantee an option to purchase shares of PZE
Common Stock (as defined in the Merger Agreement) pursuant to a Stock Option
Agreement, dated as of May 19, 1999 (the "Original Option Agreement").
The Company, the Grantee, Newco and Devon Oklahoma Corporation, an Oklahoma
corporation ("Devon Oklahoma"), are entering into the Merger Agreement and
thereby amending and restating the Original Merger Agreement in its entirety.
In connection with such amendment and restatement of the Original Merger
Agreement, the Company and the Grantee wish to enter into this Agreement and
thereby amend and restate the Original Option Agreement in its entirety.
The Board of Directors of the Grantee has approved the Merger Agreement, the
Merger and this Agreement and has recommended approval of the Merger Agreement
by the holders of DVN Common Stock.
The Board of Directors of the Company has approved the Merger Agreement, the
Merger and this Agreement and has recommended approval of the Merger Agreement
by the holders of PZE Common Stock (as defined in the Merger Agreement).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, the Company and the Grantee agree as follows:
1. Capitalized Terms. Those capitalized terms used but not defined herein
that are defined in the Merger Agreement are used herein with the same meanings
as ascribed to them therein; provided, however, that, as used in this
Agreement, "Person" shall have the meaning specified in Sections 3(a)(9) and
13(d)(3) of the Exchange Act. Those capitalized terms used in this Agreement
that are not defined in the Merger Agreement are defined in Annex A hereto and
are used herein with the meanings ascribed to them therein.
2. The Option.
(a) Grant of Option. Subject to the terms and conditions set forth
herein, the Company hereby grants to the Grantee an irrevocable option to
purchase, out of the authorized but unissued PZE Common Stock, 7,145,912
shares of PZE Common Stock (as adjusted as set forth herein) (the "Option
Shares"), at the Exercise Price.
(b) Exercise Price. The exercise price (the "Exercise Price") of the
Option shall be $14.488 per Option Share.
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(c) Term. The Option shall be exercisable at any time and from time to
time following the occurrence of an Exercise Event and shall remain in full
force and effect until the earliest to occur of (i) the Effective Time,
(ii) the first anniversary of the receipt by Grantee of written notice from
the Company of the occurrence of an Exercise Event and (iii) termination of
the Merger Agreement in accordance with its terms prior to the occurrence
of the later of (x) an Exercise Event and (y) the event giving rise to the
payment of the $12 million fee under Section 9.5 of the Merger Agreement
(the "Option Term"). If the Option is not theretofore exercised, the rights
and obligations set forth in this Agreement shall terminate at the
expiration of the Option Term.
(d) Exercise of Option.
(i) The Grantee may exercise the Option, in whole or in part, at any
time and from time to time during the Option Term. Notwithstanding the
expiration of the Option Term, the Grantee shall be entitled to
purchase those Option Shares with respect to which it has exercised the
Option in accordance with the terms hereof prior to the expiration of
the Option Term.
(ii) If the Grantee wishes to exercise the Option, it shall send a
written notice (an "Exercise Notice") (the date of which being herein
referred to as the "Notice Date") to the Company specifying (i) the
total number of Option Shares it intends to purchase pursuant to such
exercise and (ii) a place and a date (the "Closing Date") not earlier
than three Business Days nor later than 15 Business Days from the
Notice Date for the closing of the purchase and sale pursuant to the
Option (the "Closing").
(iii) If the Closing cannot be effected by reason of the application
of any Law, Regulation or Order, the Closing Date shall be extended to
the tenth Business Day following the expiration or termination of the
restriction imposed by such Law, Regulation or Order. Without limiting
the foregoing, if prior notification to, or Authorization of, any
Governmental Authority is required in connection with the purchase of
such Option Shares by virtue of the application of such Law, Regulation
or Order, the Grantee and, if applicable, the Company shall promptly
file the required notice or application for Authorization and the
Grantee, with the cooperation of the Company, shall expeditiously
process the same.
(e) Payment and Delivery of Certificates.
