-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RjYGMR607MfKiwtO/791uOy3GyKVV+7eEYDSKLSw2gkfAOF2WabhfNjmWtrHKsNs Dyzx4WihQcRCkKHFH+STYQ== 0000950129-95-000012.txt : 19950509 0000950129-95-000012.hdr.sgml : 19950508 ACCESSION NUMBER: 0000950129-95-000012 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19950117 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: APACHE CORP CENTRAL INDEX KEY: 0000006769 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 410747868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-57321 FILM NUMBER: 95501713 BUSINESS ADDRESS: STREET 1: 2000 POST OAK BLVD STREET 2: ONE POST OAK CENTER STE 100 CITY: HOUSTON STATE: TX ZIP: 77056-4400 BUSINESS PHONE: 7132966000 FORMER COMPANY: FORMER CONFORMED NAME: APACHE OIL CORP DATE OF NAME CHANGE: 19660830 S-4 1 FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 17, 1995 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- APACHE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 1311 41-0747868 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) Z. S. KOBIASHVILI ONE POST OAK CENTRAL ONE POST OAK CENTRAL 2000 POST OAK BOULEVARD, SUITE 100 2000 POST OAK BOULEVARD, SUITE 100 HOUSTON, TEXAS 77056-4400 HOUSTON, TEXAS 77056-4400 (713) 296-6000 (713) 296-6000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, ADDRESS, INCLUDING ZIP CODE, AND NUMBER, INCLUDING AREA CODE, OF TELEPHONE NUMBER, INCLUDING AREA REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) CODE, OF AGENT FOR SERVICE)
Copies to: GEOFFREY K. WALKER WILBUR C. DELP, JR. MAYOR, DAY, CALDWELL & KEETON, L.L.P. SIDLEY & AUSTIN 700 LOUISIANA, SUITE 1900 ONE FIRST NATIONAL PLAZA HOUSTON, TEXAS 77002-2778 CHICAGO, ILLINOIS 60603 (713) 225-7000 (312) 853-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: Upon the Effective Time of the Merger described in this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE - ------------------------------------------------------------------------------------------------- Common Stock, $1.25 par value.................... 8,850,000 shares(1) $21.4583(2) $189,905,955(2) $65,486 - ------------------------------------------------------------------------------------------------- Common Stock Purchase Rights(3)................ 8,850,000 rights -- -- None
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Consists of up to 8,447,603 shares of Apache Common Stock issuable pursuant to the Merger Agreement upon the exchange of currently outstanding shares of DEKALB Stock, and up to 402,397 shares of Apache Common Stock issuable in respect of currently outstanding DEKALB Options. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(1) and Rule 457(c), based on the average of the high and low prices of DEKALB Class B Stock on The Nasdaq Stock Market, Inc., on January 11, 1995 of $19.3125 and the maximum Exchange Ratio of 0.9 shares of Apache Common Stock for each share of DEKALB Stock. (3) Common Stock Purchase Rights are evidenced by certificates for shares of Apache Common Stock and automatically trade with the Apache Common Stock. Value attributable to such Common Stock Purchase Rights, if any, is reflected in the market price of the Apache Common Stock. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 APACHE CORPORATION CROSS REFERENCE SHEET BETWEEN ITEMS IN PART I OF THE REGISTRATION STATEMENT (FORM S-4) AND PROSPECTUS PURSUANT TO ITEM 501(B)
ITEM OF FORM S-4 LOCATION IN PROSPECTUS ----------------------------------------------------- --------------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus........................... Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus......................................... Inside Front Cover Page of Prospectus; Available Information; Incorporation of Certain Documents by Reference; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information.................................. Outside Front Cover Page of Prospectus; Summary 4. Terms of the Transaction............................. Outside Front Cover Page of Prospectus; Summary; The Special Meeting; The Merger; Certain Terms of the Merger Agreement; Stockholder Agreements; Description of Apache Capital Stock; Comparative Rights of Apache and DEKALB Stockholders 5. Pro Forma Financial Information...................... Unaudited Pro Forma Condensed Financial Information 6. Material Contacts with the Company Being Acquired.... The Merger; Certain Terms of the Merger Agreement; Stockholder Agreements; Description of Apache Capital Stock 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters...... * 8. Interests of Named Experts and Counsel............... * 9. Disclosure of Commission Position on Indemnification For Securities Act Liabilities..................... * B. INFORMATION ABOUT THE REGISTRANT 10. Information with Respect to S-3 Registrants.......... * 11. Incorporation of Certain Information by Reference.... Incorporation of Certain Documents by Reference; Description of Apache Capital Stock; Inside Front Cover Page of Prospectus; Summary; The Special Meeting; The Merger; Certain Terms of the Merger Agreement. 12. Information with Respect to S-2 or S-3 Registrants... * 13. Incorporation of Certain Information by Reference.... * 14. Information with Respect to Registrants other than S-3 or S-2 Registrants............................. *
3
ITEM OF FORM S-4 LOCATION IN PROSPECTUS ----------------------------------------------------- --------------------------------- C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information with Respect to S-3 Companies............ * 16. Information with Respect to S-2 or S-3 Companies..... Incorporation of Certain Documents by Reference; Outside and Inside Front Cover Pages of Prospectus; Summary; The Special Meeting; The Merger; Certain Terms of the Merger Agreement 17. Information with Respect to Companies other than S-3 or S-2 Companies................................... * D. VOTING AND MANAGEMENT INFORMATION 18. Information if Proxies, Consents or Authorizations are to be Solicited................................ Incorporation of Certain Documents by Reference; Outside Front Cover Page of Prospectus; Summary; The Special Meeting; The Merger; Certain Terms of the Merger Agreement; Principal Stockholders of Apache and DEKALB; Stockholders' Proposals 19. Information if Proxies, Consents or Authorizations are not to be Solicited in an Exchange Offer....... *
- --------------- * Not applicable or answer is negative. 4 DEKALB ENERGY COMPANY 10TH FLOOR, 700-9TH AVENUE S.W. CALGARY, ALBERTA, CANADA T2P 3V4 , 1995 Fellow Shareholders: On December 21, 1994, we announced that DEKALB Energy Company ("DEKALB") had entered into a merger agreement with Houston-based Apache Corporation ("Apache") under which outstanding shares of DEKALB Class A Stock and Class B (nonvoting) Stock will be converted into between .85 and .90 shares of Apache Common Stock depending upon the price of Apache's Stock during a period shortly before the merger. The recommended merger provides DEKALB shareholders with both fair value for their investment in DEKALB and the opportunity to benefit from Apache's rapidly expanding and internationally diversified operations. Moreover, Apache's financial resources will allow for the full exploitation of the exploration and development opportunities DEKALB has identified. Your Board has called a Special Meeting of the holders of DEKALB Class A Stock to consider approval and adoption of the recommended merger. The meeting will be held at 9:00 a.m., on , 1995 at DEKALB's Calgary office. The accompanying Proxy Statement/Prospectus contains a detailed description of the recommended merger, as well as background about the transaction and Apache's and DEKALB's businesses. On behalf of the Board, I urge holders of DEKALB Class A Stock to be represented in person or by proxy at this meeting, regardless of the number of shares you own or whether you are able to attend the meeting. Please complete, sign, date and return the enclosed proxy card as soon as possible. This action will not limit your right to vote in person at the meeting if you wish to do so. We urge you to vote FOR approval of the recommended merger. Bruce P. Bickner Chairman of the Board 5 DEKALB ENERGY COMPANY 10TH FLOOR, 700-9TH AVENUE S.W. CALGARY, ALBERTA, CANADA T2P 3V4 NOTICE OF SPECIAL MEETING OF HOLDERS OF CLASS A STOCK TO BE HELD ON , 1995 A Special Meeting of the holders of Class A Stock of DEKALB Energy Company, a Delaware corporation ("DEKALB"), will be held at 9:00 a.m. local time, on , , 1995 at DEKALB's Calgary office at the address set forth above. At the Special Meeting, the holders of Class A Stock of DEKALB will: 1. Consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated December 21, 1994 (the "Merger Agreement"), relating to the merger ("Merger") of a wholly owned subsidiary of Apache Corporation, a Delaware corporation ("Apache"), with and into DEKALB pursuant to which each outstanding share of Class A Stock, no par value ("DEKALB Class A Stock"), and (except for shares held by a subsidiary of DEKALB) each outstanding share of DEKALB Class B (nonvoting) Stock, no par value ("DEKALB Class B Stock") (DEKALB Class A Stock and DEKALB Class B Stock being referred to collectively as "DEKALB Stock"), will be converted into the right to receive between 0.85 and 0.90 shares of common stock, $1.25 par value per share, of Apache Corporation, depending on the average of the closing prices of Apache common stock as reported on The New York Stock Exchange, Inc. Composite Transactions Reporting System during the ten consecutive trading day period ending on (and including) the third trading day prior to the effective time of the Merger, all as more fully set forth in the accompanying Proxy Statement/Prospectus and in the Merger Agreement, a copy of which is included as Appendix I thereto; and 2. Transact such other business as may properly come before the Special Meeting or any adjournments thereof. The Board of Directors has fixed the close of business on , 1995 as the record date for the determination of stockholders entitled to notice of and to vote at the Special Meeting or any adjournments thereof. Holders of record of all shares of DEKALB Stock at the close of business on the record date are entitled to notice of the Special Meeting. Only holders of record of shares of DEKALB Class A Stock at the close of business on the record date are entitled to vote at the Special Meeting. Complete lists of such stockholders will be available for examination at the offices of DEKALB in Calgary, Alberta during normal business hours by any holder of DEKALB Stock, for any purpose germane to the Special Meeting, for a period of ten days prior to the Special Meeting. Holders of DEKALB Class A Stock who properly dissent in compliance with the applicable provisions of the Delaware General Corporation Law ("DGCL") will obtain the right of appraisal as to their shares of DEKALB Class A Stock. Holders of DEKALB Class B Stock are not entitled to vote on, or to any appraisal or dissenter's rights under the DGCL in respect of, the Merger. See "The Merger -- Appraisal Rights of Dissenting DEKALB Class A Stockholders" in the accompanying Proxy Statement/Prospectus. The affirmative vote of the holders of a majority of the outstanding shares of DEKALB Class A Stock is required for approval and adoption of the Merger Agreement. The holders of a majority of the currently outstanding DEKALB Class A Stock have signed stockholder agreements obligating them, except in certain circumstances, to vote in favor of the Merger. Consequently, approval of the Merger Agreement at the Special Meeting is expected. See "The Special Meeting -- Quorum and Vote Required" in the accompanying Proxy Statement/Prospectus. Holders of DEKALB Class A Stock, whether or not they expect to be present at the meeting, are requested to sign, vote and date the enclosed proxy and return it promptly in the envelope enclosed for that purpose. Any person giving a proxy has the power to revoke it at any time prior to the meeting, and stockholders who are present at the meeting may withdraw their proxies and vote in person. By Order of the Board of Directors: John H. Witmer, Jr., Secretary , 1995 6 APACHE CORPORATION DEKALB ENERGY COMPANY PROXY STATEMENT/PROSPECTUS -------------------------- This Proxy Statement/Prospectus relates to the proposed merger of XPX Acquisitions, Inc., a Delaware corporation ("Merger Sub"), which is a wholly owned subsidiary of Apache Corporation, a Delaware corporation ("Apache"), with and into DEKALB Energy Company, a Delaware corporation ("DEKALB"), pursuant to the Agreement and Plan of Merger, dated December 21, 1994, among Apache, Merger Sub and DEKALB (the "Merger Agreement"). The merger contemplated by the Merger Agreement is referred to herein as the "Merger." As a result of the Merger, (i) shares of Class A Stock, no par value, of DEKALB ("DEKALB Class A Stock") and Class B (nonvoting) Stock, no par value ("DEKALB Class B Stock") (DEKALB Class A Stock and DEKALB Class B Stock being referred to collectively as "DEKALB Stock") outstanding immediately prior to the effective time of the Merger will be converted into the right to receive, per share, between 0.85 and 0.90 shares of the common stock of Apache, $1.25 par value per share ("Apache Common Stock"), depending on the average of the closing prices of Apache Common Stock as reported on The New York Stock Exchange, Inc. ("NYSE") Composite Transactions Reporting System (the "NYSE Composite Tape") during the ten consecutive trading day period ending on (and including) the third trading day prior to the effective time of the Merger, and an equal number of associated rights to purchase Apache Common Stock, and (ii) DEKALB will become a wholly owned subsidiary of Apache. This Proxy Statement/Prospectus is being furnished to holders of DEKALB Stock in connection with the solicitation of proxies from holders of DEKALB Class A Stock by the Board of Directors of DEKALB for use at the Special Meeting of holders of DEKALB Class A Stock to be held on , 1995 (the "Special Meeting"). This Proxy Statement/Prospectus and the accompanying form of proxy are being mailed to holders of DEKALB Stock on or about , 1995. At the Special Meeting, holders of DEKALB Class A Stock will be asked to consider approval and adoption of the Merger Agreement. This Proxy Statement/Prospectus also constitutes a prospectus of Apache with respect to up to 8,850,000 shares of Apache Common Stock to be issued pursuant to the Merger Agreement in exchange for currently outstanding shares of DEKALB Stock and to be issued in respect of currently outstanding options to purchase DEKALB Stock ("DEKALB Options"). It is a condition to consummation of the Merger that the shares of Apache Common Stock issuable pursuant to the Merger Agreement be approved for listing on the NYSE, subject to official notice of issuance. On , 1995, the per share closing prices of Apache Common Stock and DEKALB Class B Stock, as reported on the NYSE Composite Tape and The Nasdaq Stock Market, Inc. ("NASDAQ") National Market System ("NASDAQ/NMS"), respectively, were $ and $ . -------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1995 7 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY APACHE OR DEKALB. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF APACHE OR DEKALB SINCE THE DATE HEREOF OR THAT THE INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROXY STATEMENT/PROSPECTUS IS ACCOMPANIED BY A COPY OF DEKALB'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 AND A COPY OF DEKALB'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1994. THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN DOCUMENTS WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. APACHE AND DEKALB EACH UNDERTAKES TO PROVIDE COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE), WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF DEKALB STOCK, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO, IN THE CASE OF DOCUMENTS RELATING TO APACHE: Z.S. KOBIASHVILI, SECRETARY, APACHE CORPORATION, ONE POST OAK CENTRAL, 2000 POST OAK BOULEVARD, SUITE 100, HOUSTON, TEXAS 77046-4400 (TELEPHONE (713) 296-6000), AND, IN THE CASE OF DOCUMENTS RELATING TO DEKALB: JOHN H. WITMER, JR., SECRETARY, DEKALB ENERGY COMPANY, 700-9TH AVENUE S.W., CALGARY, ALBERTA, CANADA T2P 3V4 (TELEPHONE (403) 261-1200). IN ORDER TO ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE SPECIAL MEETING, REQUESTS SHOULD BE RECEIVED BY , 1995. AVAILABLE INFORMATION Apache and DEKALB are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, file reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by Apache and DEKALB can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy statements and other information concerning Apache may be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005, and at the offices of the Chicago Stock Exchange, One Financial Place, 440 LaSalle Street, Chicago, Illinois 60605-1070. Reports, proxy statements and other information concerning DEKALB may be inspected at the offices of NASDAQ, 1735 K Street, Washington, D.C. 20006-1506 and also at the offices of The Toronto Stock Exchange, The Exchange Tower, 2 First Canadian Place, Toronto, Ontario, Canada M5X 1J2. Apache has filed with the Commission a Registration Statement on Form S-4 (together with all amendments, supplements and exhibits thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Apache Common Stock to be issued pursuant to the Merger Agreement. The information contained herein with respect to Apache and its affiliates, including Merger Sub, has been provided by Apache, and the information contained herein with respect to DEKALB and its affiliates has been provided by DEKALB. This Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which were omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. Any statements contained herein concerning the provisions of any document filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and in each instance reference is made to the copy of such document so filed, each such statement being qualified in its entirety by such reference. 2 8 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, which have been filed with the Commission pursuant to the Exchange Act, are incorporated herein by reference: 1. Apache's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993. 2. Apache's Quarterly Reports on Form 10-Q for the periods ended March 31, 1994, June 30, 1994 and September 30, 1994. 3. Apache's Current Reports on Form 8-K dated March 1, 1994, April 28, 1994, November 29, 1994 and December 21, 1994, and on Form 8-K/A dated December 6, 1994. 4. DEKALB's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 5. DEKALB's Quarterly Reports on Form 10-Q for the periods ended March 31, 1994, June 30, 1994 and September 30, 1994 (including Form 10-Q/A filed January 4, 1995). 6. DEKALB's Current Reports on Form 8-K dated September 17, 1994 and December 21, 1994. All documents filed by Apache pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement/Prospectus and prior to the date of the final adjournment of the Special Meeting shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Proxy Statement/Prospectus to the extent that a statement contained herein or in any other subsequently filed document, which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Proxy Statement/Prospectus. 3 9 TABLE OF CONTENTS
PAGE ------ AVAILABLE INFORMATION.......................... 2 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................... 3 SUMMARY........................................ 5 The Companies................................ 5 Recent Apache Developments................... 5 The Special Meeting.......................... 5 The Merger................................... 6 Certain Terms of the Merger Agreement........ 9 Stockholder Agreements....................... 12 Comparative Rights of Apache and DEKALB Stockholders............................... 12 Market Prices and Dividend Information....... 13 Apache Selected Historical Consolidated Financial Data............................. 14 DEKALB Selected Historical Consolidated Financial Data............................. 15 Selected Unaudited Pro Forma Consolidated Financial Data............................. 16 Comparative Per Share Data................... 17 THE COMPANIES.................................. 19 Apache and Merger Sub........................ 19 DEKALB....................................... 19 RECENT APACHE DEVELOPMENTS..................... 20 Crystal Acquisition.......................... 20 Texaco Acquisition........................... 20 Financing Activities......................... 20 THE SPECIAL MEETING............................ 21 Time, Date, Place and Purpose of Special Meeting............................ 21 Record Date and Shares Entitled to Vote...... 21 Voting and Revocation of Proxies............. 21 Quorum and Vote Required..................... 21 Solicitation of Proxies...................... 22 Other Matters................................ 22 THE MERGER..................................... 22 General Description of the Merger............ 22 Background................................... 22 Certain Information Provided................. 26 Apache's Reasons for the Merger.............. 26 DEKALB's Reasons for the Merger; Recommendation of DEKALB's Board of Directors.................................. 27 Opinion of Merrill Lynch as DEKALB's Financial Advisor.......................... 28 Interests of Certain Persons in the Merger... 34 Certain Income Tax Consequences.............. 34 Anticipated Accounting Treatment............. 39 Governmental and Regulatory Approvals........ 39 Restrictions on Resales by Affiliates........ 40 Restrictions on Resales by Canadian Residents.................................. 40 Appraisal Rights of Dissenting DEKALB Class A Stockholders............................... 40 PAGE ------ CERTAIN TERMS OF THE MERGER AGREEMENT.......... 42 Effective Time of the Merger................. 42 Manner of Converting Shares.................. 43 Treatment of DEKALB Options.................. 44 Conditions to the Merger..................... 45 Representations and Warranties............... 46 Certain Covenants; Conduct of Business Prior to the Merger.............................. 47 No Solicitation.............................. 48 Certain Post-Merger Matters.................. 48 Termination or Amendment of the Merger Agreement.................................. 49 Expenses..................................... 50 Benefit Plans and Severance.................. 51 Insurance and Indemnification................ 51 STOCKHOLDER AGREEMENTS......................... 51 MARKET PRICES AND DIVIDEND INFORMATION......... 52 UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS......................... 53 STATEMENT OF COMBINED REVENUES AND DIRECT OPERATING EXPENSES FOR THE OIL AND GAS PROPERTIES OF TEXACO EXPLORATION AND PRODUCTION INC. TO BE SOLD TO APACHE CORPORATION.................................. 63 PRINCIPAL STOCKHOLDERS OF APACHE AND DEKALB.... 65 Apache....................................... 65 DEKALB....................................... 65 DESCRIPTION OF APACHE CAPITAL STOCK................................ 67 Apache Common Stock.......................... 67 Rights....................................... 67 Preferred Stock.............................. 68 COMPARATIVE RIGHTS OF APACHE AND DEKALB STOCKHOLDERS................................. 68 Number and Classification of Board of Directors.................................. 68 Power to Call Special Meetings............... 68 Stockholder Vote Required for Certain Transactions............................... 68 Dissenters' Rights of Appraisal.............. 68 Action by Written Consent.................... 69 Certain Anti-takeover Provisions............. 69 INDEPENDENT PUBLIC ACCOUNTANTS................. 69 LEGAL MATTERS.................................. 70 EXPERTS........................................ 70 STOCKHOLDERS' PROPOSALS........................ 70 Appendices: I -- Merger Agreement............. AI-1 Appendices: II -- Merrill Lynch Fairness Opinion...................................... AII-1 Appendices: III -- Section 262 of the DGCL.... AIII-1
4 10 SUMMARY The following is a summary of certain information contained elsewhere in this Proxy Statement/Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in or incorporated by reference in this Proxy Statement/Prospectus. Stockholders are urged to carefully read this Proxy Statement/Prospectus in its entirety. As used in this Proxy Statement/Prospectus, unless otherwise required by the context, the term "Apache" means Apache Corporation and its consolidated subsidiaries and the term "DEKALB" means DEKALB Energy Company and its consolidated subsidiaries. Capitalized terms used herein without definition are, unless otherwise indicated, defined in the Merger Agreement and used herein with such meanings. All terms defined in Rule 4-10(a) of Regulation S-X are used herein with such meanings. Quantities of natural gas are expressed in terms of thousand cubic feet (Mcf), million cubic feet (MMcf) or billion cubic feet (Bcf). Oil is quantified in terms of barrels (bbls), thousands of barrels (Mbbls) and millions of barrels (MMbbls). Natural gas is compared to oil in terms of barrels of oil equivalent (boe) or million barrels of oil equivalent (MMboe). Oil and natural gas liquids are compared with natural gas in terms of million cubic feet equivalent (MMcfe) and billion cubic feet equivalent (Bcfe). One barrel of oil is the energy equivalent of six Mcf of natural gas. Daily oil and gas production is expressed in terms of barrels of oil per day (bopd) and thousands of cubic feet of gas per day (Mcfd), respectively. With respect to information relating to a working interest in wells or acreage, net oil and gas wells or acreage is determined by multiplying gross wells or acreage by the working interest therein. Unless otherwise specified, all references to wells and acres are gross. THE COMPANIES Apache and Merger Sub. Apache Corporation is an independent energy company that explores for, develops, produces, gathers, processes and markets natural gas and crude oil. Merger Sub is a wholly owned subsidiary of Apache. The principal executive offices of Apache and Merger Sub are located at One Post Oak Central, 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400, and the telephone number at such offices is (713) 296-6000. DEKALB. DEKALB Energy Company is engaged in the exploration for, and the development and production of, crude oil and natural gas, primarily in Canada. The principal executive offices of DEKALB are located at 10th Floor, 700-9th Avenue S.W., Calgary, Alberta, Canada T2P 3V4, and the telephone number at such offices is (403) 261-1200. RECENT APACHE DEVELOPMENTS On December 30, 1994, Apache purchased approximately $96 million in oil and gas properties from Crystal Oil Company, adding approximately 92 Bcf of gas and 5 MMbbls of oil to Apache's net proved reserves. On December 22, 1994, Apache executed a purchase and sale agreement with Texaco Exploration and Production Inc. and affiliates ("Texaco") providing for the purchase by Apache from Texaco of approximately $600 million of oil and gas properties. It is expected that the Texaco transaction will close in the first quarter of 1995 and will include proved reserves of 220 Bcf of gas and 81 MMbbls of oil. See "Recent Apache Developments." On January 4, 1995, Apache closed the placement of $172.5 million of 6% Convertible Subordinated Debentures, realizing net proceeds to Apache of $168.6 million. THE SPECIAL MEETING DATE, TIME, PLACE AND PURPOSE The Special Meeting of the holders of DEKALB Class A Stock will be held on , , 1995, at the offices of DEKALB on the 10th Floor, 700-9th Avenue S.W., Calgary, Alberta, Canada T2P 3V4, commencing at 9:00 a.m. local time, for the purpose of (i) considering and voting upon a proposal to approve and adopt the Merger Agreement, and (ii) transacting such other business as may properly come before the Special Meeting. 5 11 RECORD DATE AND SHARES ENTITLED TO VOTE Holders of record of all shares of DEKALB Stock at the close of business on , 1995 (the "Record Date") are entitled to notice of the Special Meeting. Only holders of record of shares of DEKALB Class A Stock at the close of business on the Record Date are entitled to vote at the Special Meeting. On the Record Date, there were shares of DEKALB Class A Stock outstanding, each of which will be entitled to one vote on each matter to be acted upon at the Special Meeting. In addition, DEKALB had outstanding at such date shares of DEKALB Class B Stock, none of which are entitled to vote. QUORUM AND VOTE REQUIRED The presence, in person or by proxy, at the Special Meeting of the holders of a majority of the shares of DEKALB Class A Stock outstanding and entitled to vote at the Special Meeting is necessary to constitute a quorum at the meeting. The affirmative vote of a majority of the shares of DEKALB Class A Stock outstanding and entitled to vote thereon at the Special Meeting is required to approve and adopt the Merger Agreement. AGREEMENT BY CERTAIN DEKALB CLASS A STOCKHOLDERS The holders of a majority of the DEKALB Class A Stock have signed stockholder agreements obligating them, except in certain circumstances, to vote in favor of the Merger. Consequently, approval of the Merger Agreement at the Special Meeting is expected. See "Stockholder Agreements." SECURITY OWNERSHIP OF DEKALB MANAGEMENT As of December 31, 1994, directors and executive officers of DEKALB and their affiliates were beneficial owners of an aggregate of 222,076 outstanding shares of DEKALB Class A Stock (approximately 9.65 percent of such shares then outstanding). THE MERGER GENERAL DESCRIPTION OF THE MERGER At the Effective Time (as hereinafter defined) of the Merger, Merger Sub will merge with and into DEKALB, with DEKALB being the surviving corporation (the "Surviving Corporation") and a wholly owned subsidiary of Apache. As a result of the Merger, each outstanding share of DEKALB Stock (except for shares held by a subsidiary of DEKALB) will be converted into the right to receive between 0.85 and 0.90 shares of Apache Common Stock (the "Exchange Ratio"), determined by adding to 0.85 an amount equal to 0.0125 multiplied by the difference between $30 and the average of the per share closing prices of Apache Common Stock as reported on the NYSE Composite Tape during the ten consecutive trading days ending on (and including) the third trading day prior to the Effective Time (the "Market Price"). If the Market Price is $26 or lower, the Exchange Ratio will be 0.90, and if the Market Price is $30 or higher, the Exchange Ratio will be 0.85. Any resulting fractional shares of Apache Common Stock will be settled in cash. The full text of the Merger Agreement is included in this Proxy Statement/Prospectus as Appendix I. Depending on the Market Price and the number of shares of DEKALB Stock outstanding as of the Record Date, between and shares of Apache Common Stock will be issuable pursuant to the Merger Agreement (assuming no exercise of DEKALB Options prior to the Effective Time and no cancellation of DEKALB Options in exchange for Apache Common Stock as described below in this summary under "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options"), representing between approximately percent and percent of the total Apache Common Stock expected to be outstanding after such issuance. 6 12 DETERMINATIONS OF THE BOARDS OF DIRECTORS The Board of Directors of Apache has determined that the Merger is fair to, and in the best interests of, the stockholders of Apache and has approved the issuance and reservation for issuance of Apache Common Stock pursuant to the terms of the Merger Agreement. No vote of the stockholders of Apache is required in connection with the Merger. See "The Merger -- Background" and "-- Apache's Reasons for the Merger." THE BOARD OF DIRECTORS OF DEKALB HAS DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, DEKALB AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS TO THE HOLDERS OF DEKALB CLASS A STOCK THAT THEY VOTE FOR ADOPTION AND APPROVAL OF THE MERGER AGREEMENT. See "The Merger -- Background" and "-- DEKALB's Reasons for the Merger; Recommendation of DEKALB's Board of Directors." In considering the recommendation of DEKALB's Board of Directors with respect to the Merger, DEKALB stockholders should be aware that certain officers, directors and employees of DEKALB have certain interests concerning the Merger separate from their interests as holders of DEKALB Stock. See "The Merger -- Interests of Certain Persons in the Merger." OPINION OF MERRILL LYNCH AS DEKALB'S FINANCIAL ADVISOR Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") delivered its written opinion, dated December 20, 1994, to the Board of Directors of DEKALB that, as of such date, the Exchange Ratio was fair from a financial point of view to holders of DEKALB Stock. A copy of the opinion of Merrill Lynch is attached as Appendix II and incorporated herein by reference. For information regarding the opinion of Merrill Lynch, including the assumptions made, matters considered and limitations on the review undertaken, see "The Merger -- Opinion of Merrill Lynch as DEKALB's Financial Advisor." STOCKHOLDERS ARE URGED TO READ CAREFULLY IN ITS ENTIRETY THE OPINION OF MERRILL LYNCH ATTACHED AS APPENDIX II TO THIS PROXY STATEMENT/PROSPECTUS. INTERESTS OF CERTAIN PERSONS IN THE MERGER Certain members of DEKALB's Board of Directors and management have certain interests concerning the Merger separate from their interests as holders of DEKALB Stock, including those referred to below under "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options," "-- Benefit Plans and Severance" and "-- Insurance and Indemnification." See "The Merger -- Interests of Certain Persons in the Merger." CERTAIN INCOME TAX CONSEQUENCES United States Federal Income Tax. The obligation of each of Apache and DEKALB to effect the Merger is subject to the receipt of opinions of their respective counsel substantially to the effect that, for U.S. federal income tax purposes, the merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), no gain or loss will be recognized by DEKALB, Apache or Merger Sub as a result of the Merger, and no gain or loss will be recognized by the stockholders of DEKALB who are United States persons (within the meaning of the Code) upon the conversion of their DEKALB Stock into shares of Apache Common Stock pursuant to the Merger except with respect to cash, if any, received in lieu of fractional shares of Apache Common Stock or upon exercise of dissenters' rights of appraisal. United States persons who are holders of DEKALB Options which are assumed by Apache as described below under "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options" generally will not recognize income or gain for U.S. federal income tax purposes upon such assumption. Holders of DEKALB Options who elect to exchange their DEKALB Options for Apache Common Stock as described below under "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options" will generally recognize ordinary compensation income as a result of the receipt of the Apache Common Stock in exchange for such DEKALB Options. 7 13 Special rules may apply to a holder of DEKALB Stock or DEKALB Options who, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust. For a discussion of these and other U.S. federal income tax considerations in connection with the Merger, see "The Merger -- Certain Income Tax Consequences." Canadian Federal Income Tax. Holders of DEKALB Stock who are residents of Canada for the purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") will be considered to have disposed of their DEKALB Stock as a result of the Merger and will therefore realize a taxable gain or loss on the Merger. Holders of DEKALB Options who are residents of Canada and who elect to exchange DEKALB Options for shares of Apache Common Stock will be subject to tax under the Canadian Tax Act on the fair market value of the Apache Common Stock received. For a discussion of these and other Canadian federal income tax considerations in connection with the Merger, including treatment of DEKALB Options that are not exchanged for shares of Apache Common Stock, see "The Merger -- Certain Income Tax Consequences." ANTICIPATED ACCOUNTING TREATMENT The Merger is expected to be accounted for as a "pooling of interests" for financial accounting purposes. See "The Merger -- Anticipated Accounting Treatment." GOVERNMENTAL AND REGULATORY APPROVALS On , 1995, Apache and DEKALB each filed a notification and report, together with requests for early termination of the waiting period, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), with the U.S. Federal Trade Commission ("FTC") and the Antitrust Division of the U.S. Department of Justice (the "Justice Department") in respect of the Merger. Expiration or early termination of the applicable waiting period under the HSR Act is a condition to the obligations of Apache and DEKALB to consummate the Merger. The waiting period will expire on , 1995, unless a request for additional information is received before such date. Apache is also required to file an Application for Review under the Investment Canada Act (Canada) ("Investment Canada Act") with Investment Canada, an agency of the Government of Canada, in respect of the Merger. Approval pursuant to the Investment Canada Act of the business investment in Canada by Apache resulting from the Merger is a condition to consummation of the Merger. Review of the Application is to be completed within 45 days after filing unless the review cannot be completed by that date, in which case the review period may be extended by 30 days (or such longer period as may be agreed to by Apache) to permit completion of the review. See "The Merger -- Governmental and Regulatory Approvals." Neither Apache nor DEKALB is aware of any other governmental or regulatory approval required for consummation of the Merger, other than compliance with applicable securities laws. RESTRICTIONS ON RESALES There are certain restrictions on resales of Apache Common Stock to be received by affiliates of DEKALB and by Canadian residents. See "The Merger -- Restrictions on Resales by Affiliates" and "-- Restrictions on Resales by Canadian Residents." APPRAISAL RIGHTS OF DISSENTING DEKALB CLASS A STOCKHOLDERS DEKALB Class A Stock. Holders of DEKALB Class A Stock who do not vote in favor of the Merger will be entitled to statutory rights of appraisal as to their shares of DEKALB Class A Stock in connection with the Merger as provided under Section 262 of the Delaware General Corporation Law ("DGCL"). Certain procedures must be followed by any holder of DEKALB Class A Stock who wishes to perfect that statutory right of appraisal, including both not voting in favor of the Merger and filing with DEKALB, before the vote on the Merger is taken, a written demand for appraisal of shares of DEKALB Class A Stock owned by such stockholder. Failure to take any of the required steps may result in termination of such appraisal rights. Holders of DEKALB Class A Stock should note that surrender to Apache or to the Exchange Agent of 8 14 certificates representing their DEKALB Class A Stock may constitute a waiver of appraisal rights under the DGCL. See "The Merger -- Appraisal Rights of Dissenting DEKALB Class A Stockholders" and Appendix III to the Proxy Statement/Prospectus, which contains the full text of Section 262 of the DGCL. Apache Common Stock and DEKALB Class B Stock. Under Delaware law, neither holders of Apache Common Stock nor holders of DEKALB Class B Stock will be entitled to any appraisal or dissenter's rights as to those shares in connection with the Merger. See "The Merger -- Appraisal Rights of Dissenting DEKALB Class A Stockholders." CERTAIN TERMS OF THE MERGER AGREEMENT EFFECTIVE TIME OF THE MERGER The Merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware (the "Effective Time"), unless the certificate of merger specifies a later Effective Time, and the "Effective Date" shall be the date on which the certificate of merger becomes effective. Assuming all conditions to the Merger contained in the Merger Agreement are satisfied or waived prior thereto, it is anticipated that the Effective Time of the Merger will occur as soon as practicable following the Special Meeting. MANNER OF CONVERTING SHARES Promptly after consummation of the Merger, Apache will mail a letter of transmittal with instructions to each holder of record of DEKALB Stock immediately before the Effective Time for use in exchanging certificates formerly representing shares of DEKALB Stock for certificates representing shares of Apache Common Stock and cash in lieu of any fractional shares of Apache Common Stock. Certificates should not be surrendered by the holders of DEKALB Stock until they have received the letter of transmittal from Apache or the Exchange Agent. See "Certain Terms of the Merger Agreement -- Manner of Converting Shares." TREATMENT OF DEKALB OPTIONS Assumption. As of the Effective Time, Apache will assume each DEKALB Option that remains unexercised in whole or in part and that has not been properly surrendered for cancellation in exchange for Apache Common Stock as described below. Accordingly, each such DEKALB Option will be deemed to remain outstanding as an option to purchase, in place of the shares of DEKALB Stock previously subject thereto, that number of shares of Apache Common Stock equal to the product of the number of shares of DEKALB Stock subject to the DEKALB Option multiplied by the Exchange Ratio. The exercise price per share of Apache Common Stock will be equal to the previous exercise price per share under the DEKALB Option divided by the Exchange Ratio. See "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options." Cancellation. As an alternative to having their DEKALB Options assumed by Apache as described above, holders of DEKALB Options may elect, in their sole discretion at any time after receipt of this Proxy Statement/Prospectus and prior to the Effective Time, to surrender any DEKALB Options (whether vested or unvested) that remain unexercised in whole or in part. As consideration for such cancellation, Apache will issue a number of shares of Apache Common Stock for each share of DEKALB Common Stock covered by a cancelled DEKALB Option determined as follows: (i) the Market Price shall be multiplied by the Exchange Ratio, then (ii) the applicable exercise price per share under the DEKALB Option being exchanged shall be subtracted from the product contained in clause (i) above, and then (iii) the difference contained in clause (ii) above shall be divided by the Market Price. See "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options." Resale of Apache Common Stock by Canadian Residents. Apache will submit applications to the securities regulatory authorities in the appropriate provinces and territories of Canada in connection with the resale of Apache Common Stock issuable to holders of DEKALB Options resident in Canada upon the exercise of any DEKALB Option or issued in exchange for the cancellation of DEKALB Options. Upon 9 15 receipt of the orders resulting from the applications, the Apache Common Stock may be resold without restriction (other than as a result of any "control block" restrictions which may arise by virtue of the ownership thereof) under applicable securities laws of the provinces and territories of Canada provided that such trade is executed through the facilities of a stock exchange outside of Canada or in the over-the-counter market in the United States if the Apache Common Stock is quoted on the over-the-counter market at the time of such trade and such trade is made in accordance with the rules of the stock exchange or market upon which the trade is made and in accordance with all laws applicable to such stock exchange or market. THE HOLDERS OF DEKALB OPTIONS RESIDENT IN CANADA ARE URGED TO CONSULT THEIR LEGAL ADVISORS TO DETERMINE THE EXTENT OF ALL APPLICABLE RESALE PROVISIONS. CONDITIONS TO THE MERGER The respective obligations of Apache and DEKALB to consummate the Merger are subject to the satisfaction or waiver of certain conditions, including the following: (i) approval and adoption of the Merger Agreement by the holders of a majority of the outstanding shares of DEKALB Class A Stock; (ii) expiration or termination of the applicable waiting period under the HSR Act, and approval under the Investment Canada Act; (iii) the absence of any order making the Merger illegal or otherwise prohibiting consummation of the Merger; (iv) Apache having no reason to believe, based on advice of Arthur Andersen LLP, Apache's independent public accountants, that the Merger would not be accounted for as a "pooling of interests" in accordance with generally accepted accounting principles; (v) the accuracy of the representations and warranties of each party and compliance with all agreements and covenants by each party; (vi) the receipt of certain tax opinions; (vii) the effectiveness of the Registration Statement of which this Proxy Statement/Prospectus is a part; (viii) the approval for listing on the NYSE of the Apache Common Stock to be issued pursuant to the Merger Agreement; (ix) the absence of certain material adverse changes; (x) the receipt of letters from Arthur Andersen LLP and Coopers & Lybrand, Apache's and DEKALB's independent public accountants, respectively, covering such matters with respect to the Registration Statement and the Proxy Statement/Prospectus as reasonably requested by Apache and DEKALB; and (xi) the receipt of other required third party or governmental approvals or consents. Apache and DEKALB anticipate that all of the conditions to the consummation of the Merger will be satisfied prior to or at the time of the Special Meeting. Either Apache or DEKALB may extend the time for performance of any of the obligations of the other party or may waive compliance with those obligations at its discretion. See "Certain Terms of the Merger Agreement -- Conditions to the Merger." NO SOLICITATION The Merger Agreement provides that DEKALB and its officers, directors and representatives will not (i) solicit, initiate or encourage any offer or proposal likely to lead to any Takeover Proposal (as defined below), (ii) participate in any discussions (other than as necessary to clarify the terms and conditions of any unsolicited offer) or negotiations regarding any Takeover Proposal, or (iii) furnish any nonpublic information outside the ordinary course of conducting its business; provided, however, that to the extent required by their fiduciary duties under applicable law and after consultation with and based upon the advice of outside legal counsel, DEKALB's Board of Directors and officers may take the actions described in clauses (ii) and (iii) above in response to a person who initiates communication with DEKALB without there having occurred any action prohibited by clause (i) above. DEKALB will promptly notify Apache of any inquiries, offers or proposals and give it five days' advance notice of any agreement to be entered into or information to be furnished in connection with any such inquiries, offers or proposals. A "Takeover Proposal" is defined to mean any tender offer or exchange offer for 20 percent or more of the outstanding shares of either class of DEKALB Stock, any proposal or offer for a merger, consolidation, amalgamation or other business combination involving DEKALB or its subsidiaries or any equity securities (or securities convertible into equity securities) of DEKALB, or any proposal or offer to acquire in any manner a 20 percent or greater equity or beneficial interest in, or a material amount of the assets or value of, DEKALB or its subsidiaries. See "Certain Terms of the Merger Agreement -- No Solicitation." 