(i) At each Closing, the Grantee shall pay to the Company in
immediately available funds by wire transfer to a bank account
designated by the Company an amount equal to the Exercise Price
multiplied by the number of Option Shares to be purchased on such
Closing Date.
(ii) At each Closing, simultaneously with the delivery of immediately
available funds as provided above, the Company shall deliver to the
Grantee a certificate or certificates representing the Option Shares to
be purchased at such Closing, which Option Shares shall be duly
authorized, validly issued, fully paid and nonassessable and free and
clear of all Liens, and the Grantee shall deliver to the Company its
written agreement that the Grantee will not offer to sell or otherwise
dispose of such Option Shares in violation of applicable Law or the
provisions of this Agreement.
(f) Certificates. Certificates for the Option Shares delivered at each
Closing shall be endorsed with a restrictive legend that shall read
substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
A new certificate or certificates evidencing the same number of shares of the
PZE Common Stock will be issued to the Grantee in lieu of the certificate
bearing the above legend, and such new certificate shall not bear such legend
if the Grantee shall have delivered to the Company a copy of a letter from the
staff of the Commission, or an opinion of counsel in form and substance
reasonably satisfactory to the Company and its counsel, to the effect that such
legend is not required for purposes of the Securities Act.
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(g) If at the time of issuance of any PZE Common Stock pursuant to any
exercise of the Option, the Company shall have issued any share purchase
rights or similar securities to holders of PZE Common Stock, then each
Option Share purchased pursuant to the Option shall also include rights
with terms substantially the same as and at least as favorable to the
Grantee as those issued to other holders of PZE Common Stock.
3. Adjustment Upon Changes in Capitalization, Etc.
(a) In the event of any change in the outstanding shares of PZE Common
Stock by reason of a stock dividend, stock split, split-up, merger,
consolidation, recapitalization, combination, conversion, exchange of
shares, extraordinary or liquidating dividend or similar transaction which
would have the effect of diluting the Grantee's rights hereunder, the type
and number of shares or securities purchasable upon the exercise of the
Option and the Exercise Price shall be adjusted appropriately, and proper
provision will be made in the agreements governing such transaction, so
that the Grantee will receive upon exercise of the Option the number and
class of shares or other securities or property that Grantee would have
received in respect of the Option Shares had the Option been exercised
immediately prior to such event or the record date therefor, as applicable.
In no event shall the number of shares of PZE Common Stock subject to the
Option exceed 14.9% of the number of shares of PZE Common Stock issued and
outstanding at the time of exercise.
(b) Without limiting the foregoing, whenever the number of Option Shares
purchasable upon exercise of the Option is adjusted as provided in this
Section 3, the Exercise Price shall be adjusted by multiplying the Exercise
Price by a fraction, the numerator of which is equal to the number of
Option Shares purchasable prior to the adjustment and the denominator of
which is equal to the number of Option Shares purchasable after the
adjustment.
(c) Without limiting the parties' relative rights and obligations under
the Merger Agreement, in the event that the Company enters into an
agreement (i) to consolidate with or merge into any person, other than the
Grantee or one of its subsidiaries, and the Company will not be the
continuing or surviving corporation in such consolidation or merger, (ii)
to permit any person, other than the Grantee or one of its subsidiaries, to
merge into the Company and the Company will be the continuing or surviving
corporation, but in connection with such merger, the shares of Common Stock
outstanding immediately prior to the consummation of such merger will be
changed into or exchanged for stock or other securities of the Company or
any other person or cash or any other property, or the shares of the PZE
Common Stock outstanding immediately prior to the consummation of such
merger will, after such merger, represent less than 50% of the outstanding
voting securities of the merged company, or (iii) to sell or otherwise
transfer all or substantially all of its assets to any person, other than
the Grantee or one of its subsidiaries, then, and in each such case, the
agreement governing such transaction will make proper provision so that the
Option will, upon the consummation of any such transaction and upon the
terms and conditions set forth herein, be converted into, or exchanged for,
an option with identical terms appropriately adjusted to acquire the number
and class of shares or other securities or property that Grantee would have
received in respect of Option Shares had the Option been exercised
immediately prior to such consolidation, merger, sale or transfer or the
record date therefor, as applicable, and will make any other necessary
adjustments and the Company shall take such steps in connection with such
consolidation, merger, liquidation or other such transaction as may be
reasonably necessary to assure that the provisions hereof shall thereafter
apply as nearly as possible to any securities or property thereafter
deliverable upon exercise of the Option.