10 16 TERMINATION OF THE MERGER AGREEMENT By Either Party. The Merger Agreement may be terminated prior to the Effective Time (i) by mutual consent of Apache and DEKALB, or (ii) by either party if (a) the Merger has not been consummated on or before June 30, 1995 (provided that the terminating party shall not have failed to fulfill any obligation under the Merger Agreement that resulted in the Merger not having been consummated), (b) any court or governmental final order shall have prohibited consummation of the Merger, (c) the required approval of the holders of DEKALB Class A Stock is not received at the Special Meeting, or (d) if the Market Price (calculated as if the Effective Date were the date of the Special Meeting) of Apache Common Stock is less than $22. By Apache. Apache may terminate the Merger Agreement (i) if DEKALB fails to comply in any material respect with any covenant or agreement set forth in the Merger Agreement, or upon DEKALB's breach of one or more representations or warranties not cured within ten business days following notice, which breaches would in the aggregate have a Material Adverse Effect on DEKALB, (ii) if any of the activities described above regarding non-solicitation of a Takeover Proposal occur, (iii) if the Board of Directors of DEKALB recommends to the stockholders of DEKALB any Takeover Proposal, or resolves to do so, or (iv) if a tender or exchange offer for 20 percent or more of the outstanding shares of DEKALB Class A Stock is commenced, and the Board of Directors of DEKALB does not recommend that stockholders not tender their shares. By DEKALB. DEKALB may terminate the Merger Agreement (i) if Apache fails to comply in any material respect with any covenant or agreement set forth in the Merger Agreement, or upon Apache's breach of one or more representations or warranties not cured within ten business days following notice, which breaches would in the aggregate have a Material Adverse Effect on Apache, or (ii) if the Board of Directors of DEKALB, to the extent required by their fiduciary duties and after consultation with and based upon the advice of outside legal counsel, resolves to recommend or agrees to a Takeover Proposal that provides stockholders of DEKALB a value per share of DEKALB Stock in excess of a value equal to the product of (a) the Exchange Ratio (calculated as if the Effective Date were the date on which DEKALB's Board of Directors considers termination of the Merger Agreement) multiplied by (b) the average of the per share closing prices of Apache Common Stock as reported on the NYSE Composite Tape for the ten consecutive trading days immediately preceding such date. See "Certain Terms of the Merger Agreement -- Termination or Amendment of the Merger Agreement." BENEFIT PLANS AND SEVERANCE The Merger Agreement provides that, for at least 24 months after the Effective Time, Apache will maintain benefit plans (including DEKALB's severance policy) for employees and officers of DEKALB no less favorable than those provided on the date of the Merger Agreement. For purposes of eligibility to participate and vest in various Apache benefit plans, employees of DEKALB and its subsidiaries will be credited with their years of service with DEKALB and its subsidiaries. In addition, DEKALB is permitted to pay certain bonuses, in addition to any bonuses pursuant to existing bonus or incentive plans. See "Certain Terms of the Merger Agreement -- Benefit Plans and Severance" and "The Merger -- Interests of Certain Persons in the Merger." INSURANCE AND INDEMNIFICATION The Merger Agreement provides that, for a period of six years after the Effective Time, Apache will, subject to certain limitations, provide to DEKALB's current directors and officers an insurance and indemnification policy that covers events through the Effective Time with terms no less favorable than the directors' and officers' liability insurance currently provided to DEKALB's directors and officers. In addition, after the Effective Time, Apache (i) will indemnify all past and present officers and directors of DEKALB to the same extent that such persons were entitled to be indemnified by DEKALB pursuant to DEKALB's Restated Certificate of Incorporation, as amended ("DEKALB's Charter"), DEKALB's Restated Bylaws 11 17 ("DEKALB's Bylaws"), or any indemnification agreement, for any acts or omissions occurring at or prior to the Effective Time, including those in connection with the Merger, and (ii) will advance reasonable litigation expenses incurred by such officers and directors in connection with defending any action arising out of such acts or omissions. See "Certain Terms of the Merger Agreement -- Insurance and Indemnification." STOCKHOLDER AGREEMENTS In consideration for Apache's and Merger Sub's execution of the Merger Agreement, holders of 1,202,403 shares of DEKALB Class A Stock (or approximately 52 percent of the 2,304,007 shares of DEKALB Class A Stock outstanding on December 15, 1994) executed stockholder agreements ("Stockholder Agreements") agreeing to vote all shares of DEKALB Class A Stock owned or controlled by such persons at any meeting of stockholders of DEKALB (or consent in lieu thereof) (i) in favor of the Merger and adoption of the Merger Agreement, (ii) against any act that would result in a breach under the Merger Agreement, and (iii) except as otherwise agreed to in writing in advance by Apache, against any business combination, sale of assets or reorganization or recapitalization, any change in DEKALB's Board of Directors, any amendment of DEKALB's Charter or DEKALB's Bylaws or corporate structure or business, or any other matter that may interfere with or adversely affect the contemplated economic benefits to Apache of the Merger or Merger Agreement. The stockholders signing Stockholder Agreements also agreed (a) not to solicit, initiate or encourage any Takeover Proposals, (b) not to grant a proxy to another person, sell or otherwise transfer or encumber their shares, or convert their shares of DEKALB Class A Stock into shares of DEKALB Class B Stock, and (c) to waive all appraisal rights with respect to the Merger. The Stockholder Agreements will terminate automatically on the earliest to occur of the Effective Time or termination of the Merger Agreement by its terms. The consequence of the Stockholder Agreements is that approval of the Merger Agreement at the Special Meeting is expected. See "Stockholder Agreements." COMPARATIVE RIGHTS OF APACHE AND DEKALB STOCKHOLDERS Rights of stockholders of DEKALB are currently governed by Delaware law, DEKALB's Charter and DEKALB's Bylaws. Upon consummation of the Merger, DEKALB stockholders will become stockholders of Apache and their rights as stockholders of Apache will be governed by Delaware law, the Restated Certificate of Incorporation of Apache ("Apache's Charter") and Apache's Bylaws. There are various differences between the rights of DEKALB stockholders and the rights of Apache stockholders. Apache's Charter and certain outstanding debt securities contain certain provisions that have an anti-takeover effect, and Apache's Board of Directors has granted to holders of Apache Common Stock rights to purchase additional shares of Apache Common Stock that also have an anti-takeover effect. See "Comparative Rights of Apache and DEKALB Stockholders" and "Description of Apache Capital Stock." 12 18 MARKET PRICES AND DIVIDEND INFORMATION Apache Common Stock is traded on the NYSE and the Chicago Stock Exchange under the symbol "APA." The DEKALB Class B Stock is traded in the over-the-counter market and quoted on the NASDAQ/NMS under the symbol "ENRGB," and on The Toronto Stock Exchange, Inc. (the "TSE") under the symbol "DKB.B." The DEKALB Class A Stock is not traded publicly. The following table sets forth, for the periods indicated, the range of high and low closing prices per share of Apache Common Stock as reported on the NYSE Composite Tape and of DEKALB Class B Stock as reported on the NASDAQ/NMS, and the dividend per share of Apache Common Stock. Dividends were not paid on the DEKALB Stock during such periods.
APACHE COMMON STOCK DEKALB CLASS B STOCK -------------------------- -------------------------- HIGH LOW DIVIDEND HIGH LOW DIVIDEND ----- ----- -------- ----- ----- -------- 1992 First Quarter......................... $15 7/8 $12 $0.07 $14 1/2 $11 3/4 -- Second Quarter........................ 18 1/8 13 7/8 0.07 15 3/4 12 -- Third Quarter......................... 22 1/8 15 1/2 0.07 14 1/4 12 -- Fourth Quarter........................ 21 3/8 17 1/8 0.07 13 1/4 10 1/4 -- 1993 First Quarter......................... $26 1/4 $17 5/8 $0.07 $15 $10 3/4 -- Second Quarter........................ 30 1/4 24 3/8 0.07 18 3/4 14 1/4 -- Third Quarter......................... 33 1/2 26 3/8 0.07 17 1/4 15 3/4 -- Fourth Quarter........................ 31 1/4 20 3/8 0.07 17 3/8 13 -- 1994 First Quarter......................... $26 7/8 $22 1/2 $0.07 $18 1/2 $13 1/4 -- Second Quarter........................ 29 22 1/4 0.07 15 1/2 13 1/4 -- Third Quarter......................... 29 1/4 23 0.07 16 1/2 15 -- Fourth Quarter........................ 28 7/8 23 5/8 0.07 21 1/2 14 3/4 -- 1995 First Quarter*........................ $25 1/2 $22 1/2 $0.07+ $21 1/2 $18 3/4 --
- --------------- * Through January 13, 1995. + Declared; payable January 31, 1995. On December 20, 1994, the last trading day prior to the announcement by Apache and DEKALB that they had executed the Merger Agreement, the closing per share sales prices of Apache Common Stock as reported on the NYSE Composite Tape, and DEKALB Class B Stock as reported on the NASDAQ/NMS, were $26.00 and $15.75, respectively. See the cover page of this Proxy Statement/Prospectus for recent closing prices of Apache Common Stock and DEKALB Class B Stock. Following the Merger, Apache Common Stock will continue to be traded on the NYSE and the Chicago Stock Exchange. Following the Merger, DEKALB Class B Stock will cease to be traded on the NASDAQ/NMS and on the TSE, and there will be no further market for the DEKALB Class B Stock. Apache has paid cash dividends on Apache Common Stock for 112 consecutive quarters and intends to continue the payment of dividends at current levels, although future dividend payments will depend upon Apache's level of earnings, financial requirements and other relevant factors. 13 19 APACHE SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data of Apache and subsidiaries shown below as of or for each year in the five year period ended December 31, 1993 have been derived from Apache's audited consolidated financial statements, and the unaudited financial data as of or for the nine month periods ended September 30, 1993 and 1994 have been derived from Apache's unaudited consolidated financial statements that include, in the opinion of Apache's management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the information for such periods. This data should be read in conjunction with the consolidated financial statements and related notes and the report of independent public accountants included in Apache's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, as amended by Apache's Form 10-K/A, and the unaudited financial statements and related notes included in Apache's Quarterly Report on Form 10-Q for the nine months ended September 30, 1994, each of which is incorporated by reference in this Proxy Statement/Prospectus.
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31, (UNAUDITED) ------------------------------------------------------------ ----------------------- 1989 1990 1991(1) 1992 1993 1993 1994 -------- -------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA Oil and gas production revenues............... $199,884 $234,570 $ 316,062 $ 394,552 $ 437,342 $ 319,523 $ 365,106 Consolidated revenues.... 246,850 273,410 356,930 454,300 466,638 341,875 397,303 Net income............... 22,122 40,297 34,615(2) 47,776(3) 37,334 24,168 30,177 Net income per common share........... .64 .90 .76 1.02 .70 .47 .49 Cash dividends per common share.................. .28 .28 .28 .28 .28 .21 .21 BALANCE SHEET DATA Working capital (deficit).............. $ 24,585 $ 15,678 $ (55,023) $ (43,775) $ (62,450) $ (32,412) $ (35,253) Total assets............. 764,368 829,634 1,209,291 1,218,704 1,592,407 1,526,388 1,715,449 Long-term debt........... 195,622 194,781 490,988 454,373 453,009 409,356 552,744 Shareholders' equity..... $350,263 $386,780 $ 439,941 $ 475,209 $ 785,854 $ 768,322 $ 807,536 Common shares outstanding at end of period....... 43,949 44,694 46,855 46,936 61,085 60,658 61,427
- --------------- (1) Includes financial data for MW Petroleum Corporation after June 30, 1991. See Note 1 -- Acquisitions and Divestitures to the audited financial statements of Apache incorporated herein by reference. (2) Includes a pre-tax charge of $11.1 million ($7.1 million after-tax) resulting from the relocation of Apache's headquarters to Houston, Texas. (3) Includes a gain of $28.3 million before-tax ($18.5 million after-tax) resulting from the sale by Apache of its 31.7 percent interest in Natural Gas Clearinghouse. 14 20 DEKALB SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data of DEKALB and subsidiaries shown below as of or for each year in the five year period ended December 31, 1993 have been derived from DEKALB's audited consolidated financial statements, and the unaudited financial data as of or for the nine month periods ended September 30, 1993 and 1994 have been derived from DEKALB's unaudited consolidated financial statements that include, in the opinion of DEKALB's management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the information for such periods. This data should be read in conjunction with DEKALB's consolidated financial statements and related notes and the report of independent public accountants included in DEKALB's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and the unaudited financial statements and related notes included in DEKALB's Quarterly Report on Form 10-Q for the nine months ended September 30, 1994, each of which accompanies and constitutes a part of this Proxy Statement/Prospectus.
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31, (UNAUDITED) ------------------------------------------------------------ -------------------- 1989 1990 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA Oil and gas production revenues................. $ 78,486 $100,880 $ 92,949 $ 59,283 $ 44,506 $ 32,991 $ 34,356 Consolidated revenues...... $ 81,020 $102,903 $ 94,692 $ 60,733 $ 45,903 $ 34,021 $ 35,443 Net income (loss): Continuing operations.... $ 9,472 $ 15,526 $(62,586)(1) $(69,253)(1) $ 5,672 $ 3,823 $ 6,056 Discontinued operations............. 16,456 11,633 -- (1,050)(2) -- -- -- Cumulative effect of change in accounting principle.............. -- -- -- -- 5,334 5,334 -- -------- -------- -------- -------- -------- -------- -------- Net income (loss).......... $ 25,928 $ 27,159 $(62,586) $(70,303) $ 11,006 $ 9,157 $ 6,056 ========= ========= ========= ========= ========= ========= ========= Net income (loss) per share: Continuing operations.... $ .91 $ 1.50 $ (6.51)(1) $ (7.19)(1) $ .59 $ .40 $ .63 Discontinued operations............. 1.57 1.12 -- (0.11)(2) -- -- -- Cumulative effect of change in accounting principle.............. -- -- -- -- .55 .55 -- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share.................... $ 2.48 $ 2.62 $ (6.51) $ (7.30) $ 1.14 $ .95 $ .63 ========= ========= ========= ========= ========= ========= ========= Cash dividends per common share............... $ .20 $ .29 $ .08 -- -- -- -- BALANCE SHEET DATA Working capital (deficit)................ $ 10,576 $ 2,680 $ (2,570) $ 11,020 $ 6,611 $ 4,196 $ (7,787) Total assets............... 416,263 558,892 425,031 218,985 210,089 193,287 224,399 Long-term debt............. 51,765 191,799 167,407 69,725 51,325 52,325 51,325 Shareholders' equity....... $242,321 $251,251 $184,357 $ 95,587 $100,599 $ 97,890 $101,535 Common shares outstanding at end of period......... 10,315 9,768 9,609 9,611 9,606 9,606 9,386
- --------------- (1) The 1991 loss reflected U.S. writedowns of $94.2 million pre-tax ($66.0 million after-tax). The 1992 loss reflected a pre-tax loss of $34.9 million ($32.3 million after-tax) on the divestiture of U.S. assets, and writedowns of $24.7 million (pre- and after-tax) on U.S. properties and $28.6 million pre-tax ($15.9 million after-tax) on Canadian properties. (2) The 1992 loss on discontinued operations related to a $0.3 million loss on divestiture of Lindsay Manufacturing Co., and a $0.75 million loss on divestiture of a commodities brokerage business. 15 21 SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following table contains unaudited pro forma data of Apache (i) to give effect to the Merger using the pooling of interests method of accounting and (ii) to give effect to the acquisition of Texaco properties (see "Recent Apache Developments -- Texaco Acquisition") using the purchase method of accounting. The operations data assume the Merger occurred on January 1, 1991 and the Texaco acquisition occurred on January 1, 1993. The Merger pro forma data are based on audited statements of Apache and DEKALB for December 31, 1991, 1992 and 1993 and on unaudited statements for the nine months ended September 30, 1994. Pro forma data relative to the Texaco acquisition are based on Texaco's Unaudited Statement of Combined Revenues and Direct Operating Expenses for the Oil and Gas Properties of Texaco Exploration and Production Inc. To Be Sold to Apache Corporation and notes thereto ("Texaco's Unaudited Statement of Revenues and Direct Operating Expenses") for the year ended December 31, 1993 and the nine months ended September 30, 1994. Pro forma balance sheet data are based on Apache's and DEKALB's unaudited September 30, 1994 balance sheets and the assumed purchase price of $600 million in the Texaco acquisition. Per share data reflect an assumption of an Exchange Ratio of 0.90. The pro forma data should be read in conjunction with the Unaudited Pro Forma Consolidated Condensed Financial Statements and notes thereto included elsewhere in this Proxy Statement/Prospectus. The unaudited pro forma operations data are not necessarily indicative of the operating results that would have resulted had the Merger occurred on January 1, 1991 and the Texaco acquisition occurred on January 1, 1993, nor are they necessarily indicative of future operating results.
DEKALB MERGER AND DEKALB MERGER TEXACO ACQUISITION --------------------------------------------- --------------------------- AT OR FOR AT OR FOR THE NINE THE NINE FOR THE YEAR ENDED MONTHS FOR THE MONTHS DECEMBER 31, ENDED YEAR ENDED ENDED ------------------------------ SEPTEMBER 30, DECEMBER 30, SEPTEMBER 30, 1991 1992 1993 1994 1993 1994 -------- -------- -------- ------------- ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF OPERATIONS DATA Consolidated revenues....... $453,657 $517,403 $512,632 $ 432,812 $ 725,432 $ 562,912 Income (loss) from continuing operations..... (27,971) (21,477) 43,006 36,233 48,759 30,331 Income (loss) per common share from continuing operations................ (.51) (.39) .69 .52 .78 .43 BALANCE SHEET DATA Total assets.............. $1,939,848 $2,552,348 Long-term debt............ 604,069 1,204,069 Shareholders' equity...... $ 909,071 $ 909,071 Common shares outstanding at end of period....... 69,875(1) 69,875(1)
- --------------- (1) Assuming an Exchange Ratio of 0.85 would result in 69,405,000 common shares outstanding at September 30, 1994. 16 22 COMPARATIVE PER SHARE DATA Set forth below are the net income, cash dividends and book value per share of Apache and DEKALB on a historical basis, a pro forma basis for Apache, and an equivalent pro forma basis for DEKALB. Apache's pro forma dividends per common share assume dividend payments are consistent with Apache's historical dividend level. The equivalent pro forma data for DEKALB are calculated by multiplying the Apache pro forma per common share data by an Exchange Ratio of 0.90 (the Exchange Ratio resulting from a Market Price of Apache Common Stock of $26.00 per share or less). The information set forth below should be read in conjunction with the respective audited and unaudited consolidated financial statements and related notes of Apache and DEKALB incorporated by reference and included elsewhere in this Proxy Statement/Prospectus, Texaco's Unaudited Statement of Revenues and Direct Operating Expenses included herein, and the Unaudited Pro Forma Consolidated Condensed Financial Statements and notes thereto included elsewhere in this Proxy Statement/Prospectus. APACHE
AT OR FOR THE NINE AT OR FOR THE YEAR MONTHS ENDED DECEMBER 31, ENDED --------------------------- SEPTEMBER 30, APACHE HISTORICAL 1991 1992 1993 1994 ----- ------ ------ ------------- (UNAUDITED) Income per share, from continuing operations...... $ .76 $ 1.02 $ .70 $ .49 Cash dividends per share..... .28 .28 .28 .21 Book value per common share...................... 9.39 10.13 12.86 13.15
DEKALB MERGER AND DEKALB MERGER TEXACO ACQUISITION ------------------------------------ -------------------- AT OR AT OR FOR AT OR FOR THE FOR THE NINE THE NINE AT OR FOR THE YEAR MONTHS YEAR MONTHS ENDED DECEMBER 31, ENDED ENDED ENDED ------------------------ SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, APACHE UNAUDITED PRO FORMA 1991 1992 1993 1994 1993 1994 ----- ----- ---- ------------- ------------ ------------- Income (loss) per share from continuing operations(1).... $(.51) $(.39) $.69 $ .52 $ .78 $ .43 Cash dividends per share...... .28 .28 .28 .21 .28 .21 Book value per common share... 13.01 13.01
- --------------- (1) Income (loss) per share would not change significantly, assuming an Exchange Ratio of 0.85. DEKALB
AT OR FOR THE NINE AT OR FOR THE YEAR MONTHS ENDED DECEMBER 31, ENDED ---------------------------- SEPTEMBER 30, DEKALB HISTORICAL 1991 1992 1993 1994 ------ ------ ------ ------------- (UNAUDITED) Income (loss) per share from continuing operations............... $(6.51) $(7.19) $ .59 $ .63 Cash dividends per share... .08 -- -- -- Book value per common share.................... 19.19 9.95 10.47 10.82
(Table continued on following page) 17 23
DEKALB MERGER AND DEKALB MERGER TEXACO ACQUISITION ------------------------------------------- --------------------------- AT OR AT OR FOR AT OR FOR THE FOR THE NINE THE NINE AT OR FOR THE YEAR MONTHS YEAR MONTHS ENDED DECEMBER 31, ENDED ENDED ENDED ------------------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DEKALB EQUIVALENT 1991 1992 1993 1994 1993 1994 ----- ----- ----- ------------- ------------ ------------- Income (loss) per share from continuing operations(1).. $(.46) $(.35) $ .62 $ .47 $ .70 $ .39 Cash dividends per share(2).................. .25 .25 .25 .19 .25 .19 Book value per common share(3).................. 11.71 11.71
- --------------- (1) Assumes an Exchange Ratio of 0.90. An assumed Exchange Ratio of 0.85 would result in the following pro forma income (loss) on a per share equivalent basis:
DEKALB MERGER AND DEKALB MERGER TEXACO ACQUISITION -------------------------------------- -------------------- FOR FOR THE FOR THE NINE THE NINE FOR THE YEAR MONTHS YEAR MONTHS ENDED DECEMBER 31, ENDED ENDED ENDED ------------------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1991 1992 1993 1994 1993 1994 ----- ----- ----- ------------- ------------ ------------- Income (loss) per share from continuing operations........... $(.44) $(.33) $ .60 $ .44 $ .67 $ .37
(2) An assumed Exchange Ratio of 0.85 would reduce pro forma equivalent dividends in each period by $0.01 per share. (3) Book value on a pro forma equivalency basis would be reduced from $11.71 to $11.14 per share, assuming an Exchange Ratio of 0.85. 18 24 THE COMPANIES APACHE AND MERGER SUB Apache, a Delaware corporation formed in 1954, is an independent energy company that explores for, develops, produces, gathers, processes and markets natural gas and crude oil. In the United States, Apache's exploration and production interests are spread over 18 states, focusing on the Gulf of Mexico, the Anadarko Basin of Oklahoma, the Permian Basin of West Texas and New Mexico, the Gulf Coast and the Rocky Mountain region. Internationally, Apache has production interests in Australia, and is currently focusing its international exploration efforts offshore Western Australia, offshore China, offshore Ivory Coast, and in Indonesia and Egypt. Apache Common Stock has been listed on the NYSE since 1969. Apache is among the largest independent oil and gas producers in the United States. Apache holds interests in many of its U.S. and international properties through operating subsidiaries, such as MW Petroleum Corporation, Apache Energy Resources Corporation, Apache Energy Limited and Apache International, Inc. Apache treats all operations as one segment of business. Apache's strategy is to expand its oil and gas production, reserves and cash flow through a combination of acquisitions, moderate-risk drilling and development of its inventory of properties. Apache also emphasizes reducing operating costs per unit produced and selling marginal and nonstrategic properties in order to increase its profit margins. For Apache, property acquisition is only one phase in a continuing cycle of business growth. Apache's aim is to follow each material acquisition with a cycle of reserve enhancement, property consolidation and cash flow acceleration, facilitating asset growth and debt reduction. This approach requires a well-planned and carefully executed property development program and a commitment to a selective program of ongoing property dispositions. It motivates Apache to target acquisitions that have ascertainable additional reserve potential and undeveloped and partially developed properties. Apache prefers to operate its properties so that it can effectively influence their development and, as a result, Apache currently operates properties accounting for over 75 percent of its production. Apache increased its reserves and production eight-fold during the decade ended 1993. In combination with its acquisitions, Apache engages in active operations to develop and exploit its inventory of workover, recompletion and other development projects to increase reserves and production. During 1993, Apache acquired $324.6 million of additional oil and gas properties and replaced more than 100 percent of its United States production through its drilling, workover and recompletion program. Apache's international investments supplement its long-term growth strategy. Although international exploration is recognized as higher-risk than most of Apache's United States activities, it offers potential for substantial rewards and significant reserve additions. Because production of oil and gas results in depletion of reserves, future oil and gas production is highly dependent upon Apache's level of success in adding reserves. Apache adds reserves by acquisition, active exploration and development, and identification, through engineering studies, of additional behind-pipe zones or secondary recovery reserves. XPX Acquisitions, Inc., a wholly owned subsidiary of Apache incorporated in Delaware on November 29, 1994, has conducted no business other than entering into the Merger Agreement. DEKALB DEKALB is engaged in the exploration for, and the development and production of, crude oil and natural gas, primarily in Canada. DEKALB's wholly owned Canadian subsidiary, DEKALB Energy Canada Ltd., concentrates its exploration and development activity in the provinces of Alberta and British Columbia. Since the disposition of substantially all of DEKALB's U.S. assets in 1992 and 1993, DEKALB's only remaining U.S. activity is related to one non-operated interest in an oil well in California and acreage adjacent thereto. DEKALB's operations are largely dependent upon its ability to discover or acquire reserves of oil and natural gas, to produce oil and natural gas in commercial quantities, and to obtain additional unproved oil and 19 25 gas lands by lease, option, concession, or otherwise. The prices obtained for the sale of oil and natural gas depend upon numerous factors, most of which are beyond the control of DEKALB, including domestic and foreign production rates of oil and natural gas, market demand, and effects of government regulations and incentives. RECENT APACHE DEVELOPMENTS CRYSTAL ACQUISITION On December 30, 1994 (effective as of October 1, 1994), Apache purchased, for approximately $96.4 million, substantially all of the U.S. oil and gas properties of Crystal Oil Company ("Crystal"), which added approximately 92 Bcf of gas and 5 MMbbls of oil (approximately 20 MMboe in the aggregate) to Apache's net proved reserves. The producing properties acquired from Crystal are located primarily along the Arkansas-Louisiana border and in southern Louisiana, and daily production at the time of acquisition was approximately 20 MMcf of gas and 2,700 bbls of oil. The acquisition also included approximately 40,000 net undeveloped mineral acres in southern Louisiana. Apache acquired an average 80 percent working interest in the properties overall, including a 97 percent working interest in two fields that account for approximately 60 percent of the value. Apache funded the Crystal acquisition by borrowing under its principal revolving bank credit facility. TEXACO ACQUISITION On December 22, 1994, Apache executed a purchase and sale agreement with Texaco providing for the purchase by Apache from Texaco of approximately $600 million of oil and gas properties, subject to adjustment. It is expected that the properties will include proved reserves of approximately 220 Bcf of gas and 81 MMbbls of oil. On an energy equivalent basis, the reserves to be acquired by Apache total approximately 118 MMboe and are approximately 69 percent crude oil. Average current daily production is approximately 21 Mbbls of oil and 90 MMcf of gas. The Texaco properties are highly concentrated, with approximately two-thirds of the reserves located in 54 fields, and are in producing regions where Apache has existing operations -- the Permian Basin, the Gulf Coast of Texas and Louisiana, western Oklahoma, eastern Texas, the Rocky Mountains and the Gulf of Mexico. Apache will operate approximately two-thirds of the production and acquire an average of approximately a 70 percent working interest in the operated properties. The total acquisition will include approximately 500,000 net mineral acres, as well as a substantial quantity of seismic data. The Texaco transaction is expected to close in the first quarter of 1995 following receipt of required regulatory approvals and satisfaction of customary closing conditions. It is currently anticipated that Apache will fund the Texaco transaction with borrowings under its existing revolving bank credit facility and with the net proceeds from recently issued Debentures (as defined below). FINANCING ACTIVITIES On January 4, 1995, Apache closed the placement of 6% Convertible Subordinated Debentures due January 15, 2002 (the "Debentures"). The Debentures were issued in transactions exempt from registration under the Securities Act. The Debentures are redeemable by Apache no earlier than January 15, 1998, and are subordinated in right of payment to all senior indebtedness of Apache. The Debentures are convertible at the option of the holders into Apache Common Stock at a conversion price of $30.68 per share, subject to adjustment. The aggregate principal amount of the Debentures placed, including the overallotment option, which was exercised in full, was $172.5 million. The net proceeds from the Debentures of $168.6 million will be used to fund in part the Texaco acquisition described above but were initially used for general corporate purposes, including the repayment of borrowings under Apache's existing revolving bank credit facility. Apache is currently engaged in discussions with the lenders under its existing revolving bank credit facility to substantially increase the total funds available thereunder in order to fund, among other things, the Texaco acquisition. No commitments have been received from such lenders, and no assurances can be given 20 26 that adequate commitments will be received or that funds will be available under such facility to fund the Texaco acquisition. THE SPECIAL MEETING TIME, DATE, PLACE AND PURPOSE OF SPECIAL MEETING The Special Meeting will be held on , , 1995, at the offices of DEKALB on the 10th Floor, 700-9th Avenue S.W., Calgary, Alberta, Canada T2P 3V4, commencing at 9:00 a.m. local time, for the purpose of (i) considering and voting upon a proposal to approve and adopt the Merger Agreement, as required under the DGCL, and (ii) transacting such other business as may properly come before the Special Meeting. RECORD DATE AND SHARES ENTITLED TO VOTE Holders of record of both DEKALB Class A Stock and DEKALB Class B Stock at the close of business on the Record Date are entitled to notice of the Special Meeting, but only holders of record of DEKALB Class A Stock at the close of business on the Record Date are entitled to vote at the Special Meeting. Under the terms of DEKALB's Charter and the DGCL, the holders of record of DEKALB Class B Stock are not entitled to vote at the Special Meeting. On the Record Date, there were approximately holders of record of DEKALB Class A Stock and shares of DEKALB Class A Stock outstanding. Each share of DEKALB Class A Stock entitles the holder thereof to one vote on each matter to be acted upon at the Special Meeting. See "Principal Stockholders of Apache and DEKALB -- DEKALB" for information regarding persons known to DEKALB to be the beneficial owners of more than five percent of the outstanding DEKALB Class A Stock. VOTING AND REVOCATION OF PROXIES All properly executed proxies that are not revoked will be voted at the Special Meeting in accordance with the instructions contained therein. If a holder of DEKALB Class A Stock executes and returns a proxy and does not specify otherwise, the shares represented by such proxy will be voted "for" approval and adoption of the Merger Agreement in accordance with the recommendation of the Board of Directors of DEKALB. A holder of DEKALB Class A Stock who has executed and returned a proxy may revoke it at any time before it is voted at the Special Meeting by (i) executing and returning a proxy bearing a later date, (ii) filing written notice of such revocation with the Secretary of DEKALB stating that the proxy is revoked, or (iii) attending the Special Meeting and voting in person. QUORUM AND VOTE REQUIRED The presence at the Special Meeting, in person or by proxy, of the holders of a majority of the outstanding shares of DEKALB Class A Stock entitled to vote thereat will constitute a quorum for the transaction of business, and approval and adoption of the Merger Agreement requires the affirmative vote of a majority of the outstanding shares of DEKALB Class A Stock entitled to vote thereon. On the Record Date, there were shares of DEKALB Class A Stock outstanding and entitled to vote at the Special Meeting. In determining whether the Merger Agreement has received the requisite number of affirmative votes, abstentions and broker non-votes will have the same effect as votes against the Merger Agreement. As of the Record Date, holders of 1,202,403 shares of DEKALB Class A Stock (or approximately 52 percent of the shares outstanding as of December 15, 1994) have executed Stockholder Agreements agreeing to vote in favor of the Merger and adoption of the Merger Agreement. Consequently, approval of the Merger Agreement at the Special Meeting is expected. See "Stockholder Agreements." 21 27 SOLICITATION OF PROXIES In addition to solicitation by mail, the directors, officers, employees and agents of DEKALB may solicit proxies from the holders of DEKALB Class A Stock by personal interview, telephone, telegram or otherwise. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who hold of record DEKALB Class A Stock for the forwarding of solicitation materials to the beneficial owners thereof. DEKALB will reimburse such brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses incurred by them in connection therewith. Apache and DEKALB will each pay one-half of the cost of printing and mailing this Proxy Statement/Prospectus and soliciting stockholder approvals if the Merger is not consummated. Neither Apache nor DEKALB has engaged the services of any third party to distribute proxy solicitation materials to brokers, banks or other nominees or to assist in the solicitation of proxies from DEKALB stockholders. OTHER MATTERS At the date of this Proxy Statement/Prospectus, the Board of Directors of DEKALB does not know of any business to be presented at the Special Meeting other than as set forth in the notice accompanying this Proxy Statement/Prospectus. If any other matters should properly come before the Special Meeting, it is intended that the shares of DEKALB Class A Stock represented by proxies at the Special Meeting will be voted with respect to such matters in accordance with the judgment of the persons voting such proxies. THE MERGER GENERAL DESCRIPTION OF THE MERGER The Merger Agreement provides that, at the Effective Time, Merger Sub will merge with and into DEKALB with DEKALB becoming the Surviving Corporation and a wholly owned subsidiary of Apache pursuant to Section 251 of the DGCL. Under Section 259 of the DGCL, the Surviving Corporation will possess the assets and liabilities of Merger Sub and DEKALB by operation of law at the Effective Time. In the Merger, each outstanding share of DEKALB Stock (except for 220,000 shares of DEKALB Class B Stock owned by a subsidiary of DEKALB, which will remain outstanding and which will not be converted into the right to receive Apache Common Stock) will be converted into the right to receive between 0.85 and 0.90 shares of Apache Common Stock, with the Exchange Ratio determined by adding to 0.85 an amount equal to 0.0125 multiplied by the difference between $30 and the Market Price of Apache Common Stock (which will be the average of the per share closing prices of Apache Common Stock as reported on the NYSE Composite Tape during the ten consecutive trading days ending on (and including) the third trading day prior to the Effective Time). If the Market Price is $26 or lower, the Exchange Ratio will be 0.90, and if the Market Price is $30 or higher, the Exchange Ratio will be 0.85. Any resulting fractional shares of Apache Common Stock will be settled in cash. Depending on the Market Price and the number of shares of DEKALB Stock outstanding as of the Record Date, between and shares of Apache Common Stock will be issuable pursuant to the Merger Agreement (assuming no exercise of DEKALB Options prior to the Effective Time and no cancellation of DEKALB Options in exchange for Apache Common Stock), representing between approximately percent and percent of the total Apache Common Stock expected to be outstanding after such issuance. BACKGROUND DEKALB reported significant writedowns of its U.S. oil and gas assets in May 1991, and of its U.S. and Canadian oil and gas assets in March 1992, resulting from value adjustments based on declines in oil and gas prices. DEKALB announced in December 1991 that its 1992 capital expenditures would be about $30 million during 1992, down approximately 35 percent from the 1991 spending level, and that 1992 capital expenditures 22 28 would focus principally on Canadian exploration opportunities. In connection therewith, significant reductions were effected in DEKALB's U.S. work force. On July 8, 1992, DEKALB entered into an agreement to sell all of its U.S. oil and gas properties, except those located in California, to Louis Dreyfus Gas Holdings Inc. ("Dreyfus"). The Dreyfus transaction was consummated on October 16, 1992. DEKALB essentially completed the divestiture of its U.S. oil and gas properties by selling all but one of its California properties (a non-operating interest) to Samedan Oil Corporation in 1993. The decision to dispose of its U.S. properties and to concentrate its activities in Canada followed unsuccessful attempts by DEKALB over several years to bring its high U.S. finding and development costs, and low reserve replacements, to competitive levels. On January 1, 1993, DEKALB's principal executive offices and all corporate functions were relocated from Denver, Colorado to Calgary, Alberta. Following these measures, DEKALB's operating results improved in both 1993 and 1994. In 1994 DEKALB listed the DEKALB Class B Stock on the TSE so that there would be trading markets for the DEKALB Class B Stock in both the United States and Canada. Despite DEKALB's improved operating results, the continuation of low world and domestic oil and North American gas prices and the general lack of enthusiasm for energy equities in the securities markets have resulted in sales prices for DEKALB Stock remaining well below levels reflective of the stockholder value which management sought to achieve through this corporate restructuring. Between the consummation of the transaction with Dreyfus in October 1992 and the execution of the Merger Agreement on December 21, 1994, more than 20 separate companies, from time to time, expressed to DEKALB or to DEKALB's financial advisor, Merrill Lynch, varying degrees of interest in acquiring DEKALB's operations. At DEKALB's request, Merrill Lynch assisted DEKALB in reviewing, evaluating and screening such unsolicited inquiries. Some of these expressions of interest resulted in meetings between officers of certain of the companies and officers of DEKALB. In the course of and as a result of the review of such inquiries, from time to time DEKALB authorized Merrill Lynch to supply, subject to confidentiality agreements, proprietary information to certain of the companies that expressed a strong degree of interest and that were viewed by DEKALB as capable of potentially consummating an acceptable transaction. During this period DEKALB entered into confidentiality agreements with a total of eight companies. Periodically during late 1992 and the first half of 1993, DEKALB management advised the Executive Committee of DEKALB's Board of Directors and/or the full Board of certain expressions of interest. In order to provide DEKALB's Board with relevant information to enable it to evaluate these expressions of interest, in mid-1993 management requested Merrill Lynch to provide certain information on the valuation of energy companies and to identify energy companies that might have an interest in acquiring DEKALB. Beginning on July 28, 1993, representatives of Merrill Lynch attended most of the meetings of the Board, as discussed below. At the meeting of DEKALB's Board held on July 28, 1993, representatives of Merrill Lynch reviewed with the Board oil and gas price forecasts, market valuations of certain energy companies in relation to their reserves and financial results, and recent Canadian and U.S. oil and gas acquisitions. They further discussed various companies that had provided unsolicited indications of interest in entering into a transaction with DEKALB, as well as other companies identified by Merrill Lynch that might have a potential interest in acquiring DEKALB. Merrill Lynch continued to screen and communicate with companies interested in acquiring DEKALB, and in the fall of 1993 DEKALB entered into confidentiality agreements with three such companies. During the first half of 1994, these three companies were provided the opportunity to visit with and obtain confidential information about DEKALB from Ryder Scott Company Petroleum Engineers ("Ryder Scott"), its independent petroleum engineers, and Coopers & Lybrand, its independent public accountants. At a Board meeting held on February 25, 1994, representatives of Merrill Lynch provided (i) an overview of the energy industry, including, among other things, the then current oil and gas prices as well as Merrill Lynch's forecasts for oil and gas prices; a discussion of valuation methodologies pertinent to the energy industry; and a summary of the then current economic climate for energy company acquisitions, and (ii) a 23 29 preliminary reference value analysis (prepared without the benefit of a comprehensive due diligence review), including a comparison of stock trading multiples of other Canadian energy companies with DEKALB's stock trading multiples. Merrill Lynch also provided a status report concerning communications with companies that had expressed interest in potential transactions with DEKALB. At a Board meeting held on May 18, 1994, representatives of Merrill Lynch reviewed with the Board the terms of nonbinding proposals from each of the three companies that had received confidential information, as well as Merrill Lynch's assessment of the economic environment in the energy industry. The Board determined that none of the three proposals was likely to lead to a transaction that would be acceptable to the Board. DEKALB advised the three companies that it was not interested in pursuing their proposals and requested that they destroy or return the confidential information in their possession. The Board also concluded that it was unlikely that an acceptable transaction could be negotiated at that time. Nevertheless, subsequent to the May 18, 1994 meeting, DEKALB continued to receive unsolicited expressions of interest. In mid-September 1994, one of DEKALB's most promising young executives unexpectedly passed away. Because people in the industry were aware of his importance to DEKALB, there was an intensification of expressions of interest concerning DEKALB's willingness to enter into a transaction, which resulted in the execution of confidentiality agreements with five additional companies, including Apache, and renewed contacts with companies that had previously expressed an interest. The first indication of Apache's interest in DEKALB occurred in late September 1994, when a representative of Apache's financial advisor informed a director of DEKALB that Apache was interested in discussing the possibility of a business combination. DEKALB referred the inquiry to Merrill Lynch and asked Merrill Lynch to provide certain proprietary information to Apache subject to a confidentiality agreement dated October 18, 1994. At meetings of the Executive Committee of the Board held on October 19 and 28, 1994 the interest in DEKALB expressed by a number of companies, including Apache, was discussed. Pursuant to the confidentiality agreements, DEKALB arranged for Apache and four other companies to receive access to information regarding DEKALB's business from representatives of Ryder Scott, Coopers & Lybrand and Merrill Lynch. At Apache's request, on October 29, 1994, officers of Apache and DEKALB met to discuss a possible business combination and the process necessary to determine the desirability of such a combination. In early November 1994, at DEKALB's request, Merrill Lynch advised each of the five companies, including Apache, that DEKALB's Board was scheduled to meet on November 9, 1994 and that if such company wished the Board to consider a proposal, it should be submitted in writing in advance of the meeting. On November 8, 1994, the five companies, including Apache, delivered nonbinding proposals (one of which was not in writing) for an acquisition of DEKALB subject in each case, among other things, to the completion of appropriate due diligence by the parties. The DEKALB Board of Directors held its regularly scheduled meeting on November 9, 1994. Merrill Lynch representatives participated in part of that meeting. The Merrill Lynch representatives discussed the then current business and stock market environment and the then current merger and acquisition environment for energy companies. Representatives of Merrill Lynch reviewed with the Board Merrill Lynch's preliminary reference value analysis (prepared without the benefit of a comprehensive due diligence review), including a comparison of stock trading multiples of other Canadian energy companies with DEKALB's stock trading multiples. Merrill Lynch then provided a detailed report about the status of recent discussions with those energy companies that had submitted more detailed proposals for a transaction with DEKALB as well as the status of discussions with other companies that had recently expressed interest in a transaction with DEKALB. The Board determined that the Apache proposal was the most likely to provide DEKALB stockholders with fair value and lead to an acceptable transaction, and thus was preferable to the other proposals. However, the Board instructed management and Merrill Lynch to seek clarification of certain of the proposals. On November 16, 1994, after DEKALB received such clarifications, DEKALB and Apache agreed to a comprehensive exchange of additional data subject to their confidentiality agreement. DEKALB also agreed, as required by the terms of Apache's proposal, to grant to Apache an exclusivity period expiring December 12, 1994, during which DEKALB would not solicit, discuss, negotiate or provide information with regard to, any 24 30 third party proposals for a business combination except to the extent necessary to comply with fiduciary obligations under applicable law. On November 22, 1994, DEKALB and Merrill Lynch entered into an engagement letter. See "-- Opinion of Merrill Lynch as DEKALB's Financial Advisor." During the period beginning on November 21, 1994, and continuing through December 20, 1994, DEKALB and Apache each conducted on-site due diligence of the other. Beginning December 6, 1994, representatives of Apache and DEKALB met to discuss various business and legal issues relating to the possible combination, and prepared and revised successive preliminary drafts of a merger agreement that set forth the basic structure of the proposed business combination. Forms of stockholder agreements and agreements to be entered into by "affiliates" of DEKALB were also prepared. On December 8, 1994, Apache's Board of Directors met to receive and to consider presentations by Apache management and its advisors concerning a business combination between Apache and DEKALB. After detailed discussion and review, the Apache Board authorized the officers of Apache to negotiate a merger with DEKALB. On December 12, 1994, representatives of Apache met with representatives of DEKALB and proposed certain merger terms. From December 13, 1994 through December 20, 1994, representatives of DEKALB and its advisors continued to meet and negotiate with representatives of Apache and its advisors. The parties also: continued their due diligence efforts; negotiated most of the terms of the proposed merger agreement, the remaining legal and structural issues and other transaction documents; discussed the details of the proposed business combination; and completed the schedules to the proposed merger agreement. On December 19, 1994, DEKALB's Board of Directors held a meeting by telephone conference. The Chairman reviewed with the Board developments in DEKALB's business and in the oil and gas industry since the disposition of DEKALB's U.S. properties, including the interests that had been expressed by other companies in acquiring DEKALB, including the exchange of information with other companies. He also reviewed the process which led to management's proposal that the Board consider approval of the proposed merger agreement with Apache. He described in detail the Apache negotiations. The Chairman, with the assistance of legal counsel, described the more important provisions of the proposed merger agreement and the proposed stockholder agreements and described for the Board the process by which it was contemplated that the vote of the holders of DEKALB Class A Stock approving the Merger would be solicited and obtained and the Merger would be consummated. He urged the directors to review the drafts of the proposed merger agreement which had been provided to them. The Board, following discussion, determined not to pursue a transaction with any other company at that time because: (i) no other company had expressed an interest in DEKALB which was acceptable to the Board for a variety of reasons, including price, structure, timing and various uncertainties; and (ii) Apache was unwilling to continue the negotiations if DEKALB pursued possible transactions with other companies. The Chairman reviewed the matters to be considered at the Board meeting scheduled for December 20, 1994, including a presentation by Apache management, formal and more detailed presentations to the Board by DEKALB management, Merrill Lynch and legal counsel, and consideration of the proposed transaction by the Board. On December 20, 1994, representatives of Apache met with certain holders of DEKALB Class A Stock and with DEKALB's Board of Directors to discuss the business and prospects of Apache and the terms of the Merger. Certain of those stockholders, and other stockholders who had been invited to but did not attend the meeting, were advised of the requirement by Apache that, following approval of the Merger Agreement by DEKALB's Board of Directors, such stockholders deliver to Apache signed Stockholder Agreements obligating the holders of a majority of the outstanding DEKALB Class A Stock to vote in favor of the Merger Agreement. See "Stockholder Agreements." DEKALB's Board was advised that holders of a majority of the outstanding shares of DEKALB Class A Stock were prepared to sign the required Stockholder Agreements and desired that DEKALB enter into the proposed merger agreement with Apache. On December 20, 1994, DEKALB's Board of Directors met and again reviewed proposals that DEKALB had previously received for the purpose of evaluating the proposed business combination with Apache. 25 31 DEKALB's Board of Directors reviewed the material terms of the business combination that representatives of Apache and DEKALB had negotiated to that point, including the material terms of the draft merger agreement and form of stockholder agreement. The Board received a written opinion dated December 20, 1994 from Merrill Lynch that, as of that date, based upon the procedures and subject to the assumptions described therein, the Exchange Ratio was fair from a financial point of view to the holders of DEKALB Stock. Receipt of the written opinion was preceded by an oral report from Merrill Lynch representatives who described the basis for its opinion and the procedures performed in reaching such opinion. See "-- Opinion of Merrill Lynch as DEKALB's Financial Advisor." The Board also received detailed reports from members of DEKALB's management concerning the results of the due diligence they performed as to Apache and from Merrill Lynch and DEKALB's management with respect to certain financial and reserve information about DEKALB and Apache. DEKALB's legal counsel reported on the results of legal due diligence of Apache and made a presentation to the Board concerning the Board's fiduciary duties to DEKALB's stockholders in connection with a business combination. After careful consideration of all matters, the Board directed DEKALB's management to negotiate further certain of the draft merger agreement terms with Apache and determined to meet again the next day. On December 21, 1994, DEKALB's Board of Directors met again. The Board received a report concerning the results of the prior night's negotiations with Apache. After reviewing the results of such further negotiations, DEKALB's due diligence investigation of Apache, the material terms of the Merger Agreement and of the Stockholder Agreements and further considering Merrill Lynch's written opinion dated December 20, 1994 that, as of such date, the Exchange Ratio was fair from a financial point of view to the holders of DEKALB Stock, the Board approved the Merger and authorized the execution and delivery of the Merger Agreement, which required as a condition to Apache's execution thereof the execution and delivery of the Stockholder Agreements. Shortly thereafter, the Stockholder Agreements were executed and delivered and the Merger Agreement was executed and delivered. CERTAIN INFORMATION PROVIDED In connection with the discussions between Apache and DEKALB described above, Apache provided to DEKALB confidential information and internal analyses, including certain preliminary financial forecasts with respect to Apache's operating results, cash flows and financing activities, capitalization and capital expenditures for 1994 and 1995, and the assumptions on which such preliminary financial forecasts were based. Such preliminary financial forecasts were developed by Apache for internal use only, were not prepared with the intent that they would be publicly distributed, were based on numerous assumptions (many of which are beyond the control of Apache) and are not necessarily indicative of future results. In connection with the discussions between Apache and DEKALB described above, DEKALB provided to Apache confidential information and internal analyses, including certain internal operating budgets relating to DEKALB's 1994 and 1995 fiscal years, and the assumptions on which such budgets were based. Such internal operating budgets were prepared by DEKALB for internal use only, were not prepared with the intent that they would be publicly distributed, were based on numerous assumptions (many of which are beyond the control of DEKALB) and are not necessarily indicative of future results. APACHE'S REASONS FOR THE MERGER With increased access to natural gas markets following the completion of several transportation systems during the last several years, western Canada's oil and gas industry has experienced a significant increase in drilling and exploration activity. Reduced delays in the connection of new gas wells along with increased production allowable rates have contributed to a substantially improved operating environment with greater access to pipeline capacity and markets. Operating in all major gas producing basins in North America outside of Canada, Apache has been looking since 1990 to reestablish a base of operations in western Canada because of growth potential and an improved business environment. Canada's Western Sedimentary Basin is estimated to hold more gas reserves than any other basin in North America, yet it is still underexplored relative to the U.S. and undeveloped 26 32 acreage is still relatively accessible. Apache believes that the recent completion of several pending and proposed gas pipeline expansion projects will unlock Western Canada's exploration and development potential by de-bottlenecking transportation constraints and tapping growing gas markets. The proposed Merger represents a significant step in Apache's objective of reestablishing an operating presence in Canada. Apache's management believes that DEKALB represents an attractive operating hub in Canada that has the critical mass and established organizational structure to enable Apache to initiate activity in the basin without the delays and expenses typically associated with start-up operations. In addition, Apache is attracted to DEKALB because its properties are relatively shallow, primarily self-operated and have the potential for exploitation and exploration. DEKALB's properties also have a higher reserve to production ratio, and Apache foresees an increase in its reserve life index. Finally, DEKALB has an experienced and capable staff with a record of growing its oil and gas reserves. For the foregoing reasons, Apache's Board of Directors believes that the Exchange Ratio and the other terms of the Merger Agreement are fair to, and in the best interests of, Apache and the stockholders of Apache. In reaching its conclusion, Apache's Board considered the judgment and advice of Apache's management, the prior financial performance and future operating prospects of DEKALB, the reasonableness of achieving prospective future incremental revenues from the combined operation, the financial flexibility offered by the combination, the terms of the Merger Agreement, and the risks associated with achieving expected results. At Apache's regular Board meeting held on December 9, 1994, all directors in attendance expressed support for the Merger and voted to approve the Merger. The final form of the Merger Agreement as executed was ratified and approved by unanimous written consent of the directors of Apache. DEKALB'S REASONS FOR THE MERGER; RECOMMENDATION OF DEKALB'S BOARD OF DIRECTORS The Merger, including the Merger Agreement and the transactions contemplated thereby, was submitted to DEKALB's Board of Directors and unanimously approved at a special meeting held on December 21, 1994 attended by all members of the Board. The DEKALB Board of Directors believes that the Merger is fair to, and in the best interests of, DEKALB and its stockholders and unanimously recommends to the holders of DEKALB Class A Stock that they vote FOR adoption and approval of the Merger Agreement. As described above under "-- Background," sales prices for DEKALB Stock prior to public announcement of the Merger Agreement have remained well below levels reflective of stockholder value. By contrast, management believes that the recommended Merger with Apache has been structured to produce DEKALB stockholder value which is fair to DEKALB's stockholders and which management sought to achieve. Accordingly, DEKALB's Board of Directors and management have concluded that it was appropriate to enter into the Merger Agreement. In addition, the Board of Directors considered, among other things, the following factors in approving and recommending the Merger: (i) the written opinion of Merrill Lynch dated December 20, 1994 that, as of such date, the Exchange Ratio was fair from a financial point of view to the holders of DEKALB Stock (see "-- Opinion of Merrill Lynch as DEKALB's Financial Advisor"); (ii) information with respect to the historical financial condition, results of operations, business and prospects of DEKALB and of Apache, including reserve information, together with current industry, economic and market conditions; (iii) information with respect to the pro forma financial condition and results of operations of Apache, assuming consummation of the Merger; (iv) recent and historical trading prices of DEKALB Class B Stock, and ratios at which common stock of oil and gas exploration and production companies, including Apache, had been trading; (v) the fact that the Apache Common Stock to be received by the holders of DEKALB Stock in the Merger was trading at prices substantially in excess of the trading prices of DEKALB Class B Stock prior to the December 21, 1994 DEKALB Board meeting; (vi) the history of unsolicited indications of interest from more than 20 companies (including the eight companies that signed confidentiality agreements, which were among those identified by Merrill Lynch as being the most likely to have an interest in acquiring DEKALB) and the opinion of DEKALB's Board of Directors that none of the other interests expressed was at the level of value provided by the Merger Agreement on December 21, 1994; (vii) reports from various members of DEKALB's management concerning the results of the due diligence they performed as to Apache; (viii) the fact that Apache Common Stock has reasonable trading liquidity; (ix) the structure of the 27 33 Merger, which would provide equal consideration to holders of DEKALB Class A Stock and DEKALB Class B Stock and would permit holders of DEKALB Stock who are United States persons to exchange such DEKALB Stock for shares of Apache Common Stock without, in general, recognizing gain or loss for U.S. federal income tax purposes; (x) the fact that the holders of a majority of the outstanding shares of DEKALB Class A Stock desired that DEKALB accept Apache's proposal; (xi) the presentation of Apache management regarding Apache and Apache's reasons to effect the Merger, including its stated interest in reestablishing its activity in Canada and its views as to potential Canadian reserves, which indicated a strong desire to consummate the Merger; (xii) DEKALB management's view that the information provided to Apache in its due diligence investigation of DEKALB would not reasonably be expected to result in appreciably enhanced expressions of interest if provided to other companies; (xiii) the fact that there are no dissenters' rights for holders of DEKALB Class B Stock; (xiv) the terms, and the course of negotiations resulting in the financial and other terms, of the Merger Agreement, including Apache's insistence on terms which could inhibit consideration of a higher-valued proposal; (xv) DEKALB's ability to accept a superior offer (subject to certain restrictions) without any financial penalty; (xvi) alternatives available to DEKALB, including management succession issues; and (xviii) management's recommendation and the knowledge and experience of the members of DEKALB's Board of Directors. Although basing its conclusion upon the different considerations discussed above, the DEKALB Board of Directors did not assign any relative weight to the various factors it considered in reaching its decision. The Board of Directors, however, placed emphasis on the fact that the Apache offer was the highest proposal received, the firmness of the Apache proposal and the high degree of interest of Apache in accomplishing the transaction, and its belief, as supported by the Merrill Lynch opinion, that, as of the date of Merrill Lynch's opinion, the Exchange Ratio was fair from a financial point of view to holders of DEKALB Stock. In light of such factors, the Board determined that the Merger is in the best interests of DEKALB and the holders of DEKALB Stock. It is expected that if the Merger is not approved by the holders of DEKALB Class A Stock, or if the other conditions to the consummation of the Merger are not satisfied or waived, DEKALB's management, under the general direction of the Board of Directors of DEKALB, will continue to manage DEKALB as an ongoing business and may seek other purchasers for DEKALB. No assurance can be given that another offer for DEKALB will be made or, if made, whether the consideration would be more or less than that offered by Apache. OPINION OF MERRILL LYNCH AS DEKALB'S FINANCIAL ADVISOR At the special meeting of DEKALB's Board of Directors held on December 20, 1994 to consider entering into the Merger Agreement, Merrill Lynch delivered its written opinion, dated December 20, 1994, that, as of such date, the Exchange Ratio was fair from a financial point of view to holders of DEKALB Stock. A copy of the opinion of Merrill Lynch which sets forth the assumptions made, matters considered and limitations on the review undertaken, is attached as Appendix II to this Proxy Statement/Prospectus and is incorporated herein by reference. The summary of the opinion of Merrill Lynch set forth in this Proxy Statement/Prospectus is qualified in its entirety by reference to the full text of such opinion attached as Appendix II hereto. STOCKHOLDERS OF DEKALB ARE URGED TO READ CAREFULLY THE OPINION IN ITS ENTIRETY. Merrill Lynch's opinion is directed only to the fairness from a financial point of view of the Exchange Ratio to the holders of DEKALB Stock and does not constitute a recommendation to any stockholder as to how such stockholder should vote at the Special Meeting. The Exchange Ratio was determined through negotiations between DEKALB and Apache and was unanimously approved by DEKALB's Board of Directors. Merrill Lynch provided advice to DEKALB during the course of such negotiations, but did not make a recommendation with respect to the amount of the Exchange Ratio. In arriving at its opinion, Merrill Lynch, among other things: (i) reviewed DEKALB's Annual Reports, Forms 10-K and related financial information for the three fiscal years ended December 31, 1993 and DEKALB's Forms 10-Q and the related unaudited financial information for the quarterly periods ended March 31, 1994, June 30, 1994 and September 30, 1994; (ii) reviewed Apache's Annual Reports, Forms 10-K 28 34 and related financial information for the three fiscal years ended December 31, 1993 and Apache's Forms 10-Q and the related unaudited financial information for the quarterly periods ended March 31, 1994, June 30, 1994 and September 30, 1994; (iii) reviewed certain information relating to the business, earnings, cash flow and assets of DEKALB and Apache furnished to Merrill Lynch by DEKALB and Apache, respectively; (iv) reviewed financial forecasts for DEKALB furnished to Merrill Lynch by DEKALB; (v) reviewed certain reserve and reserve production estimates for 1993 and 1994 for DEKALB and Apache prepared by DEKALB and Apache, respectively, and the reserve audit letters for 1993 for DEKALB and Apache, respectively, prepared by Ryder Scott, and discussed such reserve and reserve production estimates with DEKALB, Apache, and Ryder Scott, respectively; (vi) considered the pro forma effect of the pending acquisitions by Apache of U.S. assets of Crystal and certain oil and gas assets of Texaco; (vii) conducted discussions with members of senior management of DEKALB and Apache concerning their respective businesses and prospects; (viii) reviewed the historical market prices and trading activity for the shares of DEKALB Class B Stock and Apache Common Stock and compared them with that of certain publicly traded companies which Merrill Lynch deemed to be reasonably similar to DEKALB and Apache, respectively; (ix) compared the results of operations of DEKALB and Apache with that of certain companies which Merrill Lynch deemed to be reasonably similar to DEKALB and Apache, respectively; (x) compared the proposed financial terms of the Merger with the financial terms of other mergers and acquisitions which Merrill Lynch deemed to be relevant; (xi) reviewed a draft dated December 18, 1994 of the Merger Agreement; and (xii) reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as Merrill Lynch deemed necessary, including Merrill Lynch's assessment of general economic, market and monetary conditions. In preparing its opinion, Merrill Lynch relied on the accuracy and completeness of all information supplied or otherwise made available to it by DEKALB and Apache, and Merrill Lynch did not independently verify such information or undertake an independent appraisal of the assets of DEKALB or Apache. With respect to the reserve-related information furnished by DEKALB and Apache, Merrill Lynch assumed that they were reasonably prepared and reflected the best currently available estimates and judgment of the managements of DEKALB and Apache as to the reserves of DEKALB or Apache, as the case may be. With respect to the financial forecasts furnished by DEKALB, Merrill Lynch assumed that they were reasonably prepared and reflected the best currently available estimates and judgment of DEKALB's management as to the expected future financial performance of DEKALB. Merrill Lynch also assumed (i) that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code and will not result in any liability to DEKALB under the Canadian Tax Act, and (ii) that the Merger will be accounted for as a "pooling of interests" in accordance with generally accepted accounting principles. Merrill Lynch's opinion was based upon market, economic, financial and other conditions as they existed and could be evaluated as of the date of such opinion. In connection with the preparation of its opinion, Merrill Lynch was not authorized by DEKALB or its Board of Directors to solicit, nor did Merrill Lynch solicit, third-party indications of interest for the acquisition of all or any part of DEKALB. Merrill Lynch did, however, have discussions with a number of parties who submitted unsolicited indications of interest in acquiring DEKALB. The following is a brief summary of the analyses performed by Merrill Lynch in connection with its opinion dated December 20, 1994, which it discussed with the Board of Directors of DEKALB at its meeting held on December 20, 1994. Discounted Cash Flow Analysis of DEKALB. Using a discounted cash flow analysis, Merrill Lynch estimated the present value of the after-tax future cash flows that DEKALB could be expected to generate from January 1, 1995 and beyond based upon (a) reserve reports prepared by DEKALB and audited annually by Ryder Scott (containing both proved and probable reserve estimates and the production profile relating to such reserves) and (b) Merrill Lynch's oil and gas price forecasts under two distinct pricing scenarios, Case I and Case II. The oil price forecasts were based on West Texas Intermediate ("WTI") equivalent crude oil on the spot market and were then adjusted for the transportation, location and quality of DEKALB's crude oil. In Case I, 29 35 unadjusted WTI oil prices per barrel for the years 1995 to 1998 were assumed to be $17.00, $18.50, $21.00 and $24.00, respectively, and then assumed to escalate at 6 percent per annum thereafter. In Case II, unadjusted WTI oil prices per barrel for the years 1995 to 1998 were assumed to be $18.50, $20.50, $23.00 and $26.00, respectively, and then assumed to escalate at 8 percent per annum thereafter. In both pricing scenarios, the unadjusted oil price was capped at $50.00 per barrel in the later years. The natural gas price forecasts were based on forecasts for spot market sales at Henry Hub, Louisiana and on a standard heating value of 1,000 British Thermal Units ("BTU") per cubic foot of gas. Adjustments were made to the natural gas price forecasts to reflect natural gas contracts in place, transportation charges and a heating value of 1,070 BTU per cubic foot of DEKALB's gas. In Case I, gas prices per million BTU ("MMBTU") for the years 1995 to 1998 were assumed to be $1.80, $1.95, $2.10 and $2.25, respectively, and then assumed to escalate at 6 percent per annum thereafter. In Case II, gas prices per MMBTU for the years 1995 to 1998 were assumed to be $1.90, $2.10, $2.25 and $2.40, respectively, and then assumed to escalate at 8 percent per annum thereafter. In both pricing scenarios, the unadjusted natural gas price was capped at $6.00 per MMBTU in the later years. Operating expenses and maintenance capital expenditures, necessary to lift and produce the proved and probable reserves estimated in the engineering reports, were assumed to increase at a rate of 3 percent per annum. The after-tax cash flows were discounted at rates of 11 percent and 13 percent for proved reserves and rates of 15 percent and 20 percent for risk-adjusted probable reserves. By discounting all the after-tax cash flows generated by DEKALB's proved and probable reserves as of January 1, 1995, adding assessed value for undeveloped acreage and other assets and deducting estimated net long-term debt and working capital, Merrill Lynch arrived at a net asset reference value range for DEKALB of $17.38 to $21.10 per share in Case I, and $21.05 to $25.29 per share in Case II, in each case on a fully diluted basis. Discounted Cash Flow Analysis of Apache. Using a discounted cash flow analysis, Merrill Lynch estimated the present value of the after-tax future cash flows that Apache could be expected to generate from January 1, 1995 and beyond based upon (a) reserve reports prepared by Apache and audited annually by Ryder Scott (containing proved reserve estimates for Apache, proved reserve estimates for assets acquired from Crystal and Texaco and the production profiles relating to such reserves) and (b) Merrill Lynch's oil and gas price forecasts under two distinct pricing scenarios, Case I and Case II. The oil price forecasts were based on WTI equivalent crude oil on the spot market and were then adjusted for the transportation, location and quality of Apache's crude oil. In Case I, unadjusted WTI oil prices per barrel for the years 1995 to 1998 were assumed to be $17.00, $18.50, $21.00 and $24.00, respectively, and then assumed to escalate at 6 percent per annum thereafter. In Case II, unadjusted WTI oil prices per barrel for the years 1995 to 1998 were assumed to be $18.50, $20.50, $23.00 and $26.00, respectively, and then assumed to escalate at 8 percent per annum thereafter. In both pricing scenarios, the unadjusted oil price was capped at $50.00 per barrel in the later years. The natural gas price forecasts were based on forecasts for spot market sales at Henry Hub, Louisiana and on a standard heating value of 1,000 BTU per cubic foot of gas. Adjustments were made to these natural gas price forecasts to reflect natural gas contracts in place and transportation charges for Apache's gas. No heating value adjustment was made to Apache's projected gas prices. In Case I, gas prices per MMBTU for the years 1995 to 1998 were assumed to be $1.80, $1.95, $2.10 and $2.25, respectively, and then assumed to escalate at 6 percent per annum thereafter. In Case II, gas prices per MMBTU for the years 1995 to 1998 were assumed to be $1.90, $2.10, $2.25 and $2.40, respectively, and then assumed to escalate at 8 percent per annum thereafter. In both pricing scenarios, the unadjusted natural gas price was capped at $6.00 per MMBTU in the later years. Operating expenses and maintenance capital expenditures, necessary to lift and produce the proved and probable reserves estimated in the engineering reports, were assumed to increase at a rate of 3 percent per annum. The after-tax cash flows for proved reserves were discounted at rates of 9 percent and 12.5 percent. By discounting all the after-tax cash flows generated by Apache's proved reserves as of January 1, 1995, assessing the value of the probable reserve base at 15 percent of the proved reserves, adding the value of cost savings generated by the Texaco property acquisition and assessing the value of the unproven international 30 36 ventures and other assets as estimated by Apache, Merrill Lynch arrived at a total asset reference value range. After deducting estimated net long-term debt and working capital, Merrill Lynch arrived at a net asset reference value range for Apache of $16.84 to $22.97 per share in Case I, and $21.79 to $29.28 per share in Case II, in each case on a fully diluted basis. Analysis of Selected Publicly Traded Comparable Companies for DEKALB. Merrill Lynch compared selected historical stock, operating and financial ratios for DEKALB to the corresponding data and ratios of the following publicly traded companies: Cabre Exploration Ltd., Canadian Natural Resources Limited, Conwest Exploration Company Limited, Inverness Petroleum Ltd., Mark Resources Inc., Morgan Hydrocarbons Inc., Morrison Petroleums Ltd., Northstar Energy Corporation, Numac Energy Inc., Ocelot Energy Inc., Paramount Resources Ltd., Rigel Energy Corporation and Ulster Petroleums Ltd. An analysis of the ratio of adjusted market capitalization (defined as market value plus debt and preferred stock less available cash) at December 15, 1994 to the last twelve months pre-tax, pre-leverage cash flow (defined as EBITDE or Earnings Before Interest, Taxes, Depreciation, Depletion, Exploration Expense and Amortization) yielded a multiple range of 5.3 times to 13.8 times, a mean value of 7.9 times and a median value of 7.4 times, compared to 6.3 times for DEKALB. The application of DEKALB's adjusted market capitalization to EBITDE multiple as a low end limit and the comparable company median ratio of 7.4 times as the upper end limit to DEKALB's last twelve months EBITDE, less net long-term debt and working capital, yielded a net asset reference value range of $15.77 to $19.43 per share on a fully diluted basis. Analysis of Selected Publicly Traded Comparable Companies for Apache. Merrill Lynch compared selected historical stock, operating and financial ratios for Apache to the corresponding data and ratios of the following publicly traded companies: Anadarko Petroleum Corporation, Burlington Resources, Inc., Enron Oil & Gas Company, The Louisiana Land & Exploration Company, Noble Affiliates, Inc., Seagull Energy Corporation and Vastar Resources, Inc. An analysis of the ratio of adjusted market capitalization (defined as market value plus debt and preferred stock less available cash) at December 15, 1994 to the estimated pro forma 1995 EBITDE yielded a multiple range of 6.0 times to 9.3 times, a mean value of 7.4 times and a median value of 6.8 times. The application of the comparable company ratio of 6.0 times as the lower limit and 6.5 times as the upper limit to Apache's 1995 estimated EBITDE, less net long-term debt and working capital deficiencies, yielded a net asset reference value range of $25.41 to $29.28 per share on a primary basis. No company utilized in the above comparable companies analyses is identical to DEKALB or Apache. Accordingly, an analysis of the results of the foregoing 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 public trading value of the comparable companies or company to which they are being compared. Analysis of Selected Comparable Acquisition Transactions for DEKALB. Merrill Lynch also reviewed publicly available information on certain acquisitions which involved companies with primarily Canadian operations in the oil and gas exploration and production industry and consideration in excess of $100 million and which took place between December 1992 and June 1994. Canadian oil and gas acquisitions in excess of $100 million considered by Merrill Lynch include (Buyer/Seller): Encal Energy Ltd./Luscar Oil and Gas Ltd., Pennzoil Company/Co-Enerco Resources Ltd., Seagull Energy Corporation/Novalta Resources Inc., Home Oil Company Limited/Scurry-Rainbow Oil Ltd., Canadian Natural Resources Limited/Amoco Corporation, Numac Oil and Gas Ltd./Westcoast Petroleum Ltd., Talisman Energy Inc./Encor Inc., Elan Energy Inc./OMV (Canada) Ltd., Hong Kong Private Investors/Westcoast Petroleum Ltd., and Norcen Energy Resources Limited/North Canadian Oils Limited. Merrill Lynch examined multiples based on the total consideration for each of the transactions to, among other things, such acquired companies' respective proved reserves. In particular, Merrill Lynch calculated offer value expressed in terms of dollars per barrel of oil equivalent of proved reserves ("$/boe"). The calculations yielded a range of offer values per barrel of oil equivalent of $3.50/boe to $4.50/boe. Merrill Lynch then calculated the aggregate and per share imputed equity values for DEKALB by applying DEKALB's proved reserves to the multiples derived from its analysis of the comparable acquisition 31 37 transactions. These imputed equity values ranged from $173 million, or $17.57 per share on a fully diluted basis, to $237 million, or $24.14 per share on a fully diluted basis. Analysis of Selected Comparable Acquisition Transactions for Apache. Merrill Lynch also reviewed publicly available information on certain acquisitions which involved companies with primarily U.S. operations in the oil and gas exploration and production industry and consideration in excess of $100 million and which took place between February 1994 and November 1994. U.S. oil and gas acquisitions in excess of $100 million considered by Merrill Lynch include (Buyer/Seller): Apache/Texaco, Apache/Crystal, Parker & Parsley Petroleum Company/TideWest Oil Company, Parker & Parsley Petroleum Company/PG&E Resources Company, Cairn Energy USA, Inc./Phemus Corporation/Smith Offshore Exploration Company II, Parker & Parsley Petroleum Company/Bridge Oil Limited, MCN Corporation/Undisclosed Sellers, Meridian Oil Inc./Maxus Energy Corporation, Occidental Petroleum Corporation/Agip Petroleum Co., Union Pacific Resources Company/AMAX Inc., and Cabot Oil & Gas Corporation/Washington Energy Resources Company. Merrill Lynch examined multiples based on the total consideration for each of the transactions to, among other things, such acquired companies' respective proved reserves. In particular, Merrill Lynch calculated offer value expressed in terms of dollars per barrel of oil equivalent of proved reserves. The calculations yielded a range of offer values per barrel of oil equivalent of $6.60/boe to $7.80/boe. Merrill Lynch then calculated the aggregate and per share imputed equity values for Apache by applying Apache's proved reserves to the multiples derived from its analysis of the comparable acquisition transactions. These imputed equity values ranged from $1,150 million, or $18.73 per share on a primary basis, to $1,593 million, or $25.95 per share on a primary basis, for Apache's United States assets, and imputed equity values ranging from $1,315 million, or $21.42 per share on a primary basis, to $1,803 million, or $29.37 per share on a primary basis, for Apache's United States and international assets (as estimated by Apache). No company utilized in the comparable acquisitions transactions analyses was identical to DEKALB or Apache. Accordingly, an analysis of the results of the foregoing is not purely mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable acquired companies and other factors, such as total consideration paid in relation to a company's reserves, total oil and gas reserves, reserve life index and location of the reserves acquired, that could affect the acquisition value of such companies, DEKALB and Apache. Purchase Price Analysis and Stock Trading History. Merrill Lynch performed an analysis of the Merger based on an assumed Exchange Ratio of 0.90 shares of Apache Common Stock for each share of DEKALB Stock (which was determined by applying the average of the per share closing prices for Apache Common Stock during the ten trading days preceding December 15, 1994 to the Exchange Ratio formula). Merrill Lynch's analysis indicated that, on the basis of an assumed Exchange Ratio of 0.90, the pro forma ownership percentage of DEKALB stockholders of the pro forma combined company would be approximately 13 percent following the merger. In addition, Merrill Lynch calculated the multiple of DEKALB's net income, cash flow and reserves the same assumed Exchange Ratio would represent. An Exchange Ratio of 0.90 would represent a value equal to 32.9 times DEKALB's 1994 net income per share, and a value equal to 30.7 times and 20.7 times DEKALB's projected 1995 and 1996 net income per share (as estimated by DEKALB), respectively. An Exchange Ratio of 0.90 would also represent a value equal to 8.3 times DEKALB's 1994 cash flow per share, and a value equal to 7.1 times and 5.5 times DEKALB's projected 1995 and 1996 cash flow per share (as estimated by DEKALB), respectively. Finally, such an Exchange Ratio would represent a value equal to $4.44 per boe of DEKALB's proved reserves as of January 1, 1995 (as estimated by DEKALB), and $3.90 per boe of proved and probable reserves as of January 1, 1995 (as estimated by DEKALB). Merrill Lynch also examined the history of trading prices and volumes for DEKALB Class B Stock and the Apache Common Stock and the historical ratios of the prices of DEKALB Class B Stock to the prices of Apache Common Stock. Pro Forma Merger Analysis. Merrill Lynch analyzed certain pro forma effects which could result from the Merger. In connection with such analyses, Merrill Lynch reviewed the projections provided by members of management of DEKALB with respect to the future financial performance of DEKALB for the years 1994, 32 38 1995 and 1996, and, after discussing such projections with members of management of DEKALB, made certain adjustments. In addition, Merrill Lynch utilized its own oil and gas price forecasts and made certain adjustments to projected capital expenditures. Merrill Lynch then developed its own analysis of the pro forma effects of the Merger (treated as a pooling of interests for accounting purposes), based on the lowest and highest possible Exchange Ratios, 0.85 and 0.90, respectively, after considering publicly available information that it deemed relevant. This analysis indicated that the cash flow per share of the combined company would, in the case of an assumed Exchange Ratio of 0.85, be dilutive in 1994 and 1995, but would be accretive in 1996, and would, in the case of an assumed Exchange Ratio of 0.90, be dilutive in 1994 and 1995, but would be accretive in 1996, as compared to the comparable stand-alone projections for Apache pro forma. For the purposes of such analysis, Merrill Lynch defined discretionary cash flow per share as (i) net income to common stock plus depletion, depreciation, amortization and exploration expenses, plus deferred taxes and other non-cash charges, but not including changes in working capital, divided by (ii) the pro forma shares outstanding. Merrill Lynch also analyzed the effects of the Merger on the balance sheet of the combined company. The combined company's debt-to-total capitalization ratio as estimated at December 31, 1994 for the combined company would be approximately 59 percent as compared to 35 percent for DEKALB alone and 61 percent for Apache on a pro forma stand-alone basis. The summary set forth above does not purport to be a complete description of the analyses conducted by Merrill Lynch or Merrill Lynch's presentation to the Board of Directors of DEKALB. Merrill Lynch believes that its analyses must be considered as a whole and that selecting portions of its analysis and the factors considered by it, without considering all factors and analyses, could create an incomplete view of the process underlying its opinions. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. In performing its analyses, Merrill Lynch made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of DEKALB or Apache. Any estimates contained in the analyses performed by Merrill Lynch are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of the businesses do not purport to be appraisals or to reflect the prices at which businesses may actually be sold. Because such estimates are inherently subject to uncertainty, neither DEKALB, Apache, Merrill Lynch nor any other person assumes responsibility for their accuracy. Merrill Lynch is an internationally recognized investment banking firm engaged in the valuation of businesses and their securities in connection with mergers and acquisitions and for other purposes. DEKALB selected Merrill Lynch to act as its financial advisor in connection with the Merger because it is an internationally recognized investment banking firm and has substantial experience in transactions similar to the Merger. In connection with Merrill Lynch's services as financial advisor to DEKALB, DEKALB has agreed to pay Merrill Lynch as compensation for its services a fee, in the amount of 0.875 percent of the aggregate consideration to be paid for the shares of DEKALB Common Stock acquired by Apache as a result of the Merger (which is defined to include the amount of all indebtedness (less the amount of all cash and cash equivalents) of DEKALB which is assumed, acquired, retired or defeased by Apache in connection with the Merger), which fee is estimated to be approximately $2.5 million. DEKALB has also agreed to reimburse Merrill Lynch for certain reasonable out-of-pocket expenses incurred in connection with the Merger (including reasonable fees and expenses of its legal counsel) and to indemnify Merrill Lynch and certain related persons against certain liabilities and expenses in connection with the Merger, including certain liabilities under the federal securities laws. Merrill Lynch has, in the past, provided financial advisory and financing services to DEKALB and Apache and has received fees for the rendering of such services. In the ordinary course of Merrill Lynch's business, it may actively trade the securities of DEKALB and Apache 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. 33 39 INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of DEKALB's Board of Directors with respect to the Merger, DEKALB stockholders should be aware that certain members of DEKALB's Board and management have certain interests concerning the Merger separate from their interests as holders of DEKALB Stock, including those referred to below. As of the Effective Time, Apache will assume each then outstanding DEKALB Option that remains unexercised. Each holder of a DEKALB Option may elect, prior to the Effective Time, to surrender such DEKALB Option, in whole or in part, in exchange for shares of Apache Common Stock. See "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options." The holders of DEKALB Options include the following persons who served as directors or executive officers of DEKALB for some or all of the period of time commencing January 1, 1994: Messrs. Bruce P. Bickner, Bruce A. Craig, Larry G. Evans, Richard G. Nash, Charles C. Roberts, Thomas H. Roberts, Jr. and John H. Witmer, Jr.; as well as Mr. Michael E. Finnegan, who was an executive officer of DEKALB until his death in September 1994. As of the date of this Proxy Statement/Prospectus, Messrs. Bickner, Craig, Evans, Nash, C. Roberts, T. Roberts, and Witmer and the estate of Mr. Finnegan hold DEKALB Options with respect to 100,000, 38,500, 40,653, 38,821, 18,100, 23,300, 30,000 and 38,716 shares of DEKALB Stock, respectively, with an average exercise price of $10.49, $14.43, $14.16, $13.70, $8.53, $8.53, $11.06 and $13.67, respectively. The Board of Directors of DEKALB has determined that up to $500,000 may be used to pay discretionary bonuses to those officers and employees of DEKALB and its subsidiaries determined by the Board of Directors to merit such bonuses based upon their efforts during the process that could result in the proposed Merger. Such discretionary bonuses, if any, would be awarded shortly before the Effective Date. The Merger Agreement provides that Apache will provide DEKALB's directors and officers with liability insurance for six years from the Effective Time, subject to certain limitations, and will indemnify DEKALB's past and present officers and directors to the same extent they are currently entitled to be indemnified by DEKALB pursuant to DEKALB's Charter or DEKALB's Bylaws, or any indemnification agreement, for acts or omissions occurring at or prior to the Effective Time, including those in connection with the Merger, and will advance reasonable litigation expenses incurred by such officers and directors in connection with defending any action arising out of such acts or omissions. See "Certain Terms of the Merger Agreement -- Insurance and Indemnification." See "Certain Terms of the Merger Agreement -- Certain Benefit Plans and Severance" for information about post-Merger arrangements concerning DEKALB employee benefit plans. CERTAIN INCOME TAX CONSEQUENCES United States Federal Income Tax The following is a general summary of the material U.S. federal income tax consequences of the Merger to the holders of DEKALB Stock and DEKALB Options and is based upon current provisions of the Code, existing, temporary and final regulations thereunder and current administrative rulings and court decisions, all of which are subject to change (possibly on a retroactive basis). No attempt has been made to comment on all U.S. federal income tax consequences of the Merger that may be relevant to particular holders, including holders that are subject to special tax rules such as dealers in securities, mutual funds, insurance companies, tax-exempt entities and holders who do not hold their shares as capital assets. THE TAX DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY. IT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF DEKALB STOCK OR DEKALB OPTIONS. HOLDERS OF DEKALB STOCK AND DEKALB OPTIONS ARE ADVISED AND EXPECTED TO CONSULT WITH THEIR OWN LEGAL AND TAX ADVISERS REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AND ANY OTHER CONSEQUENCES TO THEM OF THE MERGER UNDER STATE, LOCAL AND FOREIGN TAX LAWS. 34 40 Exchange of DEKALB Stock Pursuant to the Merger. It is anticipated that, in connection with conditions to the consummation of the Merger, Mayor, Day, Caldwell & Keeton, L.L.P., counsel to Apache, and Sidley & Austin, counsel to DEKALB, will each render an opinion at the Effective Time of the Merger to Apache and DEKALB, respectively, substantially to the effect that the U.S. federal income tax consequences of the Merger will be as follows: (i) the Merger will constitute a "reorganization" within the meaning of Section 368(a) of the Code and DEKALB, Apache and Merger Sub will each be a party to that reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be recognized by DEKALB, Apache or Merger Sub as a result of the Merger; (iii) no gain or loss will be recognized by the stockholders of DEKALB who are United States persons (within the meaning of the Code) upon the conversion of their DEKALB Stock into shares of Apache Common Stock pursuant to the Merger except with respect to cash, if any, received in lieu of fractional shares of Apache Common Stock or upon exercise of dissenters' rights of appraisal; (iv) the aggregate basis of the shares of Apache Common Stock received in exchange for shares of DEKALB Stock pursuant to the Merger (including fractional shares of Apache Common Stock for which cash is received) will be the same as the aggregate federal income tax basis for such shares of DEKALB Stock at the time of the Merger, decreased by the amount of any tax basis allocable to shares with respect to which dissenters' rights of appraisal were exercised for which cash is received; and (v) the holding period for shares of Apache Common Stock received in exchange for shares of DEKALB Stock pursuant to the Merger will include the holding period of such shares of DEKALB Stock, provided such shares of DEKALB Stock were held as capital assets by the holder at the Effective Time. A holder of DEKALB Stock who receives cash in lieu of a fractional share of Apache Common Stock will recognize gain or loss equal to the difference, if any, between such holder's basis in the fractional share (as described in (iv) above) and the amount of cash received. Such gain or loss will be a capital gain or loss if the DEKALB Stock is held by such holders as a capital asset at the Effective Time. Stockholders of DEKALB should be aware that such opinions of counsel are not binding on the United States Internal Revenue Service ("IRS"), and no assurance is or will be given that the IRS would not adopt a contrary position or that the IRS position would not be sustained by a court. No rulings from the IRS have been or will be requested in connection with the Merger. The opinions of counsel described above are subject to certain assumptions and based on certain representations of Apache, Merger Sub, DEKALB and certain stockholders of DEKALB. One of the requirements for a tax-free reorganization is that stockholders of DEKALB retain a significant continuing equity interest in Apache after the Merger. The opinions of counsel described herein assume that this requirement will be met. However, if a significant portion of the Apache Common Stock received by DEKALB stockholders in the Merger is sold shortly after the Merger, the Merger could be treated as a taxable transaction in which all stockholders of DEKALB (including stockholders who did not sell their Apache Common Stock) would recognize gain or loss equal to the difference between the fair market value of the Apache Common Stock received and the basis of the DEKALB Stock surrendered in the Merger. To the best knowledge of the management of DEKALB, there is no plan or intention on the part of DEKALB stockholders to sell an amount of Apache Common Stock that would cause the Merger to be taxable. A holder of DEKALB Class A Stock who seeks appraisal rights as described below under "-- Appraisal Rights of Dissenting DEKALB Class A Stockholders" should, in general, treat the difference between the tax basis of the DEKALB Class A Stock held by such holder with respect to which such rights are exercised and the amount received through the exercise of such rights as capital gain or loss although, depending on the holder's particular circumstances, the amount received through the exercise of such rights might be treated for U.S. federal income tax purposes as dividend income. 35 41 A holder of DEKALB Stock that, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust (a "Non-U.S. Stockholder") generally will not be subject to U.S. federal income tax (by withholding or otherwise) on the receipt of Apache Common Stock, cash in lieu of a fractional share of Apache Common Stock or on the receipt of cash pursuant to the exercise of dissenter's rights of appraisal, as described above. However, a Non-U.S. Stockholder that holds shares of DEKALB Stock will generally be subject to U.S. federal income tax on the receipt of cash in lieu of fractional shares or on the receipt of cash as the result of the exercise of dissenter's rights of appraisal if (i) the resulting income or gain is effectively connected with the conduct of a trade or business of the Non-U.S. Stockholder within the United States, (ii) the Non-U.S. Stockholder is a non-resident alien individual who holds the DEKALB Stock as a capital asset, and such individual is present in the United States for 183 days or more in the taxable year of the Merger and either has a "tax home" in the United States or the sale is attributable to an office or other fixed place of business maintained in the United States or (iii) the Non-U.S. Stockholder is subject to tax pursuant to the provisions of U.S. federal tax law applicable to certain United States expatriates. Different rules may apply to any amounts treated as dividend income under the rules referred to above. In addition, under certain circumstances, a Non-U.S. Stockholder may be subject to U.S. federal income and withholding tax under the Foreign Investment in Real Property Tax Act ("FIRPTA") if such Non-U.S. Stockholder has held, directly or indirectly (i) more than five percent of the DEKALB Class B Stock at any time during the five-year period ending on the Effective Date or (ii) DEKALB Class A Stock that, on the date it was acquired, had a fair market value (when combined with the fair market value at that time of DEKALB Stock previously acquired and continued to be owned) of more than five percent of the value at that time of all outstanding DEKALB Class B Stock. Non-U.S. Stockholders are advised and expected to consult with their own tax advisers regarding the U.S. federal income tax consequences of the Merger in light of their own personal circumstances. Apache believes it is currently, at the Effective Time will be, and thereafter will continue to be, a "United States real property holding corporation" under FIRPTA. As a result, if a Non-U.S. Stockholder subsequently sells, exchanges or otherwise disposes of shares of Apache Common Stock received in the Merger and such Non-U.S. Stockholder held, directly or indirectly at any time during the five year period ending on the date of disposition (or such shorter period that such shares were held), more than five percent of the outstanding Apache Common Stock, such Non-U.S. Stockholder will generally be subject to U.S. federal income tax under FIRPTA on any gain realized by such Non-U.S. Stockholder on such sale, exchange or other disposition (unless an applicable exception under FIRPTA applies). Dividends on Apache Common Stock paid to a Non-U.S. Stockholder will generally be subject to a U.S. withholding tax. Assumption or Cancellation of DEKALB Options Pursuant to the Merger. Holders of DEKALB Options which are assumed by Apache as described below under "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options" generally will not recognize income or gain for federal income tax purposes upon such assumption, assuming the Merger is a tax-free reorganization as described above. A holder of an assumed DEKALB Option will recognize ordinary compensation income, and Apache will be allowed a deduction for federal income tax purposes, on the date such option is exercised in an amount equal to the excess of the fair market value on such date of the Apache Common Stock acquired by exercise of such option over the exercise price of such shares of Apache Common Stock. The tax basis of the Apache Common Stock acquired by exercise of an assumed DEKALB Option will be its fair market value on the date of exercise of such option and the holding period for purposes of determining whether a subsequent sale of the Apache Common Stock would result in the recognition of short-term or long-term capital gain or loss will commence on the date of transfer of the Apache Common Stock to the holder of the option. Under current law, the tax rate imposed on long-term capital gains cannot exceed 28%. The Code imposes limitations on the amount of capital loss which can be deducted in a taxable year. If the holder of an assumed DEKALB Option delivers shares of Apache Common Stock in payment of the exercise price of the Apache Common Stock, such holder will not recognize any taxable income by reason of such delivery. The holder's basis and holding period for the number of shares of Apache Common Stock 36 42 received equal to the number of shares delivered will be the same as the shares delivered. The holder's basis for shares of Apache Common Stock received in excess of the number of shares delivered will equal the fair market value of such shares of Apache Common Stock used to determine the amount of taxable compensation arising from the exercise of such option. The holding period for such excess shares of Apache Common Stock will commence on the date the shares of Apache Common Stock are transferred to the holder. Holders of DEKALB Options who elect to cancel DEKALB Options in exchange for Apache Common Stock as described below under "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options" will generally recognize ordinary compensation income as a result of the receipt of the Apache Common Stock in exchange for such DEKALB Options. The amount treated as compensation income will equal the fair market value of the Apache Common Stock at the time of receipt. Such a holder of a DEKALB Option will have a tax basis in the Apache Common Stock received in exchange for the DEKALB Option equal to the fair market value of the Apache Common Stock at the time of receipt. Amounts described above as being treated as compensation income upon the exercise of an assumed DEKALB Option or upon the cancellation of a DEKALB Option will be subject to tax at rates applicable to ordinary income and will be subject to Medicare hospital insurance tax and, subject to certain limitations, FICA tax. The number of shares of Apache Common Stock otherwise issuable to a holder of a DEKALB Option which is cancelled will generally, and the number of shares of Apache Common Stock otherwise issuable to a holder of an assumed DEKALB Option which is exercised may, be reduced by a number of shares of Apache Common Stock having a total fair market value equal to the foregoing taxes and any other amounts required by law to be withheld. A holder of a DEKALB Option who is a non-resident alien individual and who elects to cancel such option in exchange for Apache Common Stock or who has such DEKALB Option assumed and then exercises the assumed DEKALB Option generally will not be subject to U.S. federal income tax to the extent the option is attributable to services performed outside the United States. Such a holder will generally be subject to the rules under FIRPTA discussed above with respect to the subsequent sale, exchange or other disposition of such shares. See "-- Exchange of DEKALB Stock Pursuant to the Merger." Canadian Federal Income Tax In the opinion of Bennett Jones Verchere, Canadian counsel to Apache, and Howard, Mackie, Canadian counsel to DEKALB, the following is a general summary of the material Canadian federal income tax consequences of the Merger applicable to Apache, Merger Sub and DEKALB and to holders of DEKALB Stock and DEKALB Options who are residents of Canada for the purposes of the Canadian Tax Act. The summary is limited to those holders who hold their DEKALB Stock and DEKALB Options as capital property and, in the case of DEKALB Options, assumes the DEKALB Options were issued to the holders in their capacity as employees, directors or officers of DEKALB or an affiliate of DEKALB. The summary is based on the current provisions of the Canadian Tax Act, the regulations thereunder and counsel's understanding of the current administrative and assessing practices of Revenue Canada, Customs, Excise and Taxation ("Revenue Canada"), all of which are subject to change. The summary is not exhaustive of all Canadian federal income tax considerations nor does it take into account any provincial, territorial or foreign tax considerations, which considerations may significantly differ from those discussed herein. THE TAX DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY. IT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF DEKALB STOCK OR DEKALB OPTIONS WHO IS A RESIDENT OF CANADA. HOLDERS OF DEKALB STOCK AND DEKALB OPTIONS WHO ARE RESIDENTS OF CANADA ARE ADVISED AND EXPECTED TO CONSULT WITH THEIR OWN LEGAL AND TAX ADVISERS REGARDING THE CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES, AND ANY OTHER CONSEQUENCES TO THEM OF THE MERGER UNDER PROVINCIAL, TERRITORIAL, LOCAL OR FOREIGN TAX LAWS. Exchange of DEKALB Stock Pursuant to the Merger. Pursuant to the terms of the Merger, it is intended that each holder of DEKALB Stock will receive Apache Common Stock in exchange for their DEKALB Stock. A holder of DEKALB Stock who is a resident of Canada for the purposes of the Canadian Tax Act will 37 43 be considered to have disposed of the DEKALB Stock and must include the amount of the taxable capital gain or allowable capital loss, if any, arising upon such disposition in computing the holder's income for the purposes of the Canadian Tax Act. The amount of such taxable capital gain or allowable capital loss will be equal to three-quarters of the amount, if any, by which the proceeds of disposition of the DEKALB Stock exceeds (or is less than) the adjusted cost base to the holder of the DEKALB Stock immediately before the exchange and any reasonable expenses incurred for the purpose of making the disposition. The proceeds of disposition of the DEKALB Stock will be equal to the aggregate of the fair market value of the Apache Common Stock received on the exchange and the amount of any cash received in lieu of a fractional share of Apache Common Stock. Revenue Canada generally regards the fair market value of a publicly traded share on a particular day to be equal to the closing price of the share on that day. In the case of any holder of DEKALB Class A Stock who dissents to the Merger, the proceeds of disposition will be equal to the amount of cash received upon the exercise of such dissenter's rights of appraisal. An allowable capital loss realized by a holder of DEKALB Stock may be deducted in computing the holder's income for the taxation year of the disposition to the extent of the holder's taxable capital gains in such year. Any excess allowable capital loss may be carried back three taxation years or forward indefinitely to be used generally in the same manner. The acquisition cost for the purposes of the Canadian Tax Act of the Apache Common Stock received on the Merger for future Canadian income tax purposes will be equal to the fair market value of such shares at the Effective Time. Such cost will be averaged with the cost of any other Apache Common Shares owned by the holder in determining the adjusted cost base of the Apache Common Stock to the holder. Cancellation of DEKALB Options Pursuant to the Merger. Holders of DEKALB Options who choose to exchange their existing DEKALB Options for corresponding options of Apache as described under "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options" will generally not recognize any taxable income or loss under the Canadian Tax Act, provided the holder receives no consideration on the exchange other than the new options from Apache and the value of such new options is not greater than the value of the DEKALB Options at the time of the exchange. Holders of DEKALB Options who elect to cancel their DEKALB Options in exchange for Apache Common Stock as described under "Certain Terms of the Merger Agreement -- Treatment of DEKALB Options" will be subject to tax under the Canadian Tax Act on the fair market value of the Apache Common Stock received on the exchange. The holder may be entitled to a deduction of 25% of the amount of the income inclusion provided that at the time the DEKALB Option was granted, the exercise price was not less than the fair market value of the DEKALB Stock. The acquisition cost for the purposes of the Canadian Tax Act of the Apache Common Stock received on the cancellation of the DEKALB Options for future Canadian income tax purposes will be equal to the fair market value of such shares at the Effective Time. Such cost will be averaged with the cost of any other Apache Common Stock owned by the holder when determining the adjusted cost base of the Apache Common Stock to the holder. Holders of DEKALB Options who exercise their options prior to the Effective Time and who receive DEKALB Stock as a result of such exercise, will be subject to tax under the Canadian Tax Act on the difference between the exercise price of the DEKALB Option and the fair market value of the DEKALB Stock received on the exercise. The holder may be entitled to a deduction of 25% of the amount of the income inclusion provided that at the time the DEKALB Option was granted, the exercise price was not less than the fair market value of the DEKALB Stock. Impact of Merger on Apache, Merger Sub and DEKALB. Bennett Jones Verchere and Howard, Mackie are of the opinion that no gain or loss will be recognized by Apache, Merger Sub or DEKALB in connection with the Merger under the Canadian Tax Act. Such opinions are subject to certain assumptions and based on certain representations of Apache, Merger Sub and DEKALB and rely on opinions from Mayor, Day, Caldwell & Keeton, L.L.P. and Sidley & Austin, respectively, on the effect of the Merger under Delaware corporate law. The Merger will result in a change of control of DEKALB Energy Canada Ltd. for the purposes of the Canadian Tax Act. This change of control will trigger a deemed taxation year end for DEKALB Energy Canada Ltd. and, among other things, will give rise to the application of the "successor" provisions of the 38 44 Canadian Tax Act with respect to the Canadian resource tax pools of DEKALB Energy Canada Ltd., but will not otherwise result in any immediate liability for Canadian federal income tax for DEKALB Energy Canada Ltd. ANTICIPATED ACCOUNTING TREATMENT The Merger is expected to be accounted for using the "pooling of interests" method of accounting pursuant to Opinion No. 16 of the Accounting Principles Board. The pooling of interests method of accounting assumes that the combining companies have been merged from inception, and the historical consolidated financial statements for periods prior to consummation of the Merger are combined as though the companies had been combined from inception. See the Unaudited Pro Forma Consolidated Condensed Financial Statements and notes thereto included elsewhere in this Proxy Statement/Prospectus. Apache and DEKALB have been preliminarily advised by their independent public accountants, Arthur Andersen LLP and Coopers & Lybrand, respectively, that following the Merger the combination of DEKALB and Merger Sub should be accounted for as a "pooling of interests" in conformity with generally accepted accounting principles as described in Accounting Principles Board Opinion No. 16. Apache's obligation to consummate the Merger is conditioned upon Apache's having no reasonable basis for believing that pooling of interests accounting will not be applicable. In order for pooling of interests accounting to apply, it is contemplated that each person who may be deemed an affiliate of DEKALB or Apache will satisfy Apache, by entering into an agreement with Apache or otherwise, that such person will not sell or otherwise transfer (i) any shares of DEKALB Stock or Apache Common Stock, as the case may be, within 30 days prior to the Effective Time or (ii) any Apache Common Stock thereafter prior to the publication of financial results that include at least 30 days of post-Merger combined operations of Apache and DEKALB. Such "Affiliate Agreements" have been executed by all persons identified by DEKALB as persons who may be deemed to be affiliates of DEKALB as of the date of this Proxy Statement/Prospectus. Apache has undertaken to file with the Commission a current report on Form 8-K as soon as practicable to include the results of combined operations of Apache and DEKALB for the first full calendar month following the Effective Time. GOVERNMENTAL AND REGULATORY APPROVALS Transactions such as the Merger are reviewed by the Justice Department and the FTC to determine whether they comply with applicable antitrust laws. Under the provisions of the HSR Act, the Merger may not be consummated until such time as the specified waiting period requirements of the HSR Act have been satisfied. Apache and DEKALB each filed a notification and report, together with requests for early termination of the waiting period, with the Justice Department and the FTC under the HSR Act on January , 1995. Unless earlier terminated or a request for additional information is made, the applicable waiting period will expire on February , 1995. At any time before or after the Effective Time, the Justice Department, the FTC or a private person or entity could seek under the antitrust laws, among other things, to enjoin the Merger or to cause Apache to divest itself, in whole or in part, of DEKALB or of other businesses conducted by Apache. Apache and DEKALB have agreed to use all reasonable efforts to consummate the Merger. However, there can be no assurance that a challenge to the Merger will not be made or that, if such a challenge is made, Apache and DEKALB will prevail. Under the Investment Canada Act, the Merger will result in the indirect acquisition by Apache of DEKALB's subsidiaries, some of which carry on businesses in Canada. Accordingly, an Application for Review of the Merger must be submitted to Investment Canada, an agency of the Government of Canada. Investment Canada will submit the Application to the Minister responsible for Investment Canada for the Minister's determination of whether the investment by Apache resulting from the Merger is likely to be of net benefit to Canada. The Minister has 45 days (and an additional 30 days if the Minister requires them or longer if Apache agrees) after submission of the Application to review the investment resulting from the Merger and to determine whether it is likely to be of net benefit to Canada. Approval pursuant to the Investment Canada 39 45 Act of the business investment in Canada by Apache resulting from the Merger is a condition to consummation of the Merger. Apache and DEKALB are aware of no other governmental or regulatory approvals required for consummation of the Merger, other than compliance with applicable securities laws. RESTRICTIONS ON RESALES BY AFFILIATES The issuance of the shares of Apache Common Stock to be received by DEKALB stockholders in connection with the Merger, and by holders of DEKALB Options as described below under "-- Treatment of DEKALB Options," have been registered under the Securities Act. Except for limitations imposed on persons who may be deemed to be affiliates of DEKALB as described above under "-- Anticipated Accounting Treatment," and except as set forth in this paragraph, such shares of Apache Common Stock may be traded without restriction under the Securities Act. The shares of Apache Common Stock to be issued in the Merger and received by persons who are deemed to be "affiliates" (as that term is defined in Rule 144 under the Securities Act) of DEKALB prior to the Merger may be resold by them only in transactions permitted by the resale provisions of Rule 145 under the Securities Act (or, in the case of any such person who becomes an affiliate of Apache, Rule 144 under the Securities Act) or as otherwise permitted under the Securities Act. The principal limitation imposed by Rule 145 is that an affiliate of DEKALB may not (together with other persons whose sales are aggregated under Rule 145) sell during any three-month period a number of shares of Apache Common Stock exceeding the greater of (i) one percent of the total number of outstanding shares of Apache Common Stock or (ii) the average weekly trading volume of Apache Common Stock for a specified four-week period. In addition, under guidelines published by the Commission, the sale or other disposition of Apache Common Stock or DEKALB Stock by an affiliate of either Apache or DEKALB, as the case may be, within 30 days prior to the Effective Time or the sale or other disposition of Apache Common Stock thereafter prior to the publication of financial results that include at least 30 days of post-Merger combined operations of Apache and DEKALB (the "Pooling Period") could preclude pooling of interests accounting treatment of the Merger. Pursuant to the Merger Agreement, DEKALB has used its reasonable best efforts to cause each of its affiliates to execute a written Affiliate Agreement to the effect that such person will not sell, transfer or otherwise dispose of any shares of DEKALB Stock during the Pooling Period and will not sell, transfer or otherwise dispose of Apache Common Stock at any time in violation of the Securities Act or the rules and regulations promulgated thereunder, including Rule 145. An Affiliate Agreement has been executed by each such affiliate identified by DEKALB as of the date of this Proxy Statement/Prospectus. RESTRICTIONS ON RESALES BY CANADIAN RESIDENTS Apache will submit applications to the securities regulatory authorities in the appropriate provinces and territories of Canada in connection with the resale of Apache Common Stock to be received by DEKALB stockholders resident in Canada in the Merger. Upon receipt of the orders resulting from the applications, the Apache Common Stock may be resold without restriction (other than as a result of "control block" restrictions which may arise by virtue of the ownership thereof) under applicable securities laws of the provinces and territories of Canada provided that such trade is executed through the facilities of a stock exchange outside of Canada or in the over-the-counter market in the United States if the Apache Common Stock is quoted on the over-the-counter market at the time of such trade and such trade is made in accordance with the rules of the stock exchange or market upon which the trade is made and in accordance with all laws applicable to such stock exchange or market. DEKALB STOCKHOLDERS RESIDENT IN CANADA ARE URGED TO CONSULT THEIR LEGAL ADVISORS TO DETERMINE THE EXTENT OF ALL APPLICABLE RESALE PROVISIONS. APPRAISAL RIGHTS OF DISSENTING DEKALB CLASS A STOCKHOLDERS Any person who is a holder of record of shares of DEKALB Class A Stock and who objects to the terms of the Merger may seek appraisal of such holder's DEKALB Class A Stock under and in compliance with the requirements of Section 262 of the DGCL (the DEKALB Class A Stock as to which such appraisal rights have been asserted being referred to herein as the "Dissenting Shares"). Section 262 provides a procedure by which persons who are holders of DEKALB Class A Stock at the Effective Time of the Merger may seek an 40 46 appraisal of part of or all their DEKALB Class A Stock in lieu of accepting shares of Apache Common Stock in exchange therefor as described under "The Merger -- General Description of the Merger." In any such appraisal proceeding, the Delaware Court of Chancery (the "Chancery Court") would determine the "fair value" of the DEKALB Class A Stock. Holders of DEKALB Class A Stock should recognize that such an appraisal could result in a determination of a value higher or lower than, or equivalent to, the Exchange Ratio of between 0.85 and 0.90 shares of Apache Common Stock per share of DEKALB Class A Stock. The following is a summary of the principal provisions of Section 262 and does not purport to be a complete description. A copy of Section 262 is attached hereto as Appendix III and is incorporated herein by reference. FAILURE TO TAKE ANY NECESSARY STEPS FULLY AND PRECISELY TO SATISFY THE REQUIREMENTS OF SECTION 262 OF THE DGCL WILL RESULT IN A TERMINATION OR WAIVER OF THE APPRAISAL RIGHTS OF THE DEKALB CLASS A STOCKHOLDER UNDER SUCH SECTION. A holder of DEKALB Class A Stock electing to exercise appraisal rights under Section 262 must (a) deliver to DEKALB, before the taking of the vote on the Merger Agreement, a written demand for appraisal that is made by or on behalf of the person who is the holder of record of the DEKALB Class A Stock for which appraisal is demanded and (b) not vote in favor of adoption of the Merger Agreement. A proxy or vote against approval and adoption of the Merger Agreement does not constitute such a demand. In addition, mere failure, after the completion of the Merger, to execute and return a letter of transmittal to the Exchange Agent does not constitute a demand. A holder of DEKALB Class A Stock electing to take such action must do so before the taking of the vote on the Merger Agreement by a separate written demand that reasonably informs DEKALB of the identity of the holder of DEKALB Class A Stock of record and of such holder's intention thereby to demand the appraisal of such holder's DEKALB Class A Stock. Written demands for appraisal should be directed to DEKALB Energy Company, 10th Floor, 700-9th Avenue S.W., Calgary, Alberta, Canada T2P 3V4, Attention: John H. Witmer, Jr., Secretary. Only the holder of record of DEKALB Class A Stock is entitled to assert appraisal rights for the DEKALB Class A Stock registered in that holder's name. The holder of DEKALB Class A Stock asserting appraisal rights must hold DEKALB Class A Stock of record on the date of making the demand and continuously through the Effective Time. The demand should be executed by or for the holder of record, fully and correctly, as the holder's name appears on the holder's stock certificates. If the stock is owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in that capacity, and if the stock is owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all owners. An authorized agent, including one of two or more joint owners, may execute the demand for appraisal for a holder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, the agent is acting as agent for the record owner or owners. A record holder who holds DEKALB Class A Stock as nominee for beneficial owners may exercise the holder's right of appraisal with respect to the DEKALB Class A Stock held for all or less than all of such beneficial owners. In such case, the written demand should set forth the number of shares of DEKALB Class A Stock covered by it. Where no number of shares of DEKALB Class A Stock is expressly mentioned, the demand will be presumed to cover all DEKALB Class A Stock held in the name of the record holder. Within ten days after the Effective Time, DEKALB, as the Surviving Corporation, is required to send notice as to the effectiveness of the Merger to each person who, prior to the Effective Time of the Merger, satisfied the foregoing conditions. Within 120 days after the Effective Time, DEKALB or any holder of Dissenting Shares may file a petition in the Chancery Court demanding a determination of the fair value of all of the Dissenting Shares. Holders of Dissenting Shares should not assume that (i) DEKALB will file a petition with respect to the appraisal value of their Dissenting Shares, (ii) DEKALB will initiate any negotiations with respect to the "fair value" of such Dissenting Shares or (iii) DEKALB will notify them of any act in connection with the Merger. Accordingly, holders of DEKALB Class A Stock should regard it as their obligation to initiate all necessary action with respect to the perfection of their appraisal rights within the time periods prescribed in Section 262. 