4. Repurchase at the Option of Grantee.
(a) At the request of the Grantee made at any time and from time to time
after the occurrence of an Exercise Event and prior to 120 days after the
expiration of the Option Term (the "Put Period"), the Company (or any
successor thereto) shall, at the election of the Grantee (the "Put Right"),
repurchase from the Grantee (i) that portion of the Option relating to all
or any part of the Unexercised Option Shares (or as to which the Option has
been exercised but the Closing has not occurred) and (ii) all or any
portion
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of the shares of PZE Common Stock purchased by the Grantee pursuant hereto
and with respect to which the Grantee then has ownership. The date on which
the Grantee exercises its rights under this Section 4 is referred to as the
"Put Date." Such repurchase shall be at an aggregate price (the "Put
Consideration") equal to the sum of:
(i) the aggregate Exercise Price paid by the Grantee for any Option
Shares which the Grantee owns and as to which the Grantee is exercising
the Put Right;
(ii) the excess, if any, of the Applicable Price over the Exercise
Price paid by the Grantee for each Option Share as to which the Grantee
is exercising the Put Right multiplied by the number of such shares;
and
(iii) the excess, if any, of (x) the Applicable Price per share of
PZE Common Stock over (y) the Exercise Price multiplied by the number
of Unexercised Option Shares as to which the Grantee is exercising the
Put Right.
(b) If the Grantee exercises its rights under this Section 4, the Company
shall, within five Business Days after the Put Date, pay the Put
Consideration to the Grantee in immediately available funds, and the
Grantee shall surrender to the Company the Option or portion of the Option
and the certificates evidencing the shares of PZE Common Stock purchased
thereunder. The Grantee shall warrant to the Company that, immediately
prior to the repurchase thereof pursuant to this Section 4, the Grantee had
sole record and Beneficial Ownership of the Option or such shares, or both,
as the case may be, and that the Option or such shares, or both, as the
case may be, were then held free and clear of all Liens.
(c) If the Option has been exercised, in whole or in part, as to any
Option Shares subject to the Put Right but the Closing thereunder has not
occurred, the payment of the Put Consideration shall, to that extent,
render such exercise null and void.
(d) Notwithstanding any provision to the contrary in this Agreement, the
Grantee may not exercise its rights pursuant to this Section 4 in a manner
that would result in Total Profit of more than the Profit Cap; provided,
however, that nothing in this sentence shall limit the Grantee's ability to
exercise the Option in accordance with its terms.
5. Registration Rights.
(a) The Company shall, if requested by the Grantee at any time and from
time to time during the Registration Period, as expeditiously as
practicable, prepare, file and cause to be made effective up to two
registration statements under the Securities Act if such registration is
required in order to permit the offering, sale and delivery of any or all
shares of PZE Common Stock or other securities that have been acquired by
or are issuable to the Grantee upon exercise of the Option in accordance
with the intended method of sale or other disposition stated by the
Grantee, including, at the sole discretion of the Company, a "shelf"
registration statement under Rule 415 under the Securities Act or any
successor provision, and the Company shall use all reasonable efforts to
qualify such shares or other securities under any applicable state
securities laws. The Company shall use all reasonable efforts to cause each
such registration statement to become effective, to obtain all consents or
waivers of other parties that are required therefor and to keep such
registration statement effective for such period not in excess of 180 days
from the day such registration statement first becomes effective as may be
reasonably necessary to effect such sale or other disposition. The
obligations of the Company hereunder to file a registration statement and
to maintain its effectiveness may be suspended for one or more periods of
time not exceeding 60 days in the aggregate if the Board of Directors of
the Company shall have determined in good faith that the filing of such
registration or the maintenance of its effectiveness would require
disclosure of nonpublic information that would materially and adversely
affect the Company. For purposes of determining whether two requests have
been made under this Section 5, only requests relating to a registration
statement that has become effective under the Securities Act and pursuant
to which the Grantee has disposed of all shares covered thereby in the
manner contemplated therein shall be counted.
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(b) The Registration Expenses shall be for the account of the Company;
provided, however, that the Company shall not be required to pay any
Registration Expenses with respect to such registration if the registration
request is subsequently withdrawn at the request of the Grantee unless the
Grantee agrees to forfeit its right to request one registration.
(c) The Grantee shall provide all information reasonably requested by the
Company for inclusion in any registration statement to be filed hereunder.
If during the Registration Period the Company shall propose to register
under the Securities Act the offering, sale and delivery of PZE Common
Stock for cash for its own account or for any other stockholder of the
Company pursuant to a firm underwriting, it shall, in addition to the
Company's other obligations under this Section 5, allow the Grantee the
right to participate in such registration provided that the Grantee
participates in the underwriting; provided, however, that, if the managing
underwriter of such offering advises the Company in writing that in its
opinion the number of shares of PZE Common Stock requested to be included
in such registration exceeds the number that can be sold in such offering,
the Company shall, after fully including therein all securities to be sold
by the Company, include the shares requested to be included therein by
Grantee pro rata (based on the number of shares intended to be included
therein) with the shares intended to be included therein by Persons other
than the Company.
(d) In connection with any offering, sale and delivery of PZE Common
Stock pursuant to a registration statement effected pursuant to this
Section 5, the Company and the Grantee shall provide each other and each
underwriter of the offering with customary representations, warranties and
covenants, including covenants of indemnification and contribution.
6. Profit Limitation.
(a) Notwithstanding any other provision of this Agreement, in no event
shall the Grantee's Total Profit exceed the Profit Cap and, if it otherwise
would exceed such amount, the Grantee, at its sole election, shall either
(i) deliver to the Company for cancellation Option Shares previously
purchased by Grantee, (ii) pay cash or other consideration to the Company,
(iii) reduce the amount of the fee payable to Grantee under Section 9.5 of
the Merger Agreement or (iv) undertake any combination thereof, so that the
Grantee's Total Profit shall not exceed the Profit Cap after taking into
account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, this Stock
Option may not be exercised for a number of Option Shares that would, as of
the Notice Date, result in a Notional Total Profit of more than the Profit
Cap, and, if exercise of the Option otherwise would exceed the Profit Cap,
the Grantee, at its sole option, may increase the Exercise Price for that
number of Option Shares set forth in the Exercise Notice so that the
Notional Total Profit shall not exceed the Profit Cap; provided, however,
that nothing in this sentence shall restrict any exercise of the Option
otherwise permitted by this Section 6(b) on any subsequent date at the
Exercise Price set forth in Section 2(b) if such exercise would not then be
restricted under this Section 6(b).
7. Listing. If the PZE Common Stock or any other securities then subject to
the Option are then listed on the New York Stock Exchange ("NYSE") or any other
national securities exchange, the Company, upon the occurrence of an Exercise
Event, will promptly file an application to list on the NYSE or such other
securities exchange the shares of the PZE Common Stock or other securities then
subject to the Option and will use all reasonable efforts to cause such listing
application to be approved as promptly as practicable.
8. Replacement of Agreement. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, the Company will execute and deliver a new Agreement
of like tenor and date. Any such new Agreement shall constitute an additional
contractual obligation of the Company, whether or not the Agreement so lost,
stolen, destroyed or mutilated shall at any time be enforceable by anyone.
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9. Miscellaneous.
(a) Expenses. Except as otherwise provided in the Merger Agreement or as
otherwise expressly provided herein, each of the parties hereto shall bear
and pay all costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants
and counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be waived
at any time by the party that is entitled to the benefits of such
provision. This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by the parties hereto.
(c) Entire Agreement; No Third Party Beneficiary; Severability. Except as
otherwise set forth in the Merger Agreement, this Agreement (including the
Merger Agreement and the other documents and instruments referred to herein
and therein) (i) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, between the parties
with respect to the subject matter hereof and (ii) is not intended to
confer upon any Person other than the parties hereto any rights or remedies
hereunder.