41 47 Within 120 days after the Effective Time, any holder of Dissenting Shares is entitled, upon written request, to receive from DEKALB a statement setting forth the aggregate number of Dissenting Shares and the aggregate number of holders of such Dissenting Shares. DEKALB is required to mail such statement within ten days after it receives a written request therefor. If a petition for an appraisal is timely filed, after a hearing on such petition, the Chancery Court will determine the holders of DEKALB Class A Stock entitled to appraisal rights and will appraise the Dissenting Shares owned by such holders, determining their "fair value" exclusive of any element of value arising from the accomplishment or expectation of the Merger and will determine a fair rate of interest, if any, to be paid upon the "fair value." In determining "fair value" of the Dissenting Shares, the Chancery Court shall take into account all relevant factors. Any such judicial determination of the "fair value" of the Dissenting Shares could be based upon considerations other than or in addition to the consideration paid in the Merger and the market value of the DEKALB Class A Stock, including asset values and earning capacity. In Weinberger v. UOP, Inc., the Delaware Supreme Court stated, among other things, that "proof of value by any techniques or methods generally considered acceptable in the financial community and otherwise admissible in court" should be considered in an appraisal proceeding. The value so determined for the Dissenting Shares could be more or less than, or the same as, the Exchange Ratio of between 0.85 and 0.90 shares of Apache Common Stock. The Chancery Court may allocate the costs of the appraisal proceedings as it deems equitable in the circumstances. The Chancery Court may also order that all or a portion of the expenses incurred by any holder of Dissenting Shares in connection with an appraisal proceeding, including, without limitation, reasonable attorneys' fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all the Dissenting Shares. Any holder of DEKALB Class A Stock who has duly demanded an appraisal in compliance with Section 262 will not, after the Effective Time, be entitled to vote the DEKALB Class A Stock subject to such demand for any purpose or be entitled to the payment of dividends or other distributions on such DEKALB Class A Stock (other than those payable or deemed to be payable to holders of DEKALB Class A Stock of record as of a date prior to the Effective Time) or on any shares of Apache Common Stock otherwise issuable, but for such appraisal demand, in substitution therefor. A holder of DEKALB Class A Stock will fail to perfect, or effectively lose, such holder's right to appraisal if no petition for appraisal is filed within 120 days after the Effective Time, or if the holder of DEKALB Class A Stock delivers to DEKALB a written withdrawal of such holder's demand for an appraisal and an acceptance of the Merger, except that any such attempt to withdraw made more than 60 days after the Effective Time requires the written approval of DEKALB. Holders of DEKALB Class A Stock should also note that surrender to the designated exchange agent of certificates for their DEKALB Class A Stock may constitute a waiver of appraisal rights under the DGCL. If an appraisal proceeding is timely instituted, such proceeding may not be dismissed as to any holder of DEKALB Class A Stock who has perfected his right of appraisal without the approval of the Chancery Court. Under Delaware law, holders of neither Apache Common Stock nor DEKALB Class B Stock will be entitled to any appraisal or dissenter's rights in connection with the Merger. CERTAIN TERMS OF THE MERGER AGREEMENT The following description does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, attached to this Proxy Statement/Prospectus as Appendix I and incorporated herein by reference. Certain capitalized terms used in this description and not elsewhere defined are defined in the Merger Agreement and used with the meanings provided therein. See pages AI-iv through AI-v of Appendix I. EFFECTIVE TIME OF THE MERGER The Merger Agreement provides that, as promptly as practicable after the satisfaction or waiver of the conditions to closing the Merger, the parties shall cause the Merger to be consummated by filing a Certificate 42 48 of Merger with the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, Delaware law. It is anticipated that, if the Merger Agreement is approved and adopted at the Special Meeting and all other conditions to the Merger have been satisfied or waived, the Effective Time will occur on the date of the Special Meeting or as soon thereafter as practicable. MANNER OF CONVERTING SHARES At the Effective Time, each outstanding share of DEKALB Stock (other than 220,000 shares of DEKALB Class B Stock held by DEKALB Energy Canada Ltd., a wholly owned subsidiary of DEKALB, which will remain outstanding and not be converted into shares of Apache Common Stock) will be converted into the right to receive a number of shares of Apache Common Stock determined by reference to the Exchange Ratio, which Exchange Ratio will be between 0.85 and 0.90 shares of Apache Common Stock per share of DEKALB Stock. Such Exchange Ratio will be determined by adding to 0.85 an amount (computed to the nearest ten-thousandth) equal to 0.0125 multiplied by the excess, if any, of $30 over the Market Price of Apache Common Stock. If the Market Price of the Apache Common Stock is $26 or lower, the Exchange Ratio will be 0.90, and if the Market Price of the Apache Common Stock is $30 or higher, the Exchange Ratio will be 0.85. Any resulting fractional shares of Apache Common Stock will be settled in cash. As used in the Merger Agreement, the "Market Price" of the Apache Common Stock means the average of the per share closing prices of Apache Common Stock as reported on the NYSE Composite Tape during the ten consecutive trading days ending on (and including) the third trading day prior to the Effective Time of the Merger. Notwithstanding the foregoing, if between the date of the Merger Agreement and the Effective Time the outstanding shares of Apache Common Stock shall have been changed into a different number of shares or a different class by reason of any reclassification or stock split or dividend, the Exchange Ratio shall be correspondingly adjusted to reflect such reclassification or stock split or dividend. As soon as practicable following the Effective Time, Apache will mail to each person who was a record holder of DEKALB Stock immediately prior to the Effective Time a letter of transmittal and other information advising such holder of the consummation of the Merger and for use in exchanging DEKALB Stock certificates for Apache Common Stock certificates and cash in lieu of fractional shares of Apache Common Stock. Letters of transmittal will also be available following the Effective Time at the offices of Apache in Houston, Texas. After the Effective Time, there will be no further registration of transfers on the stock transfer books of DEKALB of shares of DEKALB Stock that were outstanding prior to the Effective Time. Share certificates should not be surrendered for exchange by stockholders of DEKALB prior to the receipt of a letter of transmittal. No fractional shares of Apache Common Stock will be issued in the Merger. Each stockholder of DEKALB entitled to a fractional share of Apache Common Stock will receive an amount in cash equal either to (i) an amount determined by multiplying the Market Price by the fraction of a share of Apache Common Stock to which such holder would otherwise be entitled, or, at the option of Apache, (ii) such fractional holder's proportionate interest in the net proceeds from a sale by the Exchange Agent of the aggregate of the fractional shares of Apache Common Stock which would otherwise have been issued. No interest will be paid on such cash amounts, and all shares of DEKALB Stock held by a record holder shall be aggregated for purposes of computing the amount of any such payment. Until so surrendered and exchanged, after the Effective Time each certificate previously evidencing DEKALB Stock shall represent solely the right to receive Apache Common Stock and cash in lieu of fractional shares of Apache Common Stock. Unless and until such a DEKALB Stock certificate shall be so surrendered and exchanged, no dividends or other distributions payable to the holders of record of Apache Common Stock as of any time on or after the Effective Time shall be paid to the holder of such certificate previously evidencing DEKALB Stock; provided, however, that, upon surrender and exchange of a DEKALB Stock certificate, there shall be paid to the record holder of the Apache Common Stock certificate issued and exchanged therefor (i) the amount, without interest thereon, of dividends and other distributions, if any, with a record date on or after the Effective Time theretofore paid with respect to the number of whole shares of Apache Common Stock issued upon such exchange and surrender, and (ii) at the appropriate payment date, 43 49 the amount of dividends or other distributions, if any, with a record date on or after the Effective Time but prior to surrender and a payment date occurring after surrender, payable with respect to such whole shares of Apache Common Stock. TREATMENT OF DEKALB OPTIONS Assumption. The Merger Agreement provides that Apache and DEKALB will take such action as may be necessary to permit Apache to assume, at the Effective Time, each DEKALB Option that remains unexercised in whole or in part and to substitute shares of Apache Common Stock for shares of DEKALB Stock purchasable under such assumed DEKALB Option, subject to certain terms and conditions. The assumed DEKALB Option will not give the optionee additional benefits which such optionee did not have under the DEKALB Option, and shall be assumed on the same terms and conditions (including provisions regarding vesting and termination) as the DEKALB Option being assumed, subject to the matters described in the following paragraph. The number of shares of Apache Common Stock purchasable under any DEKALB Option assumed by Apache will be equal to the number of whole shares of Apache Common Stock that the holder of the DEKALB Option would have received upon consummation of the Merger had such DEKALB Option been exercised (without regard to any vesting schedule) in full immediately prior to the Effective Time. The exercise price per share of Apache Common Stock will be equal to the per share exercise price of the DEKALB Option divided by the Exchange Ratio. All unvested DEKALB Options assumed by Apache will vest according to the vesting schedule in effect for such DEKALB Options on the date of the Merger Agreement. Cancellation. As an alternative to having their DEKALB Options assumed by Apache, holders of DEKALB Options may elect, in their sole discretion at any time after receipt of this Proxy Statement/Prospectus and prior to the Effective Time, to surrender any DEKALB Options (whether vested or unvested) that remains unexercised in whole or in part. In exchange for the cancellation of such DEKALB Options, Apache shall issue a number of shares of Apache Common Stock for each share of DEKALB Stock covered by a cancelled DEKALB Option determined as follows: (i) the Market Price shall be multiplied by the Exchange Ratio, then (ii) the applicable exercise price per share under the DEKALB Option being exchanged shall be subtracted from the product obtained in clause (i) above, and then (iii) the difference obtained in clause (ii) above shall be divided by the Market Price. No fractional shares of Apache Common Stock will be issued in exchange for the cancellation of DEKALB Options, but rather each holder of a DEKALB Option entitled to a fractional share of Apache Common Stock will receive an amount in cash equal to the value of such fractional share of Apache Common Stock based upon the Market Price. DEKALB Options that are exchanged for Apache Common Stock in this manner shall be cancelled effective as of the Effective Time. Resale of Apache Common Stock by Canadian Residents. Apache will submit applications to the securities regulatory authorities in the appropriate provinces and territories of Canada in connection with the resale of Apache Common Stock issuable to holders of DEKALB Options resident in Canada upon the exercise of any DEKALB Option or issued in exchange for the cancellation of any DEKALB Options. Upon receipt of the orders resulting from the applications, the Apache Common Stock may be resold without restriction (other than as a result of any "control block" restrictions which may arise by virtue of the ownership thereof) under applicable securities laws of the provinces and territories of Canada provided that such trade is executed through the facilities of a stock exchange outside of Canada or in the over-the-counter market in the United States if the Apache Common Stock is quoted on the over-the-counter market at the time of such trade and such trade is made in accordance with the rules of the stock exchange or market upon which the trade is made and in accordance with all laws applicable to such stock exchange or market. THE HOLDERS OF DEKALB OPTIONS RESIDENT IN CANADA ARE URGED TO CONSULT THEIR LEGAL ADVISORS TO DETERMINE THE EXTENT OF ALL APPLICABLE RESALE PROVISIONS. 44 50 CONDITIONS TO THE MERGER The respective obligations of Apache and DEKALB to consummate the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived in writing by the parties to the Merger Agreement, in whole or in part, if legally allowable: (i) the Merger Agreement and the Merger shall have been approved and adopted by the requisite vote of the holders of DEKALB Class A Stock; (ii) the Apache Common Stock issuable in the Merger and pursuant to the DEKALB Options shall have been authorized for listing on the NYSE, upon official notice of issuance; (iii) the Registration Statement shall have been declared effective by the Commission under the Securities Act, no stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission, and Apache shall have received all state "Blue Sky" permits and other authorizations necessary to consummate the transactions contemplated by the Merger Agreement; (iv) no Governmental Entity or court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and which has the effect of making the Merger or the transactions contemplated by the Merger Agreement illegal; and (v) all authorizations, consents, orders, declarations or approvals of, or filings with, or terminations or expirations of waiting periods imposed by, any Governmental Entity shall have been obtained, shall have occurred or shall have been filed, except as would not (assuming consummation of the Merger) have a Material Adverse Effect on DEKALB. The obligation of DEKALB to effect the Merger is also subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived in writing by DEKALB, in whole or in part: (i) Apache shall have performed all agreements required by the Merger Agreement to be performed by Apache on or prior to the Effective Time, and each of the representations and warranties of Apache and Merger Sub contained in the Merger Agreement shall be true and correct in all material respects as of the Effective Time as though made on and as of the Effective Time (except for the second sentence of Section 2.2 of the Merger Agreement); (ii) all required authorizations, consents or approvals from any third party (other than a Governmental Entity), the failure to obtain which would (assuming the Merger had taken place) have a Material Adverse Effect on Apache, shall have been obtained; (iii) Sidley & Austin shall have delivered to DEKALB its written opinion as of the Effective Time as to certain U.S. federal income tax consequences of the Merger, as described above under "The Merger -- Certain Income Tax Consequences"; (iv) DEKALB shall have received an opinion of its Canadian legal counsel, Howard, Mackie, in form and substance satisfactory to DEKALB, dated the Effective Time, substantially to the effect that on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing as of the Effective Time, and relying on an opinion of Sidley & Austin on the effect of the Merger under Delaware corporate law, no gain or loss will be recognized by Apache, Merger Sub or DEKALB under the Canadian Tax Act as a result of the Merger; (v) Apache shall have furnished to DEKALB a certificate, dated the Effective Time, signed by the appropriate officers of Apache, certifying to the effect that to the best of the knowledge and belief of each of them, the conditions set forth in the Merger Agreement, insofar as they relate to Apache or Merger Sub, have been satisfied; (vi) DEKALB shall have received an opinion from Mayor, Day, Caldwell & Keeton, L.L.P., dated the Effective Time, substantially to the effect that the incorporation, good standing and capitalization of Apache are as stated in the Merger Agreement, that Apache has corporate power and authority to execute, deliver and perform the Merger Agreement, that the shares of Apache Common Stock to be issued pursuant to the Merger Agreement will be, when so issued, duly authorized, validly issued and outstanding, fully paid and nonassessable, and as to certain other matters; (vii) DEKALB shall have received, in form reasonably satisfactory to DEKALB, letters from Arthur Andersen LLP and Coopers & Lybrand, Apache's and DEKALB's independent public accountants, respectively, covering such matters with respect to the Registration Statement and the Proxy Statement as reasonably requested by DEKALB; and (viii) Apache shall have furnished to DEKALB at the closing such other customary documents, certificates or instruments as DEKALB may reasonably request. The obligation of Apache to effect the Merger is also subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived in writing by Apache, in whole or in part: (i) DEKALB shall have performed in all material respects all agreements required by the Merger Agreement 45 51 to be performed by DEKALB on or prior to the Effective Time, and each of the representations and warranties of DEKALB contained in the Merger Agreement shall be true and correct in all material respects as of the Effective Time as though made on and as of the Effective Time (except for the second sentence of Section 3.2 and clause (iii) of Section 3.5 of the Merger Agreement); (ii) all required authorizations, consents or approvals from any third party (other than a Governmental Entity), the failure to obtain which would (assuming the Merger had taken place) have a Material Adverse Effect on DEKALB, shall have been obtained; (iii) based on the advice of Arthur Andersen LLP and such other advice as Apache may deem relevant, Apache shall have no reasonable basis for believing that following the Merger the combination of DEKALB and Merger Sub may not be accounted for as a "pooling of interests" in accordance with generally accepted accounting principles; (iv) Mayor, Day, Caldwell & Keeton, L.L.P. shall have delivered to Apache its written opinion as of Effective Time as to certain U.S. federal income tax consequences of the Merger, as described above under "The Merger -- Certain Income Tax Consequences;" (v) Apache shall have received an opinion of Apache's Canadian counsel, Bennett Jones Verchere, in form and substance satisfactory to Apache, dated the Effective Time, substantially to the effect that on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing as of the Effective Time and relying on an opinion of Mayor, Day, Caldwell & Keeton, L.L.P. on the effect of the Merger under Delaware corporate law, no gain or loss will be recognized by Apache, Merger Sub or DEKALB under the Canadian Tax Act as a result of the Merger; (vi) DEKALB shall have furnished to Apache a certificate, dated the Effective Time, signed by the appropriate officers of DEKALB, certifying to the effect that to the best of the knowledge and belief of each of them, the conditions set forth in the Merger Agreement, insofar as they relate to DEKALB, have been satisfied; (vii) Apache shall have received an opinion from Sidley & Austin, dated the Effective Time, substantially to the effect that the incorporation, good standing and capitalization of DEKALB are as stated in the Merger Agreement, that DEKALB has corporate power and authority to execute, deliver and perform the Merger Agreement, and as to certain other matters; (viii) Apache shall have received, in form reasonably satisfactory to Apache, letters from Arthur Andersen LLP and Coopers & Lybrand covering such matters with respect to the Registration Statement and the Proxy Statement as reasonably requested by Apache; (ix) DEKALB shall have furnished to Apache at the closing such other customary documents, certificates or instruments as Apache may reasonably request; and (x) holders of not more than ten percent of the outstanding shares of DEKALB Class A Stock shall have properly demanded appraisal rights for their shares. There can be no assurance that all of the conditions to the Merger will be satisfied. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains various representations and warranties of DEKALB, Merger Sub and Apache relating to, among other things, (i) each of their respective organizations and similar corporate matters, (ii) each of their respective capitalizations, (iii) authorization, execution, delivery, performance and enforceability of the Merger Agreement and related matters, and the absence of conflicts, violations and defaults under their respective certificates of incorporation and bylaws and certain other agreements and documents, (iv) the documents and reports filed by them with the Commission and the accuracy of the information contained therein, (v) the absence of material adverse changes, (vi) litigation, (vii) brokers, (viii) employee benefit matters, (ix) director, officer and employee agreements, (x) certain business practices, (xi) no excess parachute payments or compensation, (xii) insider interests, (xiii) compliance with laws, (xiv) intellectual property, (xv) labor matters, (xvi) insurance, (xvii) property records and title, (xviii) contracts, (xix) condition of assets, (xx) environmental matters, (xxi) taxes and matters relating to a tax-free reorganization, (xxii) hedging activities, (xxiii) accounts receivable, (xxiv) internal financial reports, (xxv) undisclosed liabilities, (xxvi) takeover defense mechanisms, (xxvii) fairness opinion, (xxviii) no ownership by Apache of DEKALB Stock, and (xxix) the accuracy of certain other information provided. No person other than DEKALB, Apache and Merger Sub has any rights or remedies under the Merger Agreement with respect to such representations and warranties. The representations and warranties of DEKALB, Apache and Merger Sub all expire at the Effective Time. 46 52 CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER Each of DEKALB and Apache has agreed that, prior to the Effective Time, it will and will cause its subsidiaries to carry on its business in all material respects in, and not enter into any material transaction other than in, the ordinary course of business and, to the extent consistent therewith, use all reasonable efforts to preserve intact its current business organization, keep available the services of its current respective officers and employees, and preserve its relationships with its customers, suppliers, and others having business dealings with it, with a view to retaining its goodwill and ongoing business unimpaired at the Effective Time. Without limiting the generality of the covenants described above, and except as expressly contemplated by the Merger Agreement or consented to in writing by Apache, DEKALB has agreed not to, and not to permit its subsidiaries, to: (i) (A) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to stockholders of DEKALB in their capacity as such, other than dividends payable to DEKALB declared by any of DEKALB's wholly owned subsidiaries, (B) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (C) purchase, redeem or otherwise acquire any shares of capital stock of DEKALB or any of its subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (ii) issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock, any other voting securities or equity equivalent or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities or equity equivalent (other than, in the case of DEKALB, the issuance of DEKALB Stock during the period from the date of the Merger Agreement through the Effective Time upon the exercise of DEKALB Options outstanding on the date of the Merger Agreement); (iii) amend its certificate of incorporation or amend its bylaws; (iv) acquire or agree to acquire by merging or consolidating with, or by purchasing all or substantially all of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof; (v) sell, lease or otherwise dispose of or agree to sell, lease or otherwise dispose of, any of its assets except for (A) sales of actual production in the ordinary course of business, (B) certain scheduled dispositions, and (C) sales of assets (other than oil and gas properties or related plant, equipment, pipeline or gathering system assets or real property) made in the ordinary course of business consistent with past practice and not involving any asset with a value greater than $50,000 or assets with an aggregate value greater than $100,000; (vi) except in the ordinary course of business consistent with past practice and limited to borrowings under the existing principal revolving credit agreement of DEKALB Energy Canada Ltd. and other transactions not exceeding an aggregate amount equal to $100,000, (A) incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others or (B) make any loans, advances or capital contributions to, or investments in, any other person, other than DEKALB or any wholly owned subsidiary of DEKALB; (vii) alter through merger, liquidation, reorganization, restructuring or in any other fashion the corporate structure or ownership of any subsidiary of DEKALB; (viii) enter into, adopt or amend any severance plan, agreement or arrangement, any employee benefit plan or any employment or consulting agreement or hire any additional employees or consultants except as scheduled; (ix) make or incur any capital expenditures or any expenditures in connection with the Merger Agreement and the transaction contemplated thereby with regard to fees and expenses of investment bankers, legal counsel, accountants, experts and other consultants that are not set forth in DEKALB's 1994 capital budget or the preliminary 1995 capital budget; (x) make any election relating to taxes or settle or compromise any tax liability; (xi) change any material accounting principle used by it, except for any change required by generally accepted accounting principles or by the rules of the Commission; (xii) waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement (except for any agreement with Apache) to which DEKALB or any of its subsidiaries is a party; or (xiii) authorize any of, or commit or agree to take any of, the foregoing actions; provided, however, that DEKALB is not prohibited or prevented from (A) if the Effective Time is not on or before April 15, 1995, incurring indebtedness, on terms reasonably acceptable to Apache, as required to redeem in whole or in part DEKALB's 10% Notes due in 1998, which become redeemable April 15, 1995, (B) issuing DEKALB Class A Stock or DEKALB Class B Stock upon the exercise of DEKALB Options outstanding on or prior to 47 53 the Effective Time or (C) amending the Retirement Allowance Agreement of DEKALB Energy Canada Ltd. substantially in accordance with a proposed amendment previously furnished to Apache. Without limiting the generality of the covenants described above, and except as expressly contemplated by the Merger Agreement or consented to in writing by DEKALB, Apache has agreed not to, and not to permit its subsidiaries to: (i) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to stockholders of Apache in their capacity as such, other than (A) ordinary quarterly cash dividends by Apache consistent with past practice in an amount not in excess of $.07 per share of Apache Common Stock, (B) dividends declared prior to the date of the Merger Agreement, and (C) dividends payable to Apache declared by any of its subsidiaries; (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock; or (iii) purchase, redeem or otherwise acquire any shares of capital stock of Apache or any of its subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities. NO SOLICITATION At the time of execution of the Merger Agreement, DEKALB agreed to immediately cease and cause to be terminated all existing discussions and negotiations, if any, with any parties conducted theretofore with respect to any Takeover Proposal. "Takeover Proposal" means any tender offer or exchange offer for 20 percent or more of the outstanding shares of DEKALB Class A Stock or DEKALB Class B Stock or any proposal or offer for a merger, consolidation, amalgamation or other business combination involving DEKALB or its subsidiaries or any equity securities (or securities convertible into equity securities) of DEKALB, or any proposal or offer to acquire in any manner a 20 percent or greater equity or beneficial interest in, or a material amount of the assets or value of, DEKALB or its subsidiaries, other than pursuant to the transactions contemplated by the Merger Agreement. In addition, unless and until the Merger Agreement shall have been terminated, DEKALB has agreed not to, and not to permit any of its subsidiaries or any of its or its subsidiaries' officers, directors, employees, agents, financial advisors, counsel or other representatives (collectively, the "DEKALB Representatives"), to, directly or indirectly, (i) (A) solicit, (B) initiate or (C) (excluding any action referred to in clauses (ii) and (iii) of this sentence) encourage or take any action to facilitate the making of, any offer or proposal that constitutes or that is reasonably likely to lead to any Takeover Proposal, (ii) participate in any discussions (other than among DEKALB Representatives or as necessary to clarify the terms and conditions of any unsolicited offer, including any financing or other contingencies and other relevant facts with respect thereto) or negotiations regarding any Takeover Proposal or (iii) furnish to any person (other than DEKALB Representatives, Apache or its representatives) any nonpublic information or nonpublic data outside the ordinary course of conducting DEKALB's ordinary business; provided, however, that to the extent required by their fiduciary duties under applicable law and after consultation with and based upon the advice of outside legal counsel, DEKALB's Board of Directors and officers may, in response to a person who initiates communication with DEKALB without there having occurred any action prohibited by clause (i) of this sentence, take such actions as would otherwise be prohibited by clauses (ii) and (iii). DEKALB has also agreed to notify Apache orally and in writing of any such inquiries, offers or proposals (including the terms and conditions of any offer or proposal and the identity of the person making any inquiry, offer or proposal) and of any related termination events (see clauses (vi) and (vii) under "-- Termination or Amendment of the Merger Agreement" below) as promptly as possible and in any event within 24 hours after receipt thereof or the occurrence of such events, as appropriate, and to give Apache five days' advance notice of any agreement to be entered into with or any information or data to be furnished to any person in connection with any such inquiry, offer or proposal. CERTAIN POST-MERGER MATTERS Once the Merger is consummated, Merger Sub will cease to exist as a corporation, and DEKALB as the Surviving Corporation will succeed to all of the assets, rights and obligations of Merger Sub. 48 54 Pursuant to the Merger Agreement, DEKALB's Charter and DEKALB's Bylaws, as in effect immediately prior to the Effective Time, will be the certificate of incorporation and bylaws of the Surviving Corporation until thereafter amended as provided therein or pursuant to the DGCL. The officers and directors of Merger Sub at the Effective Time shall be the initial officers and directors of the Surviving Corporation. TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT The Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after any approval by the holders of DEKALB Class A Stock: (i) by mutual consent of Apache and DEKALB; (ii) by Apache if (A) DEKALB shall have failed to comply in any material respect with any of its covenants or agreements contained in the Merger Agreement required to be complied with by DEKALB prior to the date of such termination, which failure to comply has not been cured within ten business days following receipt by DEKALB of notice of such failure to comply, or (B) the holders of DEKALB Class A Stock shall have failed to approve the Merger Agreement at the Special Meeting; (iii) by DEKALB if (A) Apache shall have failed to comply in any material respect with any of its covenants or agreements contained in the Merger Agreement required to be complied with by Apache prior to the date of such termination, which failure to comply has not been cured within ten business days following receipt by Apache of notice of such failure to comply, or (B) the holders of DEKALB Class A Stock shall have failed to approve the Merger Agreement at the Special Meeting; (iv) by either Apache or DEKALB if (A) the Merger has not been effected on or prior to the close of business on June 30, 1995; provided, however, that the right to terminate the Merger Agreement pursuant to this clause shall not be available to any party whose failure to fulfill any obligation of the Merger Agreement has been the cause of, or resulted in, the failure of the Merger to have occurred on or prior to the aforesaid date; or (B) any court of competent jurisdiction or any governmental, administrative or regulatory authority, agency or body shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by the Merger Agreement and such order, decree, ruling or other action shall have become final and nonappealable; (v) (A) by DEKALB if there has been a breach by Apache (which breach has not been cured within ten business days following receipt by Apache of notice of the breach) of one or more representations or warranties (determined without regard to any qualification therein as to materiality) such that the adverse consequences of such breach or breaches would in the aggregate have a Material Adverse Effect on Apache; or (B) by Apache if there has been a breach by DEKALB (which breach has not been cured within ten business days following receipt by DEKALB of notice of the breach) of one or more representations or warranties (determined without regard to any qualification therein as to materiality and in the case of DEKALB's representation as to property records and title, determined with reference to the net consequences of all variances whether favorable or adverse) such that the adverse consequences of such breach or breaches would in the aggregate have a Material Adverse Effect on DEKALB; (vi) by Apache, (A) if DEKALB shall have taken or permitted any of the actions referred to in the nonsolicitation provisions of the Merger Agreement, (B) if the Board of Directors of DEKALB shall have recommended, or shall have resolved to recommend, to the stockholders of DEKALB any Takeover Proposal, or (C) a tender offer or exchange offer for 20 percent or more of the outstanding shares of DEKALB Class A Stock is commenced, and the Board of Directors of DEKALB does not recommend, within five days after the commencement of such offer, that stockholders not tender their shares into such tender or exchange offer; (vii) by DEKALB if DEKALB's Board of Directors, to the extent required by their fiduciary duties under applicable law and after consultation with and based upon the advice of outside legal counsel, resolve to recommend to the stockholders of DEKALB, or agree to, a Takeover Proposal that provides 49 55 stockholders of DEKALB a value per share of DEKALB Stock in excess of a value equal to the product of (A) the Exchange Ratio (calculated as if the Effective Date were the date on which the Board of Directors of DEKALB is considering terminating the Merger Agreement) multiplied by (B) the average of the per share closing prices of Apache Common Stock as reported on the NYSE Composite Tape during the ten consecutive trading days immediately preceding the day on which the Board of Directors of DEKALB is considering terminating the Merger Agreement; or (viii) by either Apache or DEKALB if the Market Price of Apache Common Stock (calculated as if the Effective Date were the date of the Special Meeting) is less than $22.00 per share. In the event of termination of the Merger Agreement by either Apache or DEKALB, the Merger Agreement will become void and there will be no liability thereunder on the part of DEKALB, Apache or Merger Sub or their respective officers or directors (except for confidentiality, standstill, expense sharing and press release provisions, which will to the extent provided therein survive the termination); provided, however, that termination will not relieve any party to the Merger Agreement from any liability for any breach of the Merger Agreement. The Merger Agreement may be amended by the parties thereto, by or pursuant to action taken by their respective Boards of Directors, at any time before or after approval of the Merger Agreement at the Special Meeting, but after any such approval at the Special Meeting no amendment can be made which changes the Exchange Ratio or which in any way materially adversely affects the rights of the stockholders of DEKALB, without the further approval of the holders of the DEKALB Class A Stock. The Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties thereto. At any time prior to the Effective Time, any party thereto may (i) extend the time for the performance of any of the obligations or other acts of any other party thereto, (ii) waive any inaccuracies in the representations and warranties of any other party contained therein or in any document delivered pursuant thereto and (iii) waive compliance with any of the agreements of any other party or any of the conditions to the obligations of such waiving party contained therein which may legally be waived. Any agreement on the part of a party to the Merger Agreement to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party and shall not constitute an amendment requiring the approval of the holders of the DEKALB Class A Stock. EXPENSES Except as described in this paragraph, DEKALB and Apache have agreed that, whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring such costs and expenses. DEKALB and Apache have agreed that if the Merger Agreement is terminated for any reason, then (i) Apache will pay (or reimburse DEKALB for) the fees and expenses of Ryder Scott incurred by DEKALB for the audit of DEKALB reserves to be conducted as provided in the Merger Agreement, and (ii) DEKALB and Apache will share equally all out-of-pocket expenses incurred relating to (A) printing and mailing the Registration Statement and the Proxy Statement, (B) the Commission's and any state's "Blue Sky" filing fees in the United States or similar filing fees in Canada incurred in connection with filing the Registration Statement, and (C) the solicitation of stockholder approvals; provided, however, that if the Merger Agreement is terminated by reason of a party's breach of the Merger Agreement, such party will not be entitled to reimbursement from the other party. Within ten days of termination of the Merger Agreement, DEKALB and Apache will deliver in writing to the other a schedule of expenses, and as soon thereafter as practicable, but not later than 20 days after termination of the Merger Agreement, either DEKALB or Apache as the case may be will reimburse the other. In addition, Apache will pay all commissions, transfer taxes and other out-of- pocket transaction costs, including the expenses and compensation of the Exchange Agent, incurred in connection with any sale of shares in connection with the payment of cash with respect to fractional shares of Apache Common Stock. 50 56 BENEFIT PLANS AND SEVERANCE For at least 24 months following the Effective Time, Apache will maintain employee benefits and programs for officers and employees of DEKALB and its subsidiaries that are no less favorable than those being provided to such officers and employees on the date of the Merger Agreement. For purposes of eligibility to participate in and vesting in various Apache benefit plans, employees of DEKALB and its subsidiaries will be credited with their years of service with DEKALB and its subsidiaries. From the date of the Merger Agreement up to the Effective Time, DEKALB will be permitted to offer and pay bonuses, in addition to any bonuses or payments pursuant to any existing bonus or incentive plans of DEKALB, payable to employees who remain in the employ of DEKALB or its subsidiaries until the date three months after the Effective Time; provided, however, that such bonuses will contain terms no more favorable than those scheduled in connection with the Merger Agreement. For a period of at least 24 months following the Effective Time, Apache will maintain DEKALB's severance policy for terminated employees as in effect on the date of the Merger Agreement, or will replace such policy with a policy providing equal or more favorable compensation. INSURANCE AND INDEMNIFICATION Apache will provide, or cause the Surviving Corporation to provide, for a period of not less than six years from the Effective Time, DEKALB's current directors and officers an insurance and indemnification policy that provides coverage for events occurring through the Effective Time (the "D&O Insurance") that is no less favorable than the coverage provided to such directors under DEKALB's existing policy or, if substantially equivalent insurance coverage is unavailable, the best available comparable coverage; provided, however, that Apache and the Surviving Corporation will not be required to pay an annual premium for the D&O Insurance in excess of five times the last annual premium paid by DEKALB prior to the date of the Merger Agreement, but in such case will purchase as much coverage as possible for such amount. From and after the Effective Time, Apache (i) has agreed to indemnify and hold harmless all past and present officers and directors of DEKALB and of its subsidiaries to the same extent that such persons are currently entitled to be indemnified by DEKALB pursuant to the applicable provisions of DEKALB's Charter or DEKALB's Bylaws or of any DEKALB indemnification agreement for the benefit of any such officers or directors for acts or omissions occurring at or prior to the Effective Time, including those in connection with the Merger, and (ii) will advance reasonable litigation expenses incurred by such officers and directors in connection with defending any action arising out of such acts or omissions, and Apache has agreed not to amend or modify any of such provisions after the Effective Time. STOCKHOLDER AGREEMENTS As a condition to Apache's and Merger Sub's execution of the Merger Agreement, holders of 1,202,403 shares of DEKALB Class A Stock (or approximately 52 percent of the 2,304,007 shares of DEKALB Class A Stock outstanding on December 15, 1994) each executed a Stockholder Agreement agreeing to vote all shares of DEKALB Class A Stock owned by such persons at any meeting of stockholders of DEKALB (or consent in lieu thereof) (i) in favor of the Merger and adoption of the Merger Agreement, (ii) against any act that would result in a breach under the Merger Agreement, and (iii) except as otherwise agreed to in writing in advance by Apache, against any business combination, sale of assets or reorganization or recapitalization, any change in DEKALB's Board of Directors, any amendment of DEKALB's Charter or DEKALB's Bylaws or corporate structure or business, or any other matter that may interfere with or adversely affect the contemplated economic benefits to Apache of the Merger or Merger Agreement. The stockholders signing Stockholder Agreements also have agreed (A) not to solicit, initiate or encourage any Takeover Proposals, (B) not to grant a proxy to another person, sell or otherwise transfer or encumber their shares, or convert their shares of DEKALB Class A Stock into shares of DEKALB Class B Stock, and (C) to waive all appraisal rights with respect to the Merger. The Stockholder Agreements will terminate automatically at the Effective Time or upon any termination of the Merger Agreement by its terms. As a consequence of the Stockholder Agreements, approval of the Merger Agreement at the Special Meeting is expected. The form of Stockholder Agreement has been filed as an Exhibit to the Registration Statement of which this Proxy Statement/Prospectus is a part and is incorporated herein by reference. 51 57 MARKET PRICES OF COMMON STOCK AND DIVIDEND INFORMATION Apache Common Stock is traded on the NYSE and the Chicago Stock Exchange under the symbol "APA." The DEKALB Class B Stock is traded in the over-the-counter market and quoted on the NASDAQ/NMS under the symbol "ENRGB," and on the TSE under the symbol "DKB.B." The DEKALB Class A Stock is not traded publicly. The following table sets forth, for the periods indicated, the range of high and low closing prices per share of Apache Common Stock as reported on the NYSE Composite Tape and of DEKALB Class B Stock on NASDAQ/NMS, and the dividend per share of Apache Common Stock. Dividends were not paid on the DEKALB Stock during such periods.