(d) Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in
any manner materially adverse to any party. Upon such determination that
any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the extent possible.
(e) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the Laws of the State of Delaware, regardless of the Laws
that might otherwise govern under applicable principles of conflicts of
law.
(f) Descriptive Headings. The descriptive headings contained herein are
for convenience or reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
(g) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses or sent by electronic
transmission to the telecopier number specified below:
If to the Company to:
PennzEnergy Company
Pennzoil Place
P.O. Box 4616
Houston, Texas 77210-4616
Facsimile: (713) 546-6050
Attn: James L. Pate
with a copy to:
Baker & Botts, L.L.P.
One Shell Plaza
910 Louisiana
Houston, Texas 77002-4995
Facsimile: (713) 229-1522
Attn: Moulton Goodrum, Jr.
E-6
<PAGE>
If to Grantee to:
Devon Energy Corporation
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102-8260
Facsimile: (405) 552-8171
Attn: J. Larry Nichols
with a copy to:
McAfee & Taft
10th Floor
Two Leadership Square
211 North Robinson
Oklahoma City, Oklahoma 73102
Facsimile: (405) 235-0439
Attn: Gary F. Fuller
(h) Counterparts. This Agreement and any amendments hereto may be
executed in counterparts, each of which shall be deemed an original and all
of which taken together shall constitute but a single document.
(i) Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder or under the Option shall be sold, assigned or
otherwise disposed of or transferred by either of the parties hereto
(whether by operation of law or otherwise) without the prior written
consent of the other party, except that the Grantee may assign this
Agreement to a wholly owned Subsidiary of the Grantee; provided, however,
that no such assignment shall have the effect of releasing the Grantee from
its obligations hereunder. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
(j) Further Assurances. In the event of any exercise of the Option by the
Grantee, the Company and the Grantee shall execute and deliver all other
documents and instruments and take all other action that may be reasonably
necessary in order to consummate the transactions provided for by such
exercise.
(k) Specific Performance. The parties hereto hereby acknowledge and agree
that the failure of any party to this Agreement to perform its agreements
and covenants hereunder will cause irreparable injury to the other party to
this Agreement for which damages, even if available, will not be an
adequate remedy. Accordingly, each of the parties hereto hereby consents to
the granting of equitable relief (including specific performance and
injunctive relief) by any court of competent jurisdiction to enforce any
party's obligations hereunder. The parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any
failure to perform this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Company and the Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
PENNZENERGY COMPANY
/s/ James L. Pate
By:__________________________________
Name: James L. Pate
Title:Chairman of the Board
DEVON ENERGY CORPORATION
/s/ H. Allen Turner
By:__________________________________
Name: H. Allen Turner
Title: Vice President
E-8
<PAGE>
ANNEX A
SCHEDULE OF DEFINED TERMS
The following terms when used in the Stock Option Agreement shall have the
meanings set forth below unless the context shall otherwise require:
"Agreement" shall mean this Stock Option Agreement.
"Applicable Price" means the highest of (i) the highest purchase price per
share paid pursuant to a third party's tender or exchange offer made for shares
of PZE Common Stock after the date hereof and on or prior to the Put Date, (ii)
the price per share to be paid by any third Person for shares of PZE Common
Stock pursuant to an agreement for a Business Combination Transaction entered
into on or prior to the Put Date, and (iii) the Current Market Price. If the
consideration to be offered, paid or received pursuant to either of the
foregoing clauses (i) or (ii) shall be other than in cash, the value of such
consideration shall be determined in good faith by an independent nationally
recognized investment banking firm jointly selected by the Grantee and the
Company, which determination shall be conclusive for all purposes of this
Agreement.
"Authorization" shall mean any and all permits, licenses, authorizations,
orders certificates, registrations or other approvals granted by any
Governmental Authority.
"Beneficial Ownership," "Beneficial Owner" and "Beneficially Own" shall have
the meanings ascribed to them in Rule 13d-3 under the Exchange Act.
"Business Combination Transaction" shall mean (i) a consolidation, exchange
of shares or merger of the Company with any Person, other than the Grantee or
one of its subsidiaries, and, in the case of a merger, in which the Company
shall not be the continuing or surviving corporation, (ii) a merger of the
Company with a Person, other than the Grantee or one of its Subsidiaries, in
which the Company shall be the continuing or surviving corporation but the then
outstanding shares of PZE Common Stock shall be changed into or exchanged for
stock or other securities of the Company or any other Person or cash or any
other property or the shares of PZE Common Stock outstanding immediately before
such merger shall after such merger represent less than 50% of the common
shares and common share equivalents of the Company outstanding immediately
after the merger or (iii) a sale, lease or other transfer of all or
substantially all the assets of the Company to any Person, other than the
Grantee or one of its Subsidiaries.
"Business Day" shall mean a day other than Saturday, Sunday or a federal
holiday.
"Closing" shall have the meaning ascribed to such term in Section 2 herein.
"Closing Date" shall have the meaning ascribed to such term in Section 2
herein.
"Court" shall mean any court or arbitration tribunal of the United States,
any foreign country or any domestic or foreign state, and any political
subdivision thereof, and shall include the European Court of Justice.
"Current Market Price" shall mean, as of any date, the average of the closing
prices (or, if such securities should not trade on any trading day, the average
of the bid and asked prices therefor on such day) of the PZE Common Stock as
reported on the New York Stock Exchange Composite Tape during the ten
consecutive trading days ending on (and including) the trading day immediately
prior to such date or, if the shares of PZE Common Stock are not quoted
thereon, on The Nasdaq Stock Market or, if the shares of PZE Common Stock are
not quoted thereon, on the principal trading market (as defined in Regulation M
under the Exchange Act) on which such shares are traded as reported by a
recognized source during such ten Business Day period.
E-9
<PAGE>
"Exercise Event" shall mean (i) any of the events giving rise to the
obligation of the Company to pay the $22 million fee under Section 9.5 of the
Merger Agreement or (ii) the event giving rise to the obligation to pay the $12
million fee under Section 9.5 of the Merger Agreement after an event giving
rise to the obligation to pay the $10 million fee under Section 9.5 of the
Merger Agreement has already occurred.
"Exercise Notice" shall have the meaning ascribed to such term in Section
2(d) herein.
"Exercise Price" shall have the meaning ascribed to such term in Section 2
herein.
"Governmental Authority" shall mean any governmental agency or authority
(other than a Court) of the United States, any foreign country, or any domestic
or foreign state, and any political subdivision thereof, and shall include any
multinational authority having governmental or quasi-governmental powers.
"Law" shall mean all laws, statutes and ordinances of the United States, any
state of the United States, any foreign country, any foreign state and any
political subdivision thereof, including all decisions of Courts having the
effect of law in each such jurisdiction.
"Lien" shall mean any mortgage, pledge, security interest, adverse claim,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing), any conditional sale or other title retention agreement, any
lease in the nature thereof or the filing of or agreement to give any financing
statement under the Laws of any jurisdiction.
"Merger Agreement" shall mean that certain Amended and Restated Agreement and
Plan of Merger dated as of the date hereof by and among the Company, Newco,
Devon Oklahoma and Grantee.
"Notice Date" shall have the meaning ascribed to such term in Section 2
herein.
"Notional Total Profit" shall mean, with respect to any number of Option
Shares as to which the Grantee may propose to exercise the Option, the Total
Profit determined as of the date of the Exercise Notice assuming that the
Option were exercised on such date for such number of Option Shares and
assuming such Option Shares, together with all other Option Shares held by the
Grantee and its Affiliates as of such date, were sold for cash at the closing
market price for the PZE Common Stock as of the close of business on the
preceding trading day (less customary brokerage commissions) and including all
amounts theretofore received or concurrently being paid to the Grantee pursuant
to clauses (i), (ii) and (iii) of the definition of Total Profit.
"Option" shall mean the option granted by the Company to Grantee pursuant to
Section 2 herein.