APACHE COMMON STOCK DEKALB CLASS B STOCK ------------------------- ------------------------- DIVI- DIVI- HIGH LOW DEND HIGH LOW DEND ----- ----- ----- ----- ----- ----- 1992 First Quarter.......................... $15 7/8 $12 $0.07 $14 1/2 $11 3/4 -- Second Quarter......................... 18 1/8 13 7/8 0.07 15 3/4 12 -- Third Quarter.......................... 22 1/8 15 1/2 0.07 14 1/4 12 -- Fourth Quarter......................... 21 3/8 17 1/8 0.07 13 1/4 10 1/4 -- 1993 First Quarter.......................... $26 1/4 $17 5/8 $0.07 $15 $10 3/4 -- Second Quarter......................... 30 1/4 24 3/8 0.07 18 3/4 14 1/4 -- Third Quarter.......................... 33 1/2 26 3/8 0.07 17 1/4 15 3/4 -- Fourth Quarter......................... 31 1/4 20 3/8 0.07 17 3/8 13 -- 1994 First Quarter.......................... $26 7/8 $22 1/2 $0.07 $18 1/2 $13 1/4 -- Second Quarter......................... 29 22 1/4 0.07 15 1/2 13 1/4 -- Third Quarter.......................... 29 1/4 23 0.07 16 1/2 15 -- Fourth Quarter......................... 28 7/8 23 5/8 0.07 21 1/2 14 3/4 -- 1995 First Quarter*......................... $25 1/2 $22 1/2 $0.07+ $21 1/2 $18 3/4 --
- --------------- * Through January 13, 1995. + Declared; payable January 31, 1995. On December 20, 1994, the last trading day prior to the announcement by Apache and DEKALB that they had executed the Merger Agreement, the closing per share sales prices of Apache Common Stock as reported on the NYSE Composite Tape, and DEKALB Class B Stock as reported on NASDAQ/NMS, were $26.00 and $15.75, respectively. See the cover page of this Proxy Statement/Prospectus for recent closing prices of Apache Common Stock and DEKALB Class B Stock. Following the Merger, Apache Common Stock will continue to be traded on the NYSE and the Chicago Stock Exchange. Following the Merger, DEKALB Class B Stock will cease to be traded on the NASDAQ/NMS and on the TSE, and there will be no further market for the DEKALB Class B Stock. Apache has paid cash dividends on Apache Common Stock for 112 consecutive quarters and intends to continue the payment of dividends at current levels, although future dividend payments will depend upon Apache's level of earnings, financial requirements and other relevant factors. 52 58 APACHE CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The following unaudited consolidated condensed financial statements and related notes are presented to show (i) the pro forma effects of the Merger of Apache and DEKALB, (ii) the pro forma effects of the expected acquisition of oil and gas properties from Texaco during the first quarter of 1995 and (iii) the cumulative pro forma effects of both of these transactions. The Merger will be reported using the pooling of interests method of accounting, and the Texaco acquisition will be reported using the purchase method of accounting. The condensed statements of operations are presented to show income from continuing operations as if the Merger of DEKALB and Apache occurred effective January 1, 1991 and as if the Texaco transaction occurred effective January 1, 1993. The pro forma condensed balance sheet is based on the assumption that both transactions occurred effective September 30, 1994. Pro forma data are based on assumptions and include adjustments as explained in the notes to the unaudited pro forma consolidated condensed financial statements. The pro forma data are not necessarily indicative of the financial results that would have occurred had the transactions been effective on and as of the dates referenced above, and should not be viewed as indicative of operations in future periods. The unaudited pro forma consolidated condensed financial statements should be read in conjunction with the notes thereto, Apache's and DEKALB's Annual Reports on Form 10-K for the fiscal year ended December 31, 1993, and their quarterly reports on Form 10-Q for the quarters ended March 31, 1994, June 30, 1994 and September 30, 1994, and Apache's Form 10-K/A for the fiscal year ended December 31, 1993, all of which are incorporated by reference, and Texaco's Unaudited Statement of Revenues and Direct Operating Expenses included elsewhere in this Proxy Statement/ Prospectus. 53 59 APACHE CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1991 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MERGER PRO APACHE DEKALB FORMA PRO HISTORICAL HISTORICAL ADJUSTMENTS FORMA ---------- ---------- ----------- -------- REVENUES Oil and gas production revenues............. $316,062 $ 92,949 $409,011 Gathering, processing and marketing revenues................................. 25,970 -- 25,970 Equity in income of affiliates.............. 8,642 2,035 10,677 Other revenues.............................. 6,256 1,743 7,999 -------- -------- ------ -------- Total revenues...................... 356,930 96,727 453,657 OPERATING EXPENSES Depreciation, depletion and amortization.... 132,230 41,080 173,310 Impairments................................. 3,600 94,241 97,841 Operating costs............................. 91,514 29,802 121,316 Gathering, processing and marketing costs... 18,909 -- 18,909 Administrative, selling and other........... 41,207 8,441 49,648 Financing costs, net........................ 25,309 10,902 36,211 -------- -------- ------ -------- 312,769 184,466 497,235 -------- -------- ------ -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......................... 44,161 (87,739) (43,578) Provision (benefit) for income taxes........ 9,546 (25,153) (15,607) -------- -------- ------ -------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS.................................. $ 34,615 $(62,586) $(27,971) ======== ======== ====== ======== NET INCOME (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE............................ $ .76 $ (6.51) $ (.51) ======== ======== ====== ======== WEIGHTED AVERAGE COMMON SHARES................ 45,777 9,618 (962)(a) 54,433 ======== ======== ====== ========
The accompanying notes to unaudited pro forma financial statements are an integral part of these statements. 54 60 APACHE CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1992 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MERGER PRO APACHE DEKALB FORMA PRO HISTORICAL HISTORICAL ADJUSTMENTS FORMA ---------- ---------- ----------- -------- REVENUES Oil and gas production revenues............. $394,552 $ 59,283 $453,835 Gathering, processing and marketing revenues................................. 28,594 -- 28,594 Equity in income of affiliates.............. 2,695 756 3,451 Gain on sale of investment in affiliate..... 28,345 1,914 30,259 Other revenues.............................. 114 1,150 1,264 -------- -------- ------ -------- Total revenues...................... 454,300 63,103 517,403 OPERATING EXPENSES Depreciation, depletion and amortization.... 157,508 22,522 180,030 Impairments................................. 12,000 53,320 65,320 Loss on disposal of U.S. assets............. -- 34,942 34,942 Operating costs............................. 125,337 18,833 144,170 Gathering, processing and marketing costs... 21,452 -- 21,452 Administrative, selling and other........... 35,010 5,589 40,599 Financing costs, net........................ 32,515 6,938 39,453 -------- -------- ------ -------- 383,822 142,144 525,966 -------- -------- ------ -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......................... 70,478 (79,041) (8,563) Provision (benefit) for income taxes........ 22,702 (9,788) 12,914 -------- -------- ------ -------- INCOME (LOSS) FROM CONTINUING OPERATIONS...... $ 47,776 $(69,253) $(21,477) -------- -------- ------ -------- INCOME (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE................................ $ 1.02 $ (7.19) $ (.39) ======== ======== ====== ======== WEIGHTED AVERAGE COMMON SHARES................ 46,904 9,630 (963)(a) 55,571 ======== ======== ====== ========
The accompanying notes to unaudited pro forma financial statements are an integral part of these statements. 55 61 APACHE CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APACHE MERGER AND PRO DEKALB TEXACO APACHE DEKALB FORMA PRO TEXACO PRO FORMA PRO HISTORICAL HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA ---------- ---------- ----------- -------- ---------- ----------- -------- REVENUES Oil and gas production revenues................. $437,342 $44,506 $481,848 $212,800 $ $694,648 Gathering, processing and marketing revenues....... 25,862 -- 25,862 25,862 Equity in income of affiliates............... 624 -- 624 624 Other revenues.............. 2,810 1,488 4,298 4,298 -------- ------- -------- -------- -------- --------- -------- Total revenues...... 466,638 45,994 512,632 212,800 725,432 OPERATING EXPENSES Depreciation, depletion and amortization............. 176,335 15,142 191,477 68,109(b) 259,586 Impairments................. 23,200 -- 23,200 23,200 Gain on disposal of U.S. assets................... -- (513) (513) (513) Operating costs............. 128,113 12,467 140,580 104,100 244,680 Gathering, processing and marketing costs.......... 21,010 -- 21,010 21,010 Administrative, selling and other................ 33,193 3,436 36,629 4,000(c) 40,629 Financing costs, net........ 26,882 3,795 30,677 27,462(d) 58,139 -------- ------- -------- -------- -------- --------- -------- 408,733 34,327 443,060 104,100 99,571 646,731 -------- ------- -------- -------- -------- --------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES....................... 57,905 11,667 69,572 108,700 (99,571) 78,701 Provision for income taxes.................... 20,571 5,995 26,566 3,376(e) 29,942 -------- ------- -------- -------- -------- --------- -------- INCOME FROM CONTINUING OPERATIONS.................. $ 37,334 $ 5,672 $ 43,006 $108,700 $(102,947) $ 48,759 ======== ======= ======== ======== ======== ========= ======== INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE....................... $ 0.70 $ .59 $ .69 $ .78 ======== ======= ======== ======== WEIGHTED AVERAGE COMMON SHARES...................... 53,534 9,675 (968)(a) 62,241 62,241 ======== ======= ======== ======== ========
The accompanying notes to unaudited pro forma financial statements are an integral part of these statements. 56 62 APACHE CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APACHE MERGER AND TEXACO PRO DEKALB PRO APACHE DEKALB FORMA PRO TEXACO FORMA PRO HISTORICAL HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA ---------- ---------- ----------- -------- ---------- ----------- -------- REVENUES Oil and gas production revenues................. $365,106 $34,356 $399,462 $130,100 $ $529,562 Gathering, processing and marketing revenues....... 29,176 -- 29,176 29,176 Equity in income of affiliates............... 385 -- 385 385 Other revenues.............. 2,636 1,153 3,789 3,789 -------- ------- -------- -------- -------- -------- -------- Total revenues...... 397,303 35,509 432,812 130,100 562,912 OPERATING EXPENSES Depreciation, depletion and amortization............. 170,402 10,503 180,905 47,501(b) 228,406 Impairments................. 7,300 -- 7,300 7,300 Operating costs............. 101,807 8,150 109,957 67,200 177,157 Gathering, processing and marketing costs.......... 25,376 -- 25,376 25,376 Administrative, selling and other.................... 26,113 2,308 28,421 3,000(c) 31,421 Financing costs, net........ 21,432 3,027 24,459 21,767(d) 46,226 -------- ------- -------- -------- -------- -------- -------- 352,430 23,988 376,418 67,200 72,268 515,886 -------- ------- -------- -------- -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES....................... 44,873 11,521 56,394 62,900 (72,268) 47,026 Provision (benefit) for income taxes............. 14,696 5,465 20,161 (3,466)(e) 16,695 -------- ------- -------- -------- -------- -------- -------- NET INCOME FROM CONTINUING OPERATIONS.................. $ 30,177 $ 6,056 $ 36,233 $ 62,900 $(68,802) $ 30,331 ======== ======= ======== ======== ======== ======== ======== NET INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE....................... $ .49 $ .63 $ .52 $ .43 ======== ======= ======== ======== WEIGHTED AVERAGE COMMON SHARES...................... 61,269 9,610 (961)(a) 69,918 69,918 ======== ======= ======== ======== ========
The accompanying notes to unaudited pro forma financial statements are an integral part of these statements. 57 63 APACHE CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1994 (IN THOUSANDS)
MERGER PRO APACHE AND TEXACO APACHE DEKALB FORMA DEKALB PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA ----------- --------- ----------- ----------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents............. $ 13,060 $ 15,898 $ $ 28,958 $ $ 28,958 Receivables................ 96,818 9,407 106,225 106,225 Inventories................ 8,743 -- 8,743 8,743 Advances to oil and gas ventures and other...... 10,538 647 11,185 11,185 ----------- --------- -------- ----------- --------- ----------- Total current assets........... 129,159 25,952 155,111 155,111 Net property and equipment... 1,552,845 197,641 1,750,486 600,000(f) 2,354,486 4,000(g) Other assets................. 33,445 806 34,251 8,500(f) 42,751 ----------- --------- -------- ----------- --------- ----------- TOTAL ASSETS................. $ 1,715,449 $ 224,399 $ $ 1,939,848 $ 612,500 $ 2,552,348 =========== ========= ======== =========== ========= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities.......... $ 164,412 $ 33,739 $ $ 198,151 $ 4,000(g) $ 210,651 8,500(f) Long-term debt............... 552,744 51,325 604,069 600,000(f) 1,204,069 Deferred income taxes........ 149,255 27,668 176,923 176,923 Other noncurrent liabilities................ 41,502 10,132 51,634 51,634 ----------- --------- -------- ----------- --------- ----------- TOTAL LIABILITIES............ 907,913 122,864 1,030,777 612,500 1,643,277 SHAREHOLDERS' EQUITY: Common stock............... 78,182 8,549 2,011(h) 88,742 88,742 Paid-in capital............ 543,315 51,657 (95,416)(h) 499,556 499,556 Retained earnings.......... 199,491 148,610 -- 348,101 348,101 Currency translation adjustments............. -- (13,876) -- (13,876) (13,876) Treasury stock at cost..... (13,452) (93,405) 93,405(h) (13,452) (13,452) ----------- --------- -------- ----------- --------- ----------- Total shareholders' equity........... 807,536 101,535 -- 909,071 909,071 ----------- --------- -------- ----------- --------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $ 1,715,449 $ 224,399 $ $ 1,939,848 $ 612,500 $ 2,552,348 =========== ========= ======== =========== ========= ===========
The accompanying notes to unaudited pro forma financial statements are an integral part of these statements. 58 64 APACHE CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS BASIS OF PRESENTATION The unaudited pro forma consolidated condensed statements of operations relative to the Merger are based on the audited statements of DEKALB and Apache for the years ended December 31, 1991, 1992 and 1993 and on unaudited information for the nine months ended September 30, 1994. The pro forma information relating to the Merger reflects the combination of Apache's and DEKALB's historical results of operations. The effects of differences in depreciation, depletion and amortization methods and other accounting policies were reviewed and considered to have an immaterial impact on the combined financial results and, consequently, no conforming adjustments are reflected on the accompanying statements. The pro forma data relative to the Texaco acquisition are based on Texaco's Unaudited Statement of Revenues and Direct Operating Expenses for the year ended December 31, 1993 and the nine months ended September 30, 1994 and on the adjustments and assumptions described below. Certain historical DEKALB data have been reclassified to conform to Apache's historical presentations. The pro forma balance sheets are based on Apache's and DEKALB's unaudited balance sheets at September 30, 1994 and upon the adjustments and assumptions described below. The pro forma balance sheet data assume an Exchange Ratio of 0.90 of an Apache share for each DEKALB share outstanding as of September 30, 1994, that all DEKALB Options will remain outstanding and will be assumed by Apache and that a total of 8,447,603 Apache shares would be issued in connection with the Merger. PRO FORMA ADJUSTMENTS THE UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS REFLECT THE FOLLOWING ADJUSTMENTS: (a) Adjust DEKALB's historic weighted average shares outstanding to reflect an assumed Exchange Ratio of 0.90, which would result from an Apache per share market price of $26 or less. (b) Record incremental depreciation, depletion and amortization expense, using the future gross revenue method, resulting from the purchase of properties from Texaco. (c) Record increases in general and administrative expense assumed with acquisition of Texaco properties. (d) Record interest expense and amortization of deferred financing costs associated with debt incurred ($600 million before adjustments) to purchase the Texaco properties, net of capitalized interest, assuming, on a preliminary basis, that $125 million of the purchase price is initially classified as unevaluated property costs. Interest expense was computed assuming a 6 percent rate on $169 million, reflecting the net proceeds received from a recent issue of 6% Convertible Subordinated Debentures due 2002, and using historic average bank debt interest rates of 5.1 percent for the twelve months ended December 31, 1993 and 5.5 percent for the nine months ended September 30, 1994. (e) Record pro forma income tax provision (benefit) relating to the pro forma pre-tax income of the Texaco properties, assuming an effective federal and state tax rate of 37 percent. THE UNAUDITED BALANCE SHEETS REFLECT THE FOLLOWING ADJUSTMENTS: (f) Record debt incurred ($600 million) to purchase Texaco properties and the related estimated bankers' fees and other costs incurred ($8.5 million) to obtain new financing arrangements. (g) Record assumed liabilities and transaction costs incurred in connection with the purchase of the Texaco properties. 59 65 APACHE CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) (h) Adjust historical combined common stock and paid-in capital account balances (i) to reflect the number of shares assumed to be issued and for the differences in par value per common share of Apache and DEKALB common stock, and (ii) to eliminate the historical carrying value of DEKALB Treasury Shares. The impact of these entries does not result in a change to total combined shareholders' equity. INCOME PER SHARE For purposes of computing pro forma income per share, Apache's and DEKALB's combined historic weighted average shares outstanding were adjusted to give effect to an assumed Exchange Ratio of 0.90, the maximum Exchange Ratio provided for by the Merger Agreement. The impact on pro forma income per share calculations of assuming an Exchange Ratio of 0.85, the minimum Exchange Ratio provided for by the Merger Agreement, would be between $.003 and $.006, which may affect rounding of income per share data on the accompanying statements. Apache and DEKALB common stock equivalents were not considered in the calculations of income per share because they were not significant or were antidilutive. INCOME TAXES DEKALB's remaining operations are substantially all in Canada and are held in a wholly-owned Canadian subsidiary. DEKALB's calculation of deferred taxes under SFAS No. 109 includes a valuation allowance of $9.5 million at December 31, 1993 for all U.S. federal tax net operating loss carryforwards and U.S. future deductible amounts since DEKALB expects limited future taxable income in the United States with which to realize these benefits. If Apache and DEKALB had historically filed U.S. tax returns on a consolidated basis, DEKALB's U.S. losses could have been recoverable in Apache's consolidated income tax return. However, a consolidated return may only be filed for periods subsequent to the merger. Because of uncertainties in realizing acquired net operating losses, no adjustment of the DEKALB valuation allowance is deemed appropriate. MERGER EXPENSES The unaudited pro forma consolidated condensed financial statements exclude nonrecurring expenses incurred as a direct result of the Merger transaction. These expenses, which primarily consist of financial advisory, legal, accounting and other professional fees, are expected to total approximately $10 million and will be included in the consolidated statements of operations of Apache and DEKALB, as appropriate. 60 66 APACHE CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURE The following table sets forth certain unaudited pro forma information concerning Apache's proved oil and gas reserves at December 31, 1993, giving effect to the Merger of Apache and DEKALB as if the Merger occurred on January 1, 1993. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact. UNAUDITED PROVED OIL AND NATURAL GAS RESERVES AT DECEMBER 31, 1993
NATURAL GAS ------------------------------------- PRO APACHE DEKALB FORMA -------- ------- -------- (MILLION CUBIC FEET) Beginning of year...................................... 643,299 276,343 919,642 Extension, discoveries and other additions............. 119,210 19,094 138,304 Purchase of minerals in place.......................... 207,458 4,405 211,863 Revisions of previous estimates........................ (6,008) 2,198 (3,810) Production............................................. (110,622) (20,969) (131,591) Sale of properties..................................... (5,118) (3,660) (8,778) -------- ------- -------- End of year............................................ 848,219 277,411 1,125,630 ======== ======= ======== Proved developed reserves Beginning of year.................................... 585,424 263,305 848,729 ======== ======= ======== End of year.......................................... 720,672 263,070 983,742 ======== ======= ========
OIL, CONDENSATE AND NATURAL GAS LIQUIDS ------------------------------------- PRO APACHE DEKALB FORMA -------- ------- -------- (THOUSANDS OF BARRELS) Beginning of year...................................... 80,659 13,984 94,643 Extension, discoveries and other additions............. 10,885 397 11,282 Purchase of minerals in place.......................... 14,966 188 15,154 Revisions of previous estimates........................ (2,090) (300) (2,390) Production............................................. (12,780) (989) (13,769) Sale of properties..................................... (1,917) (46) (1,963) -------- ------- -------- End of year............................................ 89,723 13,234 102,957 ======== ======= ======== Proved developed reserves Beginning of year.................................... 73,060 13,972 87,032 ======== ======= ======== End of year.......................................... 79,401 13,221 92,622 ======== ======= ========
61 67 APACHE CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURE -- (CONTINUED) The following table sets forth unaudited pro forma information concerning the discounted future net cash flows from proved oil and gas reserves of Apache as of December 31, 1993, net of income tax expense, and giving effect to Apache's Merger with DEKALB as if the Merger occurred on January 1, 1993. Income tax expense has been computed using assumptions relating to the future tax rates and the permanent differences and credits under the tax laws relating to oil and gas activities at December 31, 1993, and do not take into account subsequent changes in tax laws. The information should be viewed only as a form of standardized disclosure concerning possible future cash flows that would result under the assumptions used, but should not be viewed as indicative of fair market value. Reference is made to DEKALB's and Apache's financial statements for the fiscal year ended December 31, 1993, which are incorporated herein by reference, for a discussion of the assumptions used in preparing the information presented.
PRO APACHE DEKALB FORMA -------- -------- -------- (IN MILLIONS) Standardized measure of discounted future net cash flows relating to proved reserves, net of income tax expense as of December 31, 1993: Cash inflows................................................. $3,217.0 $ 672.0 $3,889.0 Production and development cost....................................................... (1,142.5) (155.2) (1,297.7) Income tax expense........................................... (387.0) (135.3) (522.3) -------- -------- -------- Net cash flows............................................... 1,687.5 381.5 2,069.0 10% annual discount rate..................................... (572.1) (179.1) (751.2) -------- -------- -------- Discounted future net cash flows............................. $1,115.4 $ 202.4 $1,317.8 ========= ========= =========
PRO APACHE DEKALB FORMA -------- -------- -------- (IN MILLIONS) Change in standardized measure of discounted future net cash flows related to proved oil and gas reserves for the year ended December 31, 1993: Sales, net of production costs............................... $ (309.2) $ (31.8) $ (341.0) Net change in prices and production costs.................... (78.2) 54.1 (24.1) Discoveries and improved recovery, net of related costs...... 205.3 20.3 225.6 Change in future developments costs.......................... .4 -- .4 Revisions in quantities...................................... (29.4) 2.6 (26.8) Purchases.................................................... 347.9 4.8 352.7 Accretion of discount........................................ 106.3 18.3 124.6 Change in income taxes....................................... (47.4) (19.9) (67.3) Sales of properties.......................................... (3.5) (4.2) (7.7) Change in production rates and other......................... 57.0 (7.5) 49.5 -------- -------- -------- $ 249.2 $ 36.7 $ 285.9 ========= ========= =========
62 68 STATEMENT OF COMBINED REVENUES AND DIRECT OPERATING EXPENSES FOR THE OIL AND GAS PROPERTIES OF TEXACO EXPLORATION AND PRODUCTION INC. TO BE SOLD TO APACHE CORPORATION (IN MILLIONS)
FOR FOR THE THE NINE YEAR MONTHS ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1993 1994 ------------ ------------- (UNAUDITED) (UNAUDITED) Revenues........................................................... $212.8 $130.1 Direct Operating Expenses.......................................... 104.1 67.2 ------ ------ Excess of revenues over direct operating expenses.................. $108.7 $ 62.9 ====== ======
The accompanying notes are an integral part of this financial statement 63 69 NOTES TO STATEMENT OF COMBINED REVENUES AND DIRECT OPERATING EXPENSES FOR THE OIL AND GAS PROPERTIES OF TEXACO EXPLORATION AND PRODUCTION INC. TO BE SOLD TO APACHE CORPORATION (1) THE PROPERTIES On November 29, 1994, Texaco Exploration and Production, Inc. (Texaco) agreed to sell to Apache Corporation (Apache) oil and gas properties in 343 fields located in 13 states and offshore Gulf of Mexico for approximately $600 million. The properties are located in the Permian Basin, the Gulf Coast of Texas and Louisiana, Western Oklahoma, East Texas, the Rocky Mountains and certain offshore locations. Closing of the sale to Apache is expected on March 1, 1995. (2) BASIS FOR PRESENTATION During the periods presented, the above properties were not accounted for or operated as a separate division by Texaco. Certain costs, such as depreciation, depletion and amortization; general and administrative expenses; and corporate income taxes were not allocated to the individual properties. Accordingly, full separate financial statements prepared in accordance with generally accepted accounting principles do not exist and are not practicable to obtain in these circumstances. Revenues and direct operating expenses included in the accompanying statement represent Texaco's net working interest in the properties and are presented on the accrual basis of accounting. Direct operating expenses do not include exploration and development expenditures related to the properties. Depreciation, depletion and amortization; allocated general and administrative expenses and corporate income taxes have also been excluded. 64 70 PRINCIPAL STOCKHOLDERS OF APACHE AND DEKALB APACHE The following table sets forth the only persons known to Apache to be the owners of more than five percent of outstanding Apache common stock, according to reports filed with the Commission, as of , 1995:
AMOUNT AND NATURE OF PERCENT OF BENEFICIAL CLASS TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING - --------------- ------------------------------------------- ---------- ----------- Apache Common FMR Corp................................... 7,682,752(1)(2) Stock, par 82 Devonshire Street value $1.25 Boston, MA 02109-3614 The Equitable Companies Incorporated....... 5,488,281(3) 787 Seventh Avenue New York, NY 10019 First Interstate Bancorp................... 3,451,515(4) 633 West 5th Street Los Angeles, CA 90071
- --------------- (1) According to information contained in a Schedule 13G filed with the Commission, dated February 11, 1994. (2) Includes 811,197 shares held by the trustee of Apache's 401(k) Retirement/Savings Plan, as of December 31, 1994. (3) According to information contained in a Schedule 13G filed with the Commission, dated February 9, 1994. (4) According to information contained in a Schedule 13G filed with the Commission, dated February 11, 1994. DEKALB The following table sets forth information with respect to stockholders of DEKALB who were known to DEKALB to own more than five percent of the DEKALB Class A Stock outstanding as of the Record Date. The information set forth below is based solely upon information furnished by such stockholders or contained in filings made by such persons with the Commission.