"Option Shares" shall have the meaning ascribed to such term in Section 2
herein.
"Option Term" shall have the meaning ascribed to such term in Section 2
herein.
"Order" shall mean any judgment, order or decree of any Court or Governmental
Authority, federal, foreign, state or local, of competent jurisdiction.
"Profit Cap" shall mean $23 million.
"Put Consideration" shall have the meaning ascribed to such term in Section 4
herein.
"Put Date" shall have the meaning ascribed to such term in Section 4 herein.
"Put Period" shall have the meaning ascribed to such term in Section 4
herein.
"Put Right" shall have the meaning ascribed to such term in Section 4 herein.
"Registration Expenses" shall mean the expenses associated with the
preparation and filing of any registration statement pursuant to Section 5
herein and any sale covered thereby (including any fees related to blue sky
qualifications and filing fees in respect of the National Association of
Securities Dealers, Inc.), but excluding underwriting discounts or commissions
or brokers' fees in respect to shares to be sold by the Grantee and the fees
and disbursements of the Grantee's counsel.
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<PAGE>
"Registration Period" shall mean the period of two years following the first
exercise of the Option by the Grantee.
"Regulation" shall mean any rule or regulation of any Governmental Authority
having the effect of Law or of any rule or regulation of any self-regulatory
organization, such as the NYSE.
"Total Profit" shall mean the aggregate (before income taxes) of the
following: (i) all amounts received by the Grantee or concurrently being paid
to the Grantee pursuant to Section 4 for the repurchase of all or part of the
unexercised portion of the Option, (ii) (A) the amounts received by the Grantee
or concurrently being paid to the Grantee pursuant to the sale of Option Shares
(or any other securities into which such Option Shares are converted or
exchanged), including sales made to the Company or pursuant to a registration
statement under the Securities Act or any exemption therefrom, less (B) the
Grantee's purchase price for such Option Shares and (iii) all amounts received
by the Grantee from the Company or concurrently being paid to the Grantee
pursuant to Section 9.5 of the Merger Agreement less (iv) any payments made
pursuant to Section 6(a)(ii).
"Unexercised Option Shares" shall mean, from and after the Exercise Date
until the expiration of the Option Term, those Option Shares as to which the
Option remains unexercised from time to time.
E-11
<PAGE>
[Devon Energy Corporation Logo]
3090-PS-99
<PAGE>
[LOGO OF DEVON ENERGY CORPORATION APPEARS HERE]
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Devon Energy Corporation, an Oklahoma
corporation hereby nominates and appoints J. Larry Nichols and John W. Nichols,
or either one of them, with full power of substitution, as true and lawful
agents and proxies to represent the undersigned and vote all shares of stock of
Devon Energy Corporation owned by the undersigned in all matters coming before
the Special Meeting of Stockholders (or any adjournment thereof) of Devon
Energy Corporation to be held in the Green Country Room on the second floor of
the Westin Hotel, One North Broadway, Oklahoma City, Oklahoma on August 17,
1999, at 10:00 a.m., Oklahoma City time. The Board of Directors recommends a
vote "FOR" the matters set forth on the reverse side.
SEE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE
REVERSE REVERSE
SIDE SIDE
Please mark
[X] votes as in
this example.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER SPECIFIED BELOW
BY THE STOCKHOLDER. TO THE EXTENT CONTRARY SPECIFICATIONS ARE NOT GIVEN, THIS
PROXY WILL BE VOTED "FOR" THE MATTERS LISTED BELOW.
1. Approve the amended and restated merger agreement.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. Approve the stock option plan amendment.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Other matters: In their discretion, to vote with respect to any other
matters that may come before the meeting or any adjournment thereof,
including matters incident to its conduct.
FOR AGAINST ABSTAIN
[_] [_] [_]
MARK HERE IF YOU PLAN TO ATTEND THE MEETING [_]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
Please sign exactly as your name appears at left, indicating your official
position or representative capacity, if applicable. If shares are held jointly,
each owner should sign.
Signature:___________________________________________________ Date:____________
Signature:___________________________________________________ Date:____________