AMOUNT AND NATURE OF PERCENT OF BENEFICIAL CLASS TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP(1) OUTSTANDING - --------------- ------------------------------------------- ------------ ----------- DEKALB Thomas H. Roberts, Jr.(2)(3)............... 187,311 Class A Stock Box 486, 9 Arrowhead Lane DeKalb, Illinois 60115 Amy I. Domini and William B. Perkins(4).... 273,204 230 Congress Street Boston, Massachusetts 02110 Douglas C. Roberts......................... 277,976 Lynne K. Roberts(2)(5) 1449 Janet Street Sycamore, Illinois 60178
(Table continued on following page) 65 71
AMOUNT AND NATURE OF PERCENT OF BENEFICIAL CLASS TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP(1) OUTSTANDING - --------------- ------------------------------------------- ------------ ----------- DEKALB Virginia Roberts Holt...................... 277,637 Class A Stock Terrance K. Holt(2)(6) 2329 Clover Lane Northfield Illinois 60093 John T. Roberts............................ 274,673 Robin R. Roberts(2)(7) 2090 Mulsanne Drive Zionsville, Indiana 46077 Thomas H. Roberts, III(2).................. 198,390 2621 Club Lake Trail McKinney, Texas 75070
- --------------- (1) The Commission defines "beneficial owner of a security" as including any person who has sole or shared voting or investment power with respect to such security. (2) Thomas H. Roberts, Jr. is the father of Thomas H. Roberts, III and the uncle of Douglas C. Roberts, John T. Roberts and Virginia Roberts Holt. Douglas C. Roberts, Virginia Roberts Holt and John T. Roberts are brothers and sister and are the cousins of Thomas H. Roberts, III. (3) Includes 23,300 shares of DEKALB Class A Stock subject to an option at $8.53 per share. (4) Based on a Schedule 13D filed with the Commission. Such Schedule indicates that Amy L. Domini and William B. Perkins beneficially own such shares as co-trustees of trusts which hold such shares and that the grantors, beneficiaries, and in certain cases, the co-trustees of such trusts include Catherine H. Roberts-Suskin and Susan Shawn Roberts. Such Schedule 13D indicates that Catherine H. Roberts-Suskin also beneficially owns 60,256 of such shares as co-trustee of certain of such trusts and may be deemed to beneficially own an additional 123,500 of such shares solely by virtue of her power to remove and replace the trustees of one of those trusts, but that she disclaims beneficial ownership of such 123,500 shares. (5) Douglas C. Roberts has sole voting and investment power with respect to 179,152 of such shares of DEKALB Class A Stock and Lynne K. Roberts has sole voting and investment power with respect to the remaining 98,824 shares of DEKALB Class A Stock. Douglas C. Roberts and Lynne K. Roberts are husband and wife. (6) Virginia Roberts Holt has sole voting and investment power with respect to 101,053 of such shares of DEKALB Class A Stock and Terrance K. Holt has sole voting and investment power with respect to the remaining 176,584 shares of DEKALB Class A Stock. Virginia Roberts Holt and Terrance K. Holt are husband and wife. (7) John T. Roberts has sole voting and investment power with respect to 131,180 of such shares of DEKALB Class A Stock and Robin R. Roberts has sole voting and investment power with respect to the remaining 143,493 shares of DEKALB Class A Stock. John T. Roberts and Robin R. Roberts are husband and wife. 66 72 DESCRIPTION OF APACHE CAPITAL STOCK At the Record Date, Apache's authorized capital stock consists of 5,000,000 shares of preferred stock, none of which were outstanding, and 215,000,000 shares of Apache Common Stock, of which were outstanding. The descriptions set forth below of the Apache Common Stock, preferred stock and Rights constitute brief summaries of certain provisions of Apache's Charter and Apache's Bylaws and the Rights Agreement between Apache and First Trust Company, Inc., and are qualified in their entirety by reference to the relevant provisions of such documents, all of which are filed as exhibits to the Registration Statement of which this Proxy Statement/Prospectus is a part and are incorporated herein by reference. APACHE COMMON STOCK All outstanding shares of Apache Common Stock are fully paid and nonassessable, and all holders of Apache Common Stock have full voting rights and are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The Board of Directors of Apache is classified into three groups of approximately equal size, one-third elected each year. Stockholders do not have the right to cumulate votes in the election of directors and have no preemptive or subscription rights. Apache Common Stock is neither redeemable nor convertible, and there are no sinking fund provisions relating to such stock. Subject to preferences that may be applicable to any shares of preferred stock outstanding at the time, holders of Apache Common Stock are entitled to dividends when and as declared by the Board of Directors from funds legally available therefor and are entitled, in the event of liquidation, to share ratably in all assets remaining after payment of liabilities. Apache's current policy is to reserve one share of Apache Common Stock for each share issued in order to provide for possible exercises of Rights under Apache's existing Rights Agreement. The currently outstanding Apache Common Stock and the Rights under Apache's existing Rights Agreement are listed on the NYSE and the Chicago Stock Exchange. Norwest Bank Minnesota, National Association, is the transfer agent and registrar for Apache Common Stock. Apache typically mails its annual report to stockholders within 120 days after the end of its fiscal year. Notices of stockholder meetings are mailed to record holders of Apache Common Stock at their addresses shown on the books of the transfer agent and registrar. RIGHTS On January 10, 1986, the Board of Directors declared a dividend of one right to purchase one share of Apache Common Stock at $50 per share (subject to adjustment) on each outstanding share of Apache Common Stock (the "Rights"). The Rights are exercisable only after a person (other than Apache or its employee benefit plans), together with all persons acting in concert with it, has acquired 20 percent or more of the Apache Common Stock, or has commenced a tender offer for 30 percent or more of the Apache Common Stock. If Apache or a 20 percent stockholder of Apache engages in certain transactions, the Rights become exercisable for Apache Common Stock or common stock of a corporation acquiring Apache (as the case may be). See "Comparative Rights of Apache and DEKALB Stockholders -- Certain Anti-takeover Provisions." Apache may redeem the Rights at a specified price at any time until ten business days after public announcement that a person has acquired 20 percent or more of the outstanding shares of Apache Common Stock. The Rights will expire on January 31, 1996, unless earlier redeemed by Apache. Unless the Rights have been previously redeemed, all shares of Apache Common Stock will include Rights, including the Apache Common Stock issuable in connection with the Merger. 67 73 PREFERRED STOCK No preferred stock is outstanding. Shares of preferred stock may be issued by the Board of Directors with such voting powers and in such classes and series, and with such designations, preferences, and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof (including conversion into or exchange for other securities of Apache or its subsidiaries), as may be stated and expressed in the resolution or resolutions providing for the issue on such stock adopted by the Board of Directors. Apache has no current plans to issue any preferred stock. COMPARATIVE RIGHTS OF APACHE AND DEKALB STOCKHOLDERS If the Merger is consummated, the stockholders of DEKALB will become stockholders of Apache. The rights of the stockholders of both Apache and DEKALB are governed by and subject to the provisions of the DGCL. The rights of current DEKALB stockholders following the Merger will be governed by Apache's Charter and Apache's Bylaws rather than the provisions of DEKALB's Charter and DEKALB's Bylaws. The following is a brief summary of certain differences between the rights of Apache stockholders and the rights of DEKALB stockholders, and is qualified in its entirety by reference to the relevant provisions of the DGCL and to Apache's Charter, Apache's Bylaws, DEKALB's Charter and DEKALB's Bylaws, all of which are incorporated herein by reference. NUMBER AND CLASSIFICATION OF BOARD OF DIRECTORS Both Apache and DEKALB have boards of directors divided into three classes, with directors serving staggered three-year terms. Apache's Charter also provides that the number of directors shall be fixed from time to time by the Board of Directors of Apache, but may not consist of less than three persons. Currently, the number of Apache directors is 12, and the number of DEKALB directors is six. POWER TO CALL SPECIAL MEETINGS Apache's Bylaws provide that a special meeting of stockholders may be called by the Chairman of the Board, and shall be called by the Chairman of the Board or the Secretary upon the request of a majority of directors. DEKALB's Bylaws provide that a special meeting of stockholders may be called by the Chairman of the Board, and shall be called by the Secretary at the request of a majority of the Board of Directors. VOTING RIGHTS Under DEKALB's Charter, holders of DEKALB Class B Stock have no voting rights except as otherwise required by applicable law. Holders of Apache Common Stock and DEKALB Class A Stock are entitled to full voting rights, with one vote for each share held of record on all matters submitted to a vote of stockholders. STOCKHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS Apache's Charter contains certain provisions that require that a higher percentage of stockholders approve certain transactions than would otherwise be required under the DGCL, subject to certain exceptions. See below "-- Certain Anti-takeover Provisions." DEKALB's Charter does not contain similar provisions. DISSENTERS' RIGHTS OF APPRAISAL The holders of Apache Common Stock will not, in the event of a merger or consolidation in which Apache is not the survivor, be entitled to dissenters' rights of appraisal under Section 262(b)(1) of the DGCL by virtue of being listed on a national securities exchange. As in the case of the Merger, holders of DEKALB Class A Stock would have dissenters' rights of appraisal under the DGCL as to their shares of DEKALB Class A Stock. Holders of DEKALB Class B Stock, however, do not have such dissenters' rights. 68 74 ACTION BY WRITTEN CONSENT Apache's Bylaws do not permit action to be taken by stockholders without a meeting. DEKALB's Bylaws permit action to be taken without a meeting if a written consent in lieu of a meeting is signed by all stockholders entitled to vote at the meeting. CERTAIN ANTI-TAKEOVER PROVISIONS Rights. If Apache engages in certain business combinations or a 20 percent stockholder engages in certain transactions with Apache, the Rights become exercisable for the Apache Common Stock or common stock of the corporation acquiring Apache (as the case may be) at 50 percent of the then market price. Any Rights that are or were beneficially owned by a person who has acquired 20 percent or more of the Apache Common Stock and who engages in certain transactions or realized the benefits of certain transactions with Apache will become void. See "Description of Apache Capital Stock -- Rights." Provisions of Certain Debt. Upon a change in control of Apache, certain indentures and other agreements obligate Apache to purchase or redeem certain series of the debt securities at their face amount. Those provisions might have the effect of reducing the economic benefit to be derived by a third party from acquiring control of Apache. Apache's Charter. Apache's Charter includes provisions designed to prevent the use of certain tactics in connection with a potential takeover of Apache. Article Twelve of Apache's Charter generally stipulates that the affirmative vote of 80 percent of Apache's voting shares is required to adopt any agreement for the merger or consolidation of Apache with or into any other corporation which is the beneficial owner of five percent or more of Apache's voting shares. Article Twelve further provides that such an 80 percent approval is necessary to authorize any sale or lease of assets between Apache and any beneficial holder of five percent or more of Apache's voting shares. Article Fourteen of Apache's Charter contains a "fair price" provision which requires that any tender offer made by a beneficial owner of more than five percent of the outstanding voting stock of Apache in connection with any plan of merger, consolidation or reorganization, any sale or lease of substantially all of Apache's assets, or any issuance of equity securities of Apache to the five percent stockholder must provide at least as favorable terms to each holder of Apache Common Stock other than the stockholder making the tender offer. Article Fifteen of Apache's Charter contains an "anti-greenmail" mechanism which prohibits Apache from acquiring any voting stock from the beneficial owner of more than five percent of the outstanding voting stock of Apache, except for acquisitions pursuant to a tender offer to all holders of voting stock on the same price, terms, and conditions, acquisitions in compliance with Rule 10b-18 of the Exchange Act, and acquisitions at a price not exceeding the market value per share. Article Sixteen of Apache's Charter prohibits the stockholders of Apache from acting by written consent in lieu of a meeting. DEKALB's Charter. DEKALB's Charter includes a provision which permits directors, when considering a third party proposal to acquire DEKALB to consider the effect thereof on DEKALB's employees, the communities in which it operates, its customers and other non-economic factors in determining whether to accept any such proposal. Apache's Charter does not contain any such provision. INDEPENDENT PUBLIC ACCOUNTANTS It is expected that representatives of Coopers & Lybrand, DEKALB's independent public accountants, will be present at the Special Meeting to respond to appropriate questions of DEKALB stockholders and to make a statement if they so desire. 69 75 LEGAL MATTERS The validity of the issuance of the Apache Common Stock offered hereby has been passed upon for Apache by Mayor, Day, Caldwell & Keeton, L.L.P., Houston, Texas. Certain United States tax consequences of the Merger have been passed upon for Apache by Mayor, Day, Caldwell & Keeton, L.L.P., Houston, Texas, and for DEKALB by Sidley & Austin, Chicago, Illinois. Certain Canadian tax consequences of the Merger have been passed upon for Apache by Bennett Jones Verchere, Calgary, Alberta, and for DEKALB by Howard, Mackie, Calgary, Alberta. EXPERTS The audited consolidated financial statements and schedules of Apache incorporated by reference in this registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are incorporated herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. The audited consolidated financial statements and schedules of DEKALB incorporated by reference in this registration statement have been audited by Coopers & Lybrand, chartered accountants, as indicated in their report with respect thereto, and are incorporated herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. The information incorporated by reference herein regarding the proved reserves of Apache has been prepared by Apache and reviewed by Ryder Scott as stated in their letter report dated , 199 . The information incorporated by reference herein regarding the proved reserves of DEKALB has been prepared by DEKALB and reviewed by Ryder Scott as stated in their letter report dated , 199 . STOCKHOLDERS' PROPOSALS If the Merger is not consummated, any proposals of stockholders of DEKALB intended to be presented at the Annual Meeting of Stockholders of DEKALB to be held in 1995 must have been received by DEKALB, addressed to the Secretary, John H. Witmer, Jr., no later than November 25, 1994, to be considered for inclusion in the proxy statement and form of proxy relating to that meeting. 70 76 APPENDIX I AGREEMENT AND PLAN OF MERGER AMONG APACHE CORPORATION XPX ACQUISITIONS, INC. AND DEKALB ENERGY COMPANY 77 TABLE OF CONTENTS
PAGE ----- ARTICLE I -- THE MERGER............................................................... AI-2 Section 1.1 The Merger............................................................ AI-2 Section 1.2 Effective Time........................................................ AI-2 Section 1.3 Effects of the Merger................................................. AI-2 Section 1.4 Certificate of Incorporation and By-laws; Directors and Officers of Surviving Corporation............................................... AI-2 Section 1.5 Conversion of Securities.............................................. AI-2 Section 1.6 Parent to Make Certificates Available................................. AI-3 Section 1.7 Dividends; Taxes...................................................... AI-3 Section 1.8 No Fractional Securities.............................................. AI-4 Section 1.9 Return of Exchange Fund and Fractional Cash Fund or Fractional Securities Fund..................................................... AI-5 Section 1.10 Adjustment of Exchange Ratio.......................................... AI-5 Section 1.11 Dissenting Shares..................................................... AI-5 Section 1.12 No Further Ownership Rights in Company Stock.......................... AI-5 Section 1.13 Closing of Company Transfer Books..................................... AI-5 Section 1.14 Closing............................................................... AI-5 ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF PARENT................................ AI-6 Section 2.1 Organization, Standing and Power...................................... AI-6 Section 2.2 Capital Structure..................................................... AI-6 Section 2.3 Authority; Non-Contravention.......................................... AI-6 Section 2.4 SEC Documents......................................................... AI-7 Section 2.5 Absence of Material Adverse Change.................................... AI-8 Section 2.6 Litigation............................................................ AI-8 Section 2.7 Brokers............................................................... AI-8 Section 2.8 Benefit Plans; ERISA Compliance....................................... AI-8 Section 2.9 Director, Officer and Employee Agreements............................. AI-10 Section 2.10 Certain Business Practices............................................ AI-10 Section 2.11 Insider Interests..................................................... AI-10 Section 2.12 Compliance with Laws.................................................. AI-10 Section 2.13 Intellectual Property................................................. AI-10 Section 2.14 Labor Matters......................................................... AI-11 Section 2.15 Insurance............................................................. AI-11 Section 2.16 Condition of Assets................................................... AI-11 Section 2.17 Environmental Matters................................................. AI-11 Section 2.18 Tax Matters........................................................... AI-11 Section 2.19 Tax-Free Reorganization............................................... AI-12 Section 2.20 Internal Financial Report............................................. AI-13 Section 2.21 Undisclosed Liabilities............................................... AI-13 Section 2.22 No Stock Ownership in Company......................................... AI-13 Section 2.23 No Misrepresentation.................................................. AI-13 ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................... AI-13 Section 3.1 Organization, Standing and Power...................................... AI-13 Section 3.2 Capital Structure..................................................... AI-14 Section 3.3 Authority; Non-Contravention.......................................... AI-14 Section 3.4 SEC Documents......................................................... AI-15 Section 3.5 Absence of Certain Changes or Events.................................. AI-15 Section 3.6 Litigation............................................................ AI-16 Section 3.7 Brokers............................................................... AI-16 Section 3.8 Benefit Plans; ERISA Compliance....................................... AI-16 Section 3.9 Director, Officer and Employee Agreements............................. AI-18 Section 3.10 Certain Business Practices............................................ AI-19 Section 3.11 No Excess Parachute Payments or Compensation.......................... AI-19
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PAGE ----- Section 3.12 Insider Interests..................................................... AI-19 Section 3.13 Compliance with Laws.................................................. AI-19 Section 3.14 Intellectual Property................................................. AI-19 Section 3.15 Labor Matters......................................................... AI-20 Section 3.16 Insurance............................................................. AI-20 Section 3.17 Property Records and Title............................................ AI-20 Section 3.18 Contracts............................................................. AI-22 Section 3.19 Condition of Assets................................................... AI-23 Section 3.20 Environmental Matters................................................. AI-23 Section 3.21 Tax Matters........................................................... AI-23 Section 3.22 Tax-Free Reorganization............................................... AI-24 Section 3.23 Hedging............................................................... AI-25 Section 3.24 Accounts Receivable................................................... AI-25 Section 3.25 Internal Financial Report............................................. AI-25 Section 3.26 Undisclosed Liabilities............................................... AI-25 Section 3.27 Takeover Defense Mechanisms........................................... AI-25 Section 3.28 Fairness Opinion...................................................... AI-25 Section 3.29 No Misrepresentation.................................................. AI-25 ARTICLE IV -- REPRESENTATIONS AND WARRANTIES REGARDING SUB............................ AI-26 Section 4.1 Organization and Standing............................................. AI-26 Section 4.2 Capital Structure..................................................... AI-26 Section 4.3 Authority............................................................. AI-26 ARTICLE V -- COVENANTS RELATING TO CONDUCT OF BUSINESS................................ AI-26 Section 5.1 Conduct of Business by the Company and Parent Pending the Merger...... AI-26 Section 5.2 No Solicitation....................................................... AI-28 Section 5.3 Pooling of Interests; Reorganization.................................. AI-28 Section 5.4 Conduct of Business of Sub Pending the Merger......................... AI-29 Section 5.5 Notices of Certain Events............................................. AI-29 ARTICLE VI -- ADDITIONAL AGREEMENTS................................................... AI-29 Section 6.1 Company Stockholder Approval.......................................... AI-29 Section 6.2 Registration Statement; Proxy Statement............................... AI-29 Section 6.3 Access to Information; Confidentiality; Standstill.................... AI-30 Section 6.4 Compliance with the Securities Act; Pooling........................... AI-32 Section 6.5 Stock Exchange Listing................................................ AI-32 Section 6.6 Fees and Expenses..................................................... AI-32 Section 6.7 Company Stock Options................................................. AI-32 Section 6.8 Reasonable Efforts.................................................... AI-33 Section 6.9 Public Announcements.................................................. AI-33 Section 6.10 State Takeover Laws................................................... AI-33 Section 6.11 Directors and Officers Insurance; Indemnification..................... AI-33 Section 6.12 Employee Benefits..................................................... AI-34 Section 6.13 Retention Bonuses; Severance Policy................................... AI-34 Section 6.14 Signatory Stockholder Notice.......................................... AI-34 Section 6.15 Reserve Reports....................................................... AI-34 Section 6.16 Accrual of Expenses................................................... AI-35 Section 6.17 Publication of Financials............................................. AI-35 Section 6.18 Capital Budget........................................................ AI-35 ARTICLE VII -- CONDITIONS PRECEDENT TO THE MERGER..................................... AI-35 Section 7.1 Conditions to Each Party's Obligation to Effect the Merger............ AI-35 Section 7.2 Conditions to Obligation of the Company to Effect the Merger.......... AI-35 Section 7.3 Conditions to Obligations of Parent and Sub to Effect the Merger...... AI-38
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PAGE ----- ARTICLE VIII -- TERMINATION, AMENDMENT AND WAIVER..................................... AI-41 Section 8.1 Termination........................................................... AI-41 Section 8.2 Effect of Termination................................................. AI-42 Section 8.3 Amendment............................................................. AI-42 Section 8.4 Waiver................................................................ AI-42 ARTICLE IX -- GENERAL PROVISIONS...................................................... AI-42 Section 9.1 Non-Survival of Representations and Warranties........................ AI-42 Section 9.2 Written Notices....................................................... AI-42 Section 9.3 Interpretation........................................................ AI-43 Section 9.4 Counterparts.......................................................... AI-43 Section 9.5 Entire Agreement; No Third-Party Beneficiaries........................ AI-43 Section 9.6 Governing Law and Jurisdiction........................................ AI-43 Section 9.7 Assignment............................................................ AI-44 Section 9.8 Severability.......................................................... AI-44 Section 9.9 Enforcement of this Agreement......................................... AI-44 Section 9.10 Further Assurances.................................................... AI-44
EXHIBITS AND SCHEDULES EXHIBIT A -- AFFILIATE AGREEMENT AI-iii 80 DEFINITIONS
DEFINED TERM SECTION - ------------ ------------ "Affiliate Agreements"........................................................... 6.4 "Agreement"...................................................................... Recitals "Aries Database"................................................................. 3.17 "Assumed Option"................................................................. 6.7 "Benefit Plans".................................................................. 2.8 and 3.8 "Certificate of Merger".......................................................... 1.2 "Certificates"................................................................... 1.6 "Closing"........................................................................ 1.14 "Code"........................................................................... Recitals "Commonly Controlled Entity"..................................................... 2.8 "Company"........................................................................ Recitals "Company Class A Stock".......................................................... Recitals "Company Class B Stock".......................................................... Recitals "Company Disclosure Schedule".................................................... 3.1 "Company Group".................................................................. 3.21 "Company Land Records"........................................................... 3.17 "Company Permits"................................................................ 3.13 "Company Preferred Stock"........................................................ 3.2 "Company Representatives"........................................................ 5.2 "Company SEC Documents".......................................................... 3.4 "Company Stock".................................................................. Recitals "Company Stock Option"........................................................... 6.7 "Competition Act"................................................................ 2.3 "Confidential Information"....................................................... 6.3 "Constituent Corporations"....................................................... Recitals "D&O Insurance".................................................................. 6.11 "DGCL"........................................................................... 1.1 "Disclosing Party"............................................................... 6.3 "Dissenting Shares".............................................................. 1.11 "Effective Date"................................................................. 1.2 "Effective Time"................................................................. 1.2 "Environmental Laws"............................................................. 2.17 "Environmental Liabilities"...................................................... 3.20 "ERISA".......................................................................... 2.8 "Excess Shares".................................................................. 1.8 "Exchange Act"................................................................... 2.3 "Exchange Agent"................................................................. 1.6 "Exchange Fund".................................................................. 1.6 "Exchange Ratio"................................................................. 1.5 "Fractional Cash Fund"........................................................... 1.8 "Fractional Securities Fund"..................................................... 1.8 "GAAP"........................................................................... 6.16 "Good and Defensible Title"...................................................... 3.17 "Governmental Entity"............................................................ 2.3 "HSR Act"........................................................................ 2.3 "Hydrocarbons"................................................................... 3.17 "Intellectual Property".......................................................... 2.13 "Investment Canada Act".......................................................... 2.3 "IRS"............................................................................ 2.8 "Lands".......................................................................... 3.17
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DEFINED TERM SECTION - ------------ ------------ "Leases"......................................................................... 3.17 "Market Price"................................................................... 1.5 "Material Adverse Change"........................................................ 2.1 "Material Adverse Effect"........................................................ 2.1 "Merger"......................................................................... Recitals "1994 Capital Budget"............................................................ 3.5 "NYSE"........................................................................... 1.5 "Parent"......................................................................... Recitals "Parent Common Stock"............................................................ Recitals "Parent Derivative Securities"................................................... 2.2 "Parent Disclosure Schedule"..................................................... 2.1 "Parent Group"................................................................... 2.18 "Parent Permits"................................................................. 2.12 "Parent Preferred Stock"......................................................... 2.2 "Parent SEC Documents"........................................................... 2.4 "Parent Subsidiaries"............................................................ 2.18 "PBGC"........................................................................... 2.8 "Pension Plans".................................................................. 2.8 and 3.8 "Permitted Encumbrances"......................................................... 3.17 "Pollutants"..................................................................... 2.17 "Properties"..................................................................... 3.17 "Proprietary Information"........................................................ 6.3 "Proxy Statement"................................................................ 6.2 "Proxy Statement/Prospectus"..................................................... 6.2 "Receiving Party"................................................................ 6.3 "Registration Statement"......................................................... 2.3 "Relevant Categories"............................................................ 3.17 "Representatives"................................................................ 6.3 "Ryder Scott".................................................................... 6.15 "SEC"............................................................................ 2.3 "Securities Act"................................................................. 2.2 "Signatory Stockholders"......................................................... Recitals "Stockholder Meeting"............................................................ 6.1 "Stockholder Agreements"......................................................... Recitals "Sub"............................................................................ Recitals "Subsidiary"..................................................................... 2.1 "Surviving Corporation".......................................................... 1.1 "Takeover Proposal".............................................................. 5.2 "Tax," "Taxes" and "Taxable"..................................................... 2.18 "Tax Return"..................................................................... 2.18 "Units".......................................................................... 3.17 "Welfare Plans".................................................................. 3.8 "Wells".......................................................................... 3.17 "WI"............................................................................. 3.17
AI-v 82 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of December 21, 1994 (this "Agreement"), among Apache Corporation, a Delaware corporation ("Parent"), XPX Acquisitions, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), and DEKALB Energy Company, a Delaware corporation (the "Company") (Sub and the Company being hereinafter collectively referred to as the "Constituent Corporations"). W I T N E S S E T H: WHEREAS, the respective Boards of Directors of Parent, Sub and the Company have approved and adopted this Agreement providing for the merger of Sub and the Company (the "Merger"), upon the terms and subject to the conditions set forth herein, whereby each issued and outstanding share of voting Class A Stock, no par value, of the Company (the "Company Class A Stock") and each issued and outstanding share of Class B (nonvoting) Stock, no par value, of the Company (the "Company Class B Stock" and, together with the Company Class A Stock, the "Company Stock") not owned directly or indirectly by Parent or the Company, will be converted into shares of Common Stock, par value $1.25 per share, of Parent ("Parent Common Stock"); WHEREAS, the Board of Directors of the Company has determined that the Merger is consistent with, in furtherance of and otherwise in the best interests of the Company and its holders of Company Class A Stock and Company Class B Stock and has approved and adopted this Agreement and the Merger and other transactions contemplated hereby, and recommended approval and adoption of this Agreement by the holders of the Company Class A Stock; WHEREAS, the Board of Directors of the Parent has determined that the Merger is consistent with and in furtherance of the long-term business strategy of and is fair to, and in the best interests of, the Parent and its stockholders and has approved and adopted this Agreement and the transactions contemplated hereby; WHEREAS, as a condition to the willingness of Parent and Sub to enter into this Agreement, (i) Parent has required that certain stockholders holding a majority of the Company Class A Stock (the "Signatory Stockholders") agree, and in order to induce Parent and Sub to enter into this Agreement the Signatory Stockholders have agreed, to vote in favor of the Merger and to take and refrain from taking certain actions pursuant to those certain Stockholders Agreements of even date herewith (the "Stockholder Agreements") and (ii) Parent has required that certain persons who may be deemed to be "affiliates" of the Company enter into certain Affiliate Agreements (as defined below) and Parent has received or will receive such Affiliate Agreements; WHEREAS, the Board of Directors of Sub, the Board of Directors of Parent and Parent, as the sole stockholder of Sub, have approved and adopted this Agreement; WHEREAS, for United States income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code") and shall not give rise to any liability of the Company under the Income Tax Act (Canada); WHEREAS, it is intended that the Merger shall be recorded for accounting purposes as a pooling of interests; and WHEREAS, Parent, Sub and the Company desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe various conditions to the Merger; NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties agree as follows: 83 ARTICLE I THE MERGER SECTION 1.1 The Merger. Upon the terms and subject to the conditions hereof, and in accordance with the General Corporation Law of the State of Delaware (the "DGCL"), Sub shall be merged with and into the Company at the Effective Time (as defined below). Following the Merger, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation") and shall succeed to and assume all the rights and obligations of Sub in accordance with the DGCL. SECTION 1.2 Effective Time. The Merger shall become effective when the Certificate of Merger (the "Certificate of Merger"), executed in accordance with the relevant provisions of the DGCL, is filed with the Secretary of State of the State of Delaware; provided, however, that, upon mutual consent of the Constituent Corporations the Certificate of Merger may provide for a later date of effectiveness of the Merger not more than 30 days after the date the Certificate of Merger is filed. When used in this Agreement, the term "Effective Time" shall mean the later of the date and time and "Effective Date" shall mean the later of the date at which the Certificate of Merger is accepted for record or such later time so established by the Certificate of Merger. The filing of the Certificate of Merger shall be made as soon as practicable after the satisfaction or waiver of the conditions to the Merger set forth herein. SECTION 1.3 Effects of the Merger. The Merger shall have the effects set forth in Section 251 of the DGCL. SECTION 1.4 Certificate of Incorporation and By-laws; Directors and Officers of Surviving Corporation. (a) The Certificate of Incorporation and By-laws of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation and By-laws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. (b) The directors of Sub at the Effective Time shall be the directors of the Surviving Corporation and will hold office from the Effective Time until their respective successors are duly elected or appointed and qualified. The officers of Sub at the Effective Time shall be the initial officers of the Surviving Corporation. SECTION 1.5 Conversion of Securities. As of the Effective Time, by virtue of the Merger and without any action on the part of any stockholder of the Company: (a) All shares of Company Stock that are held in the treasury of the Company or by any wholly-owned Subsidiary (as defined below) of the Company and any shares of Company Stock owned by Parent, Sub or any other wholly-owned Subsidiary of Parent shall be canceled and no capital stock of Parent or other consideration shall be delivered in exchange therefor; provided, however, that the 220,000 shares of Company Class B Stock held by DEKALB Energy Canada Ltd. shall remain outstanding and not be converted into shares of Parent Common Stock pursuant to Section 1.5(c) below. (b) Each issued and outstanding share of capital stock of Sub shall be converted into and become one fully paid and nonassessable share of Class A Stock, no par value, of the Surviving Corporation. (c) Subject to the provisions of Sections 1.8 and 1.10 hereof, each share of Company Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled or to remain outstanding as provided by and in accordance with Section 1.5(a)) shall be converted into 0.85 shares of validly issued, fully paid and nonassessable shares of Parent Common Stock; provided, however, that if the "Market Price" (as defined below) of Parent Common Stock is less than $30.00, such 0.85 exchange ratio shall be automatically increased by an amount (computed to the nearest ten-thousandth) equal to (i) 0.0125 multiplied by (ii) the difference between $30.00 and the Market Price; and provided further, that the resulting number shall in no event be greater than 0.90 (in any case, the "Exchange Ratio"). All such shares of Company Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and each holder of a Certificate (as defined below) representing any such shares shall cease to have any rights with respect thereto, except the right to receive certain dividends and other distributions as contemplated by Section 1.7 and shares of Parent Common Stock and any cash, without AI-2 84 interest, in lieu of fractional shares to be issued or paid in consideration therefor upon the surrender of such Certificate in accordance with Section 1.6. (d) "Market Price" shall mean the average of the per share closing prices of Parent Common Stock as reported on The New York Stock Exchange, Inc. ("NYSE") Composite Transactions Reporting System during the 10 consecutive trading days ending on (and including) the third trading day prior to the Effective Time. SECTION 1.6 Parent to Make Certificates Available. (a) Exchange of Certificates. Parent shall authorize a commercial bank (or such other person or persons as shall be acceptable to Parent and the Company) to act as Exchange Agent hereunder (the "Exchange Agent"). As soon as practicable after the Effective Time, Parent shall deposit with the Exchange Agent in trust for the holders of certificates which immediately prior to the Effective Time represented shares of Company Stock (the "Certificates") certificates representing the shares of Parent Common Stock (such shares of Parent Common Stock, together with any dividends or distributions with respect thereto, being hereinafter referred to as the "Exchange Fund") issuable pursuant to Section 1.5(c) in exchange for outstanding shares of Company Stock. (b) Exchange Procedures. As soon as practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of a Certificate whose shares were converted pursuant to Section 1.5 into shares of Parent Common Stock a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon actual delivery of the Certificates to the Exchange Agent and shall contain instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock). Upon surrender of a Certificate for cancellation to the Exchange Agent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Parent Common Stock which such holder has the right to receive pursuant to this Article I, and the Certificate so surrendered shall forthwith be canceled. Until surrendered as contemplated by this Section 1.6, each Certificate shall, at and after the Effective Time, be deemed to represent only the right to receive, upon surrender of such Certificate, the certificate representing the appropriate number of shares of Parent Common Stock, cash in lieu of fractional shares as contemplated by Section 1.8 and certain dividends and other distributions as contemplated by Section 1.7. Notwithstanding the foregoing, no party hereto (or the Exchange Agent) shall be liable to any former holder of Company Stock for any cash, Parent Common Stock or dividends or distributions thereon delivered to a public official pursuant to requirements of applicable abandoned property, escheat or similar laws. Parent (or the Exchange Agent) shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any former holder of Company Stock such amounts as Parent (or any affiliate thereof or the Exchange Agent) is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local, Canadian, territorial, provincial or other foreign tax law. To the extent that amounts are so withheld or deducted by Parent (or the Exchange Agent), such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of the Company Stock in respect of which such deduction and withholding was made. SECTION 1.7 Dividends; Taxes. No dividends or other distributions that are declared on or after the Effective Time on Parent Common Stock or are payable to the holders of record thereof on or after the Effective Time will be paid to persons entitled by reason of the Merger to receive certificates representing Parent Common Stock until such persons surrender their Certificates, as provided in Section 1.6, and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 1.8 until such holder of such Certificate shall so surrender such Certificates. Subject to the effect of applicable law, there shall be paid to the record holder of the certificates representing such Parent Common Stock (i) at the time of such surrender or as promptly as practicable thereafter, the amount of any dividends or other distributions theretofore paid with respect to whole shares of such Parent Common Stock and having a record date on or after the Effective Time and a payment date prior to such surrender and (ii) at the appropriate payment date or as promptly as practicable thereafter, the amount of dividends or other distributions payable with respect to AI-3 85 whole shares of Parent Common Stock and having a record date on or after the Effective Time but prior to surrender and a payment date subsequent to surrender. In no event shall the person entitled to receive such dividends or other distributions be entitled to receive interest on such dividends or other distributions. If any cash or certificate representing shares of Parent Common Stock is to be paid to or issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of such exchange that the Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange shall pay to the Exchange Agent any transfer or other taxes required by reason of the issuance of certificates for such shares of Parent Common Stock in a name other than that of the registered holder of the Certificate surrendered, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. Parent (or the Exchange Agent) shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any former stockholder of the Company such amount as Parent (or any affiliate thereof or the Exchange Agent) is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local, Canadian, territorial, provincial or other foreign tax law. To the extent that amounts are so withheld or deducted by Parent (or the Exchange Agent), such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former stockholder of the Company in respect of which such deduction and withholding was made. SECTION 1.8 No Fractional Securities. No certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of Certificates pursuant to this Article I, and no Parent dividend or other distribution or stock split shall relate to any fractional security, and such fractional interests shall not entitle the owner thereof to vote or to any rights of a security holder of Parent. In lieu of any such fractional securities, each holder of Company Stock who would otherwise have been entitled to a fraction of a share of Parent Common Stock upon surrender of Certificates for exchange pursuant to this Article I will at the option of Parent either: (i) be paid an amount in cash determined by multiplying (a) the Market Price by (b) the fraction of a share of Parent Common Stock to which such holder would otherwise be entitled, in which case Parent shall make available to the Exchange Agent, without regard to any other cash being provided to the Exchange Agent, the amount of cash, if any, necessary to make such payments (the "Fractional Cash Fund"); or (ii) be paid an amount in cash in accordance with the provisions of this Section 1.8 representing such holder's proportionate interest in the net proceeds from the sale by the Exchange Agent in one or more transactions (which sale transactions shall be made at such times, in such manner and on such terms as the Exchange Agent shall determine in its reasonable discretion) on behalf of all such holders of the aggregate of the fractional shares of Parent Common Stock which would otherwise have been issued (the "Excess Shares"). The sale of the Excess Shares by the Exchange Agent shall be executed as soon as practicable (but in all events in time to permit the proceeds to be delivered together with the certificates representing Parent Common Stock issued in the Merger) on the NYSE through one or more member firms of the NYSE 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 Company Stock, the Exchange Agent will hold such proceeds in trust (the "Fractional Securities Fund") for the holders of Company Stock entitled thereto. Parent shall pay all commissions, transfer taxes and other out-of-pocket transaction costs, including the expenses and compensation of the Exchange Agent, incurred in connection with this sale of the Excess Shares. The Exchange Agent shall determine the portion, if any, of the Fractional Securities Fund to which each holder of Company Stock shall be entitled by multiplying the amount of the aggregate net proceeds comprising the Fractional Securities Fund by a fraction, the numerator of which is the amount of the fractional Parent Common Stock to which such holder of Company Stock is entitled and the denominator of which is the aggregate amount of fractional share interests to which all holders of Company Stock are entitled. As soon as practicable after the determination of the amount of cash, if any, to be paid to holders of Company Stock in lieu of any fractional shares of Parent Common Stock, the Exchange Agent shall make available such AI-4 86 amounts to such holders of Company Stock without interest. All payments pursuant to this Section 1.8 and any other provisions of this Agreement shall be made in U.S. dollars. SECTION 1.9 Return of Exchange Fund and Fractional Cash Fund or Fractional Securities Fund. Any portion of the Exchange Fund and, if applicable, the Fractional Cash Fund or Fractional Securities Fund, as appropriate, which remains undistributed to the former stockholders of the Company for one year after the Effective Time shall be delivered to Parent, upon demand of Parent, and any former stockholders of the Company who have not theretofore complied with this Article I shall thereafter look only to Parent for payment of their claim for Parent Common Stock, any cash in lieu of fractional shares of Parent Common Stock and any dividends or distributions with respect to Parent Common Stock. Notwithstanding the foregoing, Parent shall not be liable to any former stockholders of the Company for any amount paid to a public official pursuant to requirements of applicable abandoned property, escheat or similar laws. SECTION 1.10 Adjustment of Exchange Ratio. In the event of any reclassification, stock split or stock dividend with respect to Parent Common Stock (or if a record date with respect to any of the foregoing should occur) during the period prior to the Effective Time, appropriate and proportionate adjustments, if any, shall be made to the Exchange Ratio, and all references to the Exchange Ratio in this Agreement shall be deemed to be to the Exchange Ratio as so adjusted. SECTION 1.11 Dissenting Shares. Notwithstanding any other provisions of this Agreement to the contrary, shares of Company Class A Stock that are outstanding immediately prior to the Effective Time and which are held by stockholders who shall have not voted in favor of the Merger or consented thereto in writing and who shall have demanded properly in writing appraisal for such shares in accordance with Section 262 of the DGCL (collectively, the "Dissenting Shares") shall not be converted into or represent the right to receive the consideration provided in Section 1.5(c). Such stockholders shall be entitled to receive payment of the appraised value of such shares of Company Class A Stock held by them in accordance with the provisions of such Section 262, except that all Dissenting Shares held by stockholders who shall have failed to perfect or who effectively shall have withdrawn or lost their rights to appraisal of such shares of Company Class A Stock under such Section 262 shall thereupon be deemed to have been converted into and to have become exchangeable for, as of the Effective Time, the right to receive the consideration, without any interest thereon, upon surrender of the certificate or certificates that formerly evidenced such shares of Company Class A Stock in the manner provided in Section 1.5(c). SECTION 1.12 No Further Ownership Rights in Company Stock. All shares of Parent Common Stock issued upon the surrender for exchange of Certificates in accordance with the terms hereof (including any cash paid pursuant to Sections 1.7 or 1.8) shall be deemed to have been issued in full satisfaction of all rights pertaining to the shares of Company Stock. SECTION 1.13 Closing of Company Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of shares of Company Stock shall thereafter be made. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they shall be canceled and exchanged as provided in this Article I. SECTION 1.14 Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Sidley & Austin, One First National Plaza, Chicago, Illinois at 10:00 A.M., local time, on the second business day after the day on which the last of the conditions set forth in Article VII hereof shall have been fulfilled or waived or at such other time and place as Parent and the Company shall agree. AI-5 87 ARTICLE II REPRESENTATIONS AND WARRANTIES OF PARENT Except as set forth on the Parent Disclosure Schedule (as defined below), Parent represents and warrants to the Company as follows: SECTION 2.1 Organization, Standing and Power. Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. Parent and each of its Subsidiaries (as defined below) is duly qualified to do business, and is in good standing, in each jurisdiction where the character of its properties owner or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on Parent. For purposes of this Agreement (a) "Material Adverse Change" or "Material Adverse Effect" means, when used with respect to Parent or the Company, as the case may be, any change or effect that is or, so far as can reasonably be determined, may be materially adverse to the assets, liabilities, business, condition (financial or otherwise) or cash flows from operating activities of Parent and its Subsidiaries taken as a whole or the Company and its Subsidiaries taken as a whole, as the case may be, (b) "Subsidiary" means any corporation, partnership, joint venture (exclusive of any joint operating agreement) or other legal entity of which Parent or the Company, as the case may be (either alone or through or together with any other Subsidiary), (i) owns, directly or indirectly, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity or (ii) is a general partner, and (c) "Parent Disclosure Schedule" means the schedule of disclosures made by Parent to the Company that has been delivered simultaneously with the execution of this Agreement. SECTION 2.2 Capital Structure. The authorized capital stock of Parent consists of 215,000,000 shares of Parent Common Stock and 5,000,000 shares of Preferred Stock, no par value ("Parent Preferred Stock"). At the close of business on December 15, 1994 (i) 61,437,046 shares of Parent Common Stock were validly issued and outstanding, fully paid and nonassessable and free of preemptive rights, (ii) 70,918,290 shares of Parent Common Stock were reserved for issuance upon the exercise of outstanding stock options, conversion of 3.93% Convertible Notes of Parent, in respect of Parent's dividend reinvestment plan, and (as to 66,177,668 shares) upon the exercise of certain rights to acquire Parent Common Stock that currently trade with Parent Common Stock (collectively, the "Parent Derivative Securities"), (iii) 1,118,975 shares of Parent Common Stock were held by Parent in its treasury and (iv) no shares of Parent Preferred Stock were issued and outstanding. The shares of Parent Common Stock issuable in exchange for Company Stock at the Effective Time in accordance with this Agreement will be, when so issued, duly authorized, validly issued, fully paid and nonassessable and free of preemptive right, and the issuance of the shares will be registered under the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder (the "Securities Act"). SECTION 2.3 Authority; Non-Contravention. Parent has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Parent and the consummation by Parent of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent. Without limiting the foregoing, no vote or approval by the stockholders of Parent of this Agreement, of the issuance of stock in the transactions contemplated hereby or of such transactions is required pursuant to statute, Certificate of Incorporation, stock exchange rules, contract or otherwise. This Agreement has been duly executed and delivered by Parent and (assuming the valid authorization, execution and delivery of this Agreement by the Company) constitutes a valid and binding obligation of Parent enforceable against it in accordance with its terms. The issuance of shares of Parent Common Stock pursuant to this Agreement, the filing of a registration statement with the Securities and Exchange Commission ("SEC") by Parent on Form S-4 under the Securities Act for the purpose of registering the shares of Parent Common Stock to be issued in the Merger (together with any amendments or supplements thereto, the "Registration Statement") and the reservation of shares of Parent Common Stock in respect of the Parent Derivative Securities have been duly authorized by Parent's Board of AI-6 88 Directors. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of a material benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Parent or any of its Subsidiaries under, any provision of (i) the Restated Certificate of Incorporation or By-laws of Parent or Sub (true and complete copies of which as of the date hereof have been delivered to the Company) or any provision of the comparable charter or organization documents of any of its Subsidiaries, (ii) any contract, agreement, loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to Parent or any of its Subsidiaries or (iii) any judgment, injunction, order, decree, statute, law, ordinance, rule or regulation applicable to Parent or any of its Subsidiaries or any of their respective properties or assets, other than, in the case of clauses (ii) or (iii), any such conflicts, violations, defaults, rights, liens, security interests, charges or encumbrances that, individually or in the aggregate, would not have a Material Adverse Effect on Parent, materially impair the ability of Parent to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. No filing or registration with, or authorization, consent or approval of, any U.S. federal, state, foreign or supranational court, commission, governmental body, regulatory agency, authority or tribunal or, in the case of Canada (or any territorial, provincial or local government thereof) any of the same and any security commission or stock exchange having jurisdiction over the Company or any of its Subsidiaries (a "Governmental Entity") is required by or with respect to Parent or any of its Subsidiaries in connection with the execution and delivery of this Agreement by Parent or is necessary for the consummation of the Merger and the other transactions contemplated by this Agreement, except for (i) in connection, or in compliance, with the provisions of the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Investment Canada Act, as amended (the "Investment Canada Act"), and the Competition Act of Canada (the "Competition Act"), the Securities Act and the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the "Exchange Act"), (ii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, (iii) such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval triggered by the Merger or the transactions contemplated by this Agreement, (iv) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under (a) the laws of Canada (or any territory or province thereof) or any other foreign country in which the Company or any of its Subsidiaries conducts any business or owns any property or assets or (b) the corporation, takeover, "Blue Sky" or securities laws of various states of the United States and territories or provinces of Canada and (v) such other consents, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate have a Material Adverse Effect on Parent, materially impair the ability of Parent to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. SECTION 2.4 SEC Documents. Parent has timely filed with the SEC all required documents since January 1, 1991, and will timely file all required Parent SEC Documents between the date hereof and the Effective Time (all such documents, the "Parent SEC Documents"). As of their respective dates, the Parent SEC Documents complied or will comply in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and none of the Parent SEC Documents contained or will contain any untrue statement of a material fact or omitted or will 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. The consolidated financial statements of Parent included or to be included in the Parent SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto) and fairly present the consolidated financial position of Parent and its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and AI-7 89 statements of cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments and to any other adjustments described therein). SECTION 2.5 Absence of Material Adverse Change. Except as disclosed in the Parent SEC Documents filed with the SEC prior to the date hereof (all of which since December 1, 1994 have been furnished to the Company), there has not been any Material Adverse Change with respect to Parent (other than changes in laws or regulations, changes in generally accepted accounting principles or interpretations thereof or changes in general economic conditions that affect the oil and natural gas industry generally, including, without limitation, the supply of, demand for and prices for, oil and natural gas). SECTION 2.6 Litigation. Except as disclosed in the Parent SEC Documents filed with the SEC prior to the date hereof, there are no investigations, claims, actions, suits, or proceedings pending or threatened, before or by any court or government agency which (i) will, or can reasonably be expected to, have a Material Adverse Effect on Parent, or (ii) could have a material adverse effect on the transactions contemplated hereby or the performance of Parent's or the Company's obligations hereunder. SECTION 2.7 Brokers. No broker, investment banker or other person, other than Wertheim Schroder & Co. Incorporated, the fees and expenses of which will be paid by Parent on the terms set forth in the engagement letter a copy of which has been furnished to the Company, is entitled to any broker's, finder's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or Sub. SECTION 2.8 Benefit Plans; ERISA Compliance. (a) Except as disclosed in the Parent SEC Documents filed with the SEC prior to the date hereof, since December 31, 1993, there has not been any adoption or material amendment by Parent or any of its Subsidiaries of any collective bargaining agreement or any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, medical, dependent care, cafeteria, employee assistance, scholarship or other plan, program, arrangement or understanding (whether or not legally binding) maintained in whole or in part, contributed to, or required to be contributed to by Parent or any of its Subsidiaries for the benefit of any present or former officer, employee or director of Parent or any of its Subsidiaries (collectively, and including all amendments thereto, for purposes of this Section 2.8, "Benefit Plans"). (b) Each "employee pension benefit plan" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) currently maintained in whole or in part, contributed to or required to be contributed to, by the Parent or any of its Subsidiaries for the benefit of any present or former officer, employee or director of the Parent or any of its Subsidiaries ("Pension Plan") and each former pension plan that is or was intended to be qualified under Section 401(a) of the Code has been the subject of a determination letter from the IRS to the effect that such plan is qualified under Section 401(a) of the Code or can still be submitted in a timely manner to the IRS for such a letter, and no such determination letter has been revoked nor has revocation of any such letter been threatened, nor has any such plan been amended since the date of its most recent determination letter or application therefor in any respect that would adversely affect its qualification or materially increase its costs, and nothing has occurred or failed to occur which would cause the loss of such qualification, and all amendments required to be adopted before the Effective Time for any such Pension Plan to continue to be so qualified have been or will be duly and timely adopted, except that this sentence does not apply to any multiemployer plans; provided however, that to the extent that this representation applies to terminated pension plans, this representation refers to the qualified status of any such plan through the time of its termination. (c) Neither the Parent nor any of its Subsidiaries sponsors or maintains any defined benefit plan described in Section 3(35) of ERISA, or Section 414(j) of the Code, other than any such plan which is a "multiemployer plan" as such term is defined in Section 4001(a)(3) of ERISA, and no such plan has been terminated in a manner that resulted in any liability of Parent and/or any Subsidiary to the Pension Benefit Guaranty Corporation (the "PBGC"). No entity, whether or not incorporated, which is deemed to be under common control (as defined in Section 414 of the Code) with the Parent and/or any of its Subsidiaries sponsors or maintains any such defined benefit plan. AI-8 90 (d) Each of the Benefit Plans sponsored by, and each of the benefit plans formerly sponsored by, Parent or any of its Subsidiaries: (A) has been in substantial compliance with all reporting and disclosure requirements of (i) Part 1 or Subtitle B of Title I of ERISA, if applicable, or (ii) other applicable law, (B) has had the appropriate required Form 5500 (or equivalent annual report) filed, timely, with the appropriate Governmental Entity for each year of its existence, (C) has at all times complied with the bonding requirements of (i) Section 412 of ERISA, if applicable, or (ii) other applicable law, (D) has no issue pending (other than the payment of benefits in the normal course) nor any issue resolved adversely to Parent or any of its Subsidiaries which may subject Parent or any of its Subsidiaries to the payment of a material penalty, interest, tax or other obligation, nor is there any basis for any imposition of any such liability, and (E) has been maintained in all respects in compliance with the applicable requirements of ERISA, the Code and other applicable law (including all rules and regulations issued thereunder) not otherwise covered hereunder so as not to give rise to any material liabilities to Parent or its Subsidiaries. (e) All voluntary employee benefit associations maintained by the Parent or any of its Subsidiaries and intended to be exempt from federal income tax under Section 501(c)(9) of the Code have been submitted to and approved as exempt from federal income tax under Section 501(c)(9) of the Code by the United States Internal Revenue Service ("IRS"), and nothing has occurred or failed to occur which would cause the loss of such exemption. (f) The execution of this Agreement or the consummation of the transactions contemplated by this Agreement will not give rise to any, or trigger any, change of control, severance or other similar provisions in any Benefit Plan. (g) Neither Parent nor any of its Subsidiaries provides material post-retirement medical, health, disability or death protection coverage or contributes to or maintains any employee welfare benefit plan which provides for medical, health, disability or death benefit coverage following termination of employment by any officer, director or employee except as is required by Section 4980B(f) of the Code or other applicable statute, nor has it made any representations, agreements, covenants or commitments to provide that coverage. (h) None of the Parent, any of its Subsidiaries, any officer of the Parent or any of its Subsidiaries or any of the Benefit Plans or prior benefit plans (including the Pension Plans and prior pension plans) which are subject to ERISA, or any trusts created thereunder, or any trustee or administrator thereof, has engaged in a "prohibited transaction" (as such term is defined in Section 406, 407 or 408 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject the Parent, any of its Subsidiaries or any officer of the Parent or any of its Subsidiaries to the tax or penalty on prohibited transactions imposed by such Section 4975 or to any liability under Section 502(i) or (1) of ERISA which would have a Material Adverse Effect on the Parent. Neither the Parent nor any of its Subsidiaries has suffered a "complete withdrawal" or a "partial withdrawal" (as such terms are defined in Section 4203 and Section 4205, respectively, of ERISA) since the effective date of such Sections 4203 and 4205 for which the Parent has any material liability outstanding. (i) With respect to any Benefit Plan that is an employee welfare benefit plan, (A) each such Benefit Plan that is a group health plan, as such term is defined in Section 5000(b)(1) of the Code, complies in all material respects with any applicable requirements of Part 6 of Title I of ERISA and Section 4980B(f) of the Code and (B) each such Benefit Plan (including any such plan covering retirees or other former employees) may be amended or terminated with respect to health benefits without material liability to Parent or any of its Subsidiaries on or at any time after the consummation of the Merger. (j) All contributions required by law or by a collective bargaining or other agreement to be made under the Benefit Plans with respect to all periods through the Effective Date including a pro rata share of contributions due for the current plan year, will have been made by such date or provided for by adequate reserves by Parent and/or each Subsidiary. No changes in contribution rates or benefit levels have been implemented or negotiated (but not yet implemented), with respect to any Benefit Plan since the date on which the information provided in the attached schedule has been provided, and no such changes are scheduled to occur. AI-9 91 (k) Neither Parent nor any Subsidiary has or will have any material liability or obligation for taxes, penalties, contributions, losses, claims, damages, judgments, settlement costs, expenses, costs, or any other liability or liabilities of any nature whatsoever arising out of or in any manner relating to any Benefit Plan or former benefit plan (including but not limited to employee benefit plans such as foreign plans which are not subject to ERISA), that has been, or is, contributed to by any entity, whether or not incorporated, which is deemed to be under common control (as defined in Section 414 of the Code), with Parent or any Subsidiary. (l) Neither Parent nor any Subsidiary has incurred a liability for payment of premiums to the United Mine Workers of America Combined Benefit Fund pursuant to Section 9704 of the Code, which liability has not been satisfied in full. (m) Following the relevant periods set forth in Section 6.12 of this Agreement, it is the intention of Parent to extend to the employees of the Company coverage under benefit plans similar in nature to the benefit plans afforded to employees of Parent, subject to applicable Canadian law. SECTION 2.9 Director, Officer and Employee Agreements. Except as disclosed in the Parent SEC Documents filed with the SEC prior to the date hereof, there exist no material employment, consulting, severance, termination or indemnification agreements, arrangements or understandings between Parent or any of its Subsidiaries and any officer, director or key employee of Parent or any of its Subsidiaries. SECTION 2.10 Certain Business Practices. There are no situations with respect to Parent or any of its Subsidiaries which involved or involves (i) the use of any corporate funds or unlawful contributions, gifts or entertainment or other unlawful expenses related to political activity, (ii) the making of any direct or indirect unlawful payments to government officials or others from corporate funds or the establishment or maintenance of any unlawful or unrecorded funds, (iii) the violation of any of the provisions of the United States Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder, (iv) the receipt of any illegal discounts or rebates or any other violation of the antitrust laws, or (v) any investigation by the SEC or any Governmental Entity. SECTION 2.11 Insider Interests. Except as disclosed in the Parent SEC Documents filed with the SEC prior to the date hereof, no affiliate, officer or director of Parent or any of its Subsidiaries has any agreement with Parent or any of its Subsidiaries or any interest in any property, real or personal, tangible or intangible, of Parent or any of its Subsidiaries except for the normal rights as a stockholder or an employee and except for such other matters which, under the rules of the SEC, are not required to be disclosed. SECTION 2.12 Compliance with Laws. Parent and its Subsidiaries hold all required, necessary or applicable permits, licenses, grants, authorizations, easements, variances, exemptions, certificates, orders, franchises and approvals necessary to own, lease and operate its material properties and to carry on its material business as now being conducted (the "Parent Permits") and there is no action, proceeding or investigation pending or threatened regarding the suspension or cancellation of any of the Parent Permits. Parent and its Subsidiaries are in compliance in all material respects with the terms of the Parent Permits except where the failure to so comply would not have a Material Adverse Effect on Parent. Neither Parent nor any of its Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule or order of any Governmental Entity, any arbitration award or any judgment, decree or order of any court or other Governmental Entity, applicable to Parent or any of its Subsidiaries or their respective business, assets or operations. SECTION 2.13 Intellectual Property. Parent and its Subsidiaries own, or are licensed or otherwise have the right to use, all patents, patent rights, trademarks, rights, trade names, trade name rights, service marks, service mark rights, copyrights, technology, know-how, processes and other proprietary intellectual property rights and computer programs ("Intellectual Property") currently used in the conduct of the business and operations of Parent and its Subsidiaries, except where the failure to so own or otherwise have the right to use such Intellectual Property would not, individually or in the aggregate, have a Material Adverse Effect on Parent. The use of such Intellectual Property by Parent and its Subsidiaries does not infringe on the rights of any person, subject to such claims and infringements as do not, individually or in the aggregate, give rise to any liability on the part of Parent and its Subsidiaries which could have a Material Adverse Effect on Parent, and AI-10 92 no person is infringing on any right of Parent or any of its Subsidiaries with respect to any such Intellectual Property. No claims are pending or threatened that Parent or any of its Subsidiaries is infringing or otherwise adversely affecting the rights of any person with regard to any Intellectual Property. SECTION 2.14 Labor Matters. There are no collective bargaining agreements or other labor union agreements or understandings to which Parent or any of its Subsidiaries is a party or by which any of them is bound, nor is Parent or any of its Subsidiaries the subject of any proceeding asserting that Parent or any Subsidiary has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions. Since September 30, 1994 neither Parent nor any of its Subsidiaries has encountered any labor union organizing activity, or had any actual or threatened employee strikes, work stoppages, slowdowns or lockouts. SECTION 2.15 Insurance. All of Parent's and its Subsidiaries' insurance policies or contracts of insurance are sufficient for compliance with all requirements of law and of all agreements to which Parent or any of its Subsidiaries is a party. All insurance policies pursuant to which any such insurance is provided are in full force and effect, no notice of cancellation or termination has been given to Parent or any of its Subsidiaries by the carrier, and all premiums required to be paid have been paid in full. SECTION 2.16 Condition of Assets. Parent and each of its respective Subsidiaries owns or has the right to use under customary industry terms the assets it needs to operate its business, including, but not limited to, (a) plants, facilities, pipelines, gathering and processing systems, compressors and equipment, all of which have been maintained in a state of repair so as to be adequate for normal operations; and (b) easements, rights-of-way, surface leases, surface fee interests, licenses and permits. SECTION 2.17 Environmental Matters. Except to the extent, if any, that would not have a Material Adverse Effect on Parent: (a) Parent and its Subsidiaries have not received notice of any violation of or investigation relating to any U.S., Canadian, or other federal, state, provincial or local environmental or pollution law, regulation, or ordinance with respect to assets now or previously owned or operated by Parent or any of its Subsidiaries that has not been fully and finally resolved; (b) all permits, licenses and other authorizations which are required under U.S., Canadian, or other federal, state, provincial and local laws with respect to pollution or protection of the environment ("Environmental Laws") relating to assets now owned or operated by Parent or any of its Subsidiaries, including Environmental Laws relating to actual or threatened emissions, discharges or releases of pollutants, contaminants or hazardous or toxic materials or wastes ("Pollutants"), have been obtained and are effective, and, with respect to assets previously owned or operated by Parent or any of its Subsidiaries, were obtained and were effective during the time of Parent's or any Subsidiaries' operation; (c) no conditions exist on, in or about the properties now or previously owned or operated by Parent or any of its Subsidiaries or any third-party properties to which any Pollutants generated by Parent or any of its Subsidiaries were sent or released that could give rise on the part of Parent or any of its Subsidiaries to liability under any Environmental Laws, claims by third parties under Environmental Laws or under common law or the incurrence of costs to avoid any such liability or claim; and (d) all operators of Parent's or any of its Subsidiaries' assets are in compliance with all terms and conditions of such Environmental Laws, permits, licenses and authorizations, and are also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in such laws or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder, relating to Parent's or any of its Subsidiaries' assets. SECTION 2.18 Tax Matters. (a) "Parent Group" shall mean any "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) that includes Parent. "Parent Subsidiaries" shall mean Sub and the corporations set forth on Section 2.18 of the Parent Disclosure Schedule (being Subsidiaries of which Parent owns, directly or indirectly, 80% or more of the stock). "Tax" (and, with correlative meaning, "Taxes" and "Taxable") shall mean any United States, Canadian, or other federal, state, provincial, local or foreign income, gross receipts, property, sales, goods and services use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or AI-11 93 charge of any kind whatsoever, together with any interest or penalty, imposed by any governmental authority. "Tax Return" shall mean any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation, any information return, claim for refund, amended return and declaration of estimated Tax. (b) With respect to each of Parent, the Parent Group and each Parent Subsidiary: (i) all Tax Returns required to be filed have been timely filed with the appropriate Governmental Entities in all jurisdictions in which such Tax Returns are required to be filed; (ii) all Taxes shown to be due on the Tax Returns referred to in clause (i) have been paid; (iii) no claim has ever been made by any Governmental Entity in a jurisdiction in which Parent, the Parent Group or any Parent Subsidiary does not file Tax Returns that Parent, the Parent Group or any Parent Subsidiary is or may be subject to taxation by that jurisdiction; (iv) neither Parent nor any Parent Subsidiary has ever been a member of any affiliated group as defined in Section 1504 of the Code other than the Parent Group; (v) Parent, the Parent Group and each Parent Subsidiary has paid (or accrued in its most recent financial statements filed with the Parent SEC Documents) all Taxes attributable to all periods or portions thereof ending on or before September 30, 1994, except for any Taxes which are not material in amount; (vi) the Tax Returns referred to in clause (i) relating to foreign, federal, state and provincial income Taxes have been examined by the Internal Revenue Service, Revenue Canada or the appropriate state or other taxing authority or the period for assessment of the Taxes in respect of which such Tax Returns were required to be filed has expired; (vii) there are no liens for Taxes upon any asset of Parent, the Parent Group or any Parent Subsidiary except for liens for current Taxes not yet due; (viii) no deficiency in respect of Taxes which have been assessed against Parent, the Parent Group or any Parent Subsidiary remains unpaid and there are no audits or investigations pending against Parent, the Parent Group or any Parent Subsidiary with respect to any Taxes; (ix) there are no claims, assessments, levies, administrative proceedings or lawsuits pending or threatened against Parent, the Parent Group or any Parent Subsidiary by any tax authority; and (x) none of Parent, the Parent Group or any Parent Subsidiary has any liability for penalties with respect to the Tax Returns described in clause (i). SECTION 2.19 Tax-Free Reorganization. With respect to the qualification of the Merger as a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code: (a) immediately following the Merger, the Company will hold at least 90 percent of the fair market value of Sub's net assets and at least 70 percent of the fair market value of Sub's gross assets held immediately prior to the Effective Time, provided that amounts used by Sub to pay reorganization expenses will be included as assets of Sub immediately prior to the Merger, (b) prior to the Merger, Parent will be in control of Sub within the meaning of Section 368(c) of the Code, (c) Parent has no plan or intention to cause the Company, after the Merger, to issue additional shares of Company Stock that would result in Parent losing control of Company within the meaning of Section 368(c) of the Code, (d) Parent has no plan or intention to reacquire any of the Parent Common Stock issued in the Merger, (e) Parent has no plan or intention to liquidate Company, to merge Company with or into another corporation, to sell or otherwise dispose of its Company Stock except for transfers of Company Stock to corporations of which Parent has control (within the meaning of Section 368(c) of the Code) at the time of such transfer, or to cause Company to sell or otherwise dispose of any of its assets or of any of the assets acquired from Sub, except for dispositions made in the ordinary course of business or transfers of assets to a corporation of which the Company has control (within the meaning of 368(c) of the Code) at the time of such transfer, (f) the liabilities of Sub assumed by Company and the liabilities to which the transferred assets of Sub are subject were incurred by Sub in the ordinary course of its business, (g) following the Merger, the Company will continue its historic business or use a significant portion of its historic business assets in a business, (h) Parent and Sub will pay their respective expenses, if any, incurred in connection with the Merger, (i) there is no intercorporate indebtedness existing between Parent and the Company or between Sub and the Company that was issued, was acquired or will be settled at a discount, (j) the Parent Common Stock that will be exchanged for Company Stock is voting stock within the meaning of Section 368(a)(2)(E) of the Code, (k) Parent does not own, nor has it owned during the past five years any Company Stock, (l) Parent and Sub are not investment companies as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code, (m) the payment of cash in lieu of fractional shares of Parent Common Stock is solely for the purpose of avoiding the expense and inconvenience to Parent of issuing fractional shares and does not represent separately bargained-for consideration, (n) the total cash considera- AI-12 94 tion that will be paid in the Merger to the holders of Company Stock instead of issuing fractional shares of Parent Common Stock will not exceed one percent of the total consideration that will be issued in the Merger to the holders of Company Stock in exchange for their Company Stock, (o) none of the compensation received by any shareholder-employees of the Company will be separate consideration for, or allocable to, any of their shares of Company Stock, (p) none of the Parent Common Stock received by any shareholder-employees of the Company will be separate consideration for, or allocable to, any employment agreement, and (q) and the compensation paid to any shareholder-employees of the Company will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. SECTION 2.20 Internal Financial Report. The consolidated financial report for the period ended October 31, 1994 prepared for the internal use of Parent's management (a true and correct copy of which has been furnished to the Company) was prepared in accordance with and consistent with past practice. SECTION 2.21 Undisclosed Liabilities. Except as set forth in the Parent SEC Documents filed with the SEC prior to the date hereof, at the date of the most recent audited financial statements of Parent included in the Parent SEC Documents, neither Parent nor any of its Subsidiaries had, and since such date neither Parent nor any of such Subsidiaries has incurred, any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by generally accepted accounting principles to be set forth on a financial statement or in the notes thereto or that, individually or in the aggregate, would have a Material Adverse Effect on Parent. SECTION 2.22 No Stock Ownership in Company. Neither Parent nor any of its affiliates as of the date hereof beneficially own any Company Stock. SECTION 2.23 No Misrepresentation. None of the factual information furnished in written or electronic form to the Company or its representatives by Parent in connection with this Agreement or the investigation by the Company with respect to this Agreement (i) was inaccurate or false in any material respect or (ii) knowingly omitted any portion of such information necessary to make the information that was furnished, in light of the circumstances, not misleading in any material respect. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth on the Company Disclosure Schedule (as defined below), the Company represents and warrants to Parent and Sub as follows: SECTION 3.1 Organization, Standing and Power. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. Each of the Company's Subsidiaries that is a corporation is duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. Each of the Company's Subsidiaries that is not a corporation is duly organized under the laws of the jurisdiction in which it is organized and has the requisite corporate power and authority to carry on its business as now being conducted. The Company and each of its Subsidiaries is duly qualified to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company has delivered to Parent complete and correct copies of its Restated Certificate of Incorporation and By-laws and of the articles or certificates of incorporation, by-laws or other similar organizational or governing documents of its Subsidiaries. Section 3.1 of the Company Disclosure Schedule lists each direct or indirect Subsidiary of the Company and the number and percentage of outstanding shares of capital stock or other ownership interests owned by the Company in such Subsidiary. All the outstanding shares of capital stock of the Company's Subsidiaries that are corporations and all of the Company's direct or indirect ownership interests in the Company's Subsidiaries that are not corporations are validly issued, fully paid and non- AI-13 95 assessable and were not issued in violation of any preemptive rights. All such stock and ownership interests are owned of record and beneficially by the Company or the Company's Subsidiary identified on such schedule as owning such interest, free and clear of all liens, pledges, security interests, charges, claims and other encumbrances of any kind or nature. Except for the capital stock and ownership interests of its Subsidiaries, the Company does not own, directly or indirectly, any capital stock, equity interest or other ownership interest in any corporation, partnership, association, joint venture (exclusive of any joint operating agreement), limited liability company or other entity. No Subsidiary that is not wholly owned holds any shares of Company Stock. "Company Disclosure Schedule" means the schedule of disclosures made by the Company to Parent that has been delivered simultaneously with the execution of this Agreement. SECTION 3.2 Capital Structure. (a) The authorized capital stock of the Company consists of 6,000,000 shares of Company Class A Stock, 13,000,000 shares of Company Class B Stock and 500,000 shares of Preferred Stock, $1.00 par value, of the Company ("Company Preferred Stock"). At the close of business on December 15, 1994, 2,304,007 shares of Company Class A Stock and 7,302,218 shares of Company Class B Stock (including 220,000 shares of Company Class B Stock held of record and beneficially by DEKALB Energy Canada Ltd.) were issued and outstanding. As of the date hereof, (i) an aggregate of 9,606,225 shares of Company Stock were issued and outstanding, (ii) 435,383 shares of Company Class A Stock and 7,050 shares of Company Class B Stock were reserved for issuance upon the exercise of outstanding Company Stock Options (as defined below), (iii) 79,782 shares of Company Class A Stock and 4,212,466 shares of Company Class B Stock were held by the Company in its treasury and (iv) no shares of Company Preferred Stock were issued or outstanding or reserved for issuance. All outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable and not subject to preemptive rights. (b) Except for the Company Stock Options, exercisable for 435,383 shares of Company Class A Stock and 7,050 shares of Company Class B Stock, outstanding as of the date of this Agreement, there are no options, warrants, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company or any of its Subsidiaries is a party or by which any of them is bound obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of the Company or of any of its Subsidiaries. There are no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any securities of the Company or any Subsidiary. (c) Section 3.2 to the Company Disclosure Schedule sets forth a complete and correct list of all outstanding Company Stock Options, setting forth as of the date hereof (i) the number and type of Company Stock Options outstanding, (ii) the exercise price of each outstanding Company Stock Option, (iii) the number of Company Stock Options exercisable, and (iv) assuming no amendment or waiver of the terms thereof, the number of Company Stock Options that will become exercisable on account of the Merger or any other transaction contemplated hereby. Section 3.2 of the Company Disclosure Schedule also sets forth a complete and correct list of all outstanding phantom stock awards, stock appreciation rights or other equity based incentive compensation arrangements, including all material terms thereof. The Company has delivered to Parent true and correct copies of all agreements, instruments and other governing documents relating to the foregoing. SECTION 3.3 Authority; Non-Contravention. The Board of Directors of the Company has declared the Merger advisable and the Company has all requisite power and authority to enter into this Agreement and, subject to approval of the Merger by the stockholders of the Company, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, subject to approval of the Merger by the stockholders of the Company as set forth in Section 6.1. This Agreement has been duly executed and delivered by the Company and (assuming the valid authorization, execution and delivery of this Agreement by Parent and Sub) constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or AI-14 96 acceleration of any obligation or to the loss of a material benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any of its Subsidiaries under, any provision of (i) the Certificate of Incorporation or By-laws of the Company or any provision of the comparable charter or organization documents of any of its Subsidiaries, (ii) any contract, agreement, loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Company or any of its Subsidiaries or (iii) any judgment, injunction, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or any of its Subsidiaries or any of their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights, liens, security interests, charges or encumbrances that, individually or in the aggregate, would not have a Material Adverse Effect on the Company, materially impair the ability of the Company to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. No filing or registration with, or authorization, consent or approval of, any Governmental Entity is required by or with respect to the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby, except for (i) the filing, if required, of a premerger notification and report form by the Company under the HSR Act, and filings under the Investment Canada Act and the Competition Act, (ii) the filing with the SEC of (x) the Proxy Statement and (y) such reports under Section 13(a) of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated hereby, (iii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which the Company or any of its Subsidiaries is qualified to do business, (iv) such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval triggered by the Merger or the transactions contemplated by this Agreement, (v) such other consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under (a) the laws of Canada (or any territory or province thereof) or any other foreign country in which the Company or any of its Subsidiaries conducts any business or owns any property or assets or (b) the corporation, takeover or "Blue Sky" or securities laws of various states of the United States and territories or provinces of Canada, and (vi) such other consents, approvals, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate, have a Material Adverse Effect on the Company, materially impair the ability of the Company to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. SECTION 3.4 SEC Documents. The Company has timely filed all required documents with the SEC since January 1, 1991, and will file all required Company SEC Documents between the date hereof and the Effective Time (all such documents, the "Company SEC Documents"). As of their respective dates, the Company SEC Documents complied or will comply in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and none of the Company SEC Documents contained or will contain any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company included or to be included in the Company SEC Documents comply or will comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been or will be prepared in accordance with generally accepted accounting principles (except, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto) and fairly present or will present the consolidated financial position of the Company and its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and changes in financial position for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments and to any other adjustments described therein). SECTION 3.5 Absence of Certain Changes or Events. Except as disclosed in the Company SEC Documents filed with the SEC prior to the date hereof, between September 30, 1994 and the date hereof, the Company has conducted its business only in the ordinary course consistent with past practice, and there has not been (i) any declaration, setting aside or payment of any dividend or distribution (whether in cash, stock AI-15 97 or property) with respect to any of the Company's capital stock or any securities of a Subsidiary not wholly-owned by the Company or any redemption, purchase or other acquisition by the Company of any of its securities or any securities of a Subsidiary not wholly owned by the Company, (ii) any material damage, destruction or loss (whether or not covered by insurance) to any material asset of the Company, (iii) other than in the ordinary course of business, any expenditure of funds, contractual commitment to expend or liability or obligation incurred by the Company involving an amount in excess of $50,000, or any series thereof of similar type or nature aggregating to an amount in excess of $50,000, (iv) any obligation incurred by the Company of the nature referred to in the first sentence of Section 3.23, (v) any change in accounting methods, principles or practices by the Company materially affecting its assets, liabilities or business, except insofar as may have been required by a change in generally accepted accounting principles, (vi) except as contemplated in this Agreement, any revaluation by the Company of any of its assets, including the writing down or off of notes or accounts receivable, other than in the ordinary course of business and consistent with past practices and, in the case of notes or accounts receivable, not in excess of $50,000 in the aggregate, (vii) any event which, if it had taken place following the execution of this Agreement, would not have been permitted by Section 5.1(b), except for capital expenditures provided for in the Company's fourth quarter 1994 capital expenditure budget, a copy of which is attached to the Company Disclosure Schedule ("1994 Capital Budget"), (viii) any condition, event or occurrence which, individually or in the aggregate, could reasonably be expected to prevent, hinder or materially delay the ability of the Company to consummate the transactions contemplated by this Agreement, or (ix) any condition, event or occurrence which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect on the Company or give rise to a Material Adverse Change with respect to the Company. SECTION 3.6 Litigation. Except as disclosed in the Company SEC Documents filed with the SEC prior to the date hereof, there are no investigations, claims, actions, suits, or proceedings pending or threatened, before or by any court or government agency which (i) will, or can reasonably be expected to, have a Material Adverse Effect on the Company, or (ii) could have a material adverse effect on the transactions contemplated hereby or the performance of Parent's or the Company's obligations hereunder. SECTION 3.7 Brokers. No broker, investment banker or other person, other than Merrill Lynch & Co., the fees and expenses of which will be paid by the Company on the terms set forth in the engagement letter a copy of which has been furnished to Parent, is entitled to any broker's, finder's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. SECTION 3.8 Benefit Plans; ERISA Compliance. (a) Except as disclosed in the Company SEC Documents filed with the SEC prior to the date hereof, since December 31, 1993, there has not been any adoption or material amendment by the Company or any of its Subsidiaries of any collective bargaining agreement or any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, medical, dependent care, cafeteria, employee assistance, scholarship or other plan, program, arrangement or understanding (whether or not legally binding) maintained in whole or in part, contributed to, or required to be contributed to by the Company or any of its Subsidiaries for the benefit of any present or former officer, employee or director of the Company or any of its Subsidiaries (collectively, and including all amendments thereto, for purposes of this Section 3.8, "Benefit Plans"). (b) Section 3.8 of the Company Disclosure Schedule contains a list of all "employee pension benefit plans" (as defined in Section 3(2) of ERISA) (sometimes referred to in this Section 3.8 as "Pension Plans"), "employee welfare benefit plans" (as defined in Section 3(1) of ERISA) (sometimes referred to in this Section 3.8 as "Welfare Plans") and all other Benefit Plans currently maintained in whole or in part, contributed to, or required to be contributed to by the Company or any of its Subsidiaries for the benefit of any present or former officer, employee or director of the Company or any of its Subsidiaries. Except for those documents relating to benefit plans that were terminated in connection with the Company's ceasing substantially all of its operations in the U.S., the Company has delivered to Parent true, complete and correct copies of (A) each Benefit Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof), (B) the three annual reports on Form 5500 most recently filed with the IRS with respect to each Benefit Plan (if any AI-16 98 such report was required), (C) the most recent IRS determination letter requested for each Benefit Plan intended to be qualified under Section 401(a) of the Code and all rulings or determinations concerning such Benefit Plan requested of the IRS subsequent to the date of that letter, (D) the most recent actuarial report for each Benefit Plan for which an actuarial report is required by ERISA, (E) the most recent summary plan description for each Benefit Plan for which such summary plan description is required by ERISA and each summary of material modifications prepared, as required by ERISA, after the last summary plan description, (F) each trust agreement and/or group annuity contract relating to any Benefit Plan and (G) all material correspondence for the last three years prior to the Effective Date with the IRS or the United States Department of Labor relating to plan qualification, filing of required forms, or pending, contemplated and announced plan audits with respect to any Benefit Plan, except that this sentence does not apply to any multiemployer plans. (c) Each Pension Plan maintained and each pension plan formerly maintained that is or was intended to be qualified under Section 401(a) of the Code has been the subject of a determination letter from the IRS to the effect that such plan is qualified under Section 401(a) of the Code or can still be submitted in a timely manner to the IRS for such a letter, and no such determination letter has been revoked nor has revocation of any such letter been threatened, nor has any such plan been amended since the date of its most recent determination letter or application therefor in any respect that would adversely affect its qualification or materially increase its costs, and nothing has occurred or failed to occur which would cause the loss of such qualification, and all amendments required to be adopted before the Effective Time for any such Pension Plan to continue to be so qualified have been or will be duly and timely adopted, except that this sentence does not apply to any multiemployer plans; provided however, that to the extent that this representation applies to terminated pension plans, this representation refers to the qualified status of any such plan through the time of its termination. The Company has paid all premiums (including any applicable interest, charges and penalties for late payment) due the PBGC with respect to each such Pension Plan for which premiums to the PBGC are required. No such Pension Plan in whole or in part maintained by the Company has been terminated or partially terminated under circumstances which would result in liability to the PBGC. (d) Each of the Benefit Plans sponsored by, and each of the benefit plans formerly sponsored by, the Company or any of its Subsidiaries: (A) has been in substantial compliance with all reporting and disclosure requirements of (i) Part 1 or Subtitle B of Title I of ERISA, if applicable, or (ii) other applicable law, (B) has had the appropriate required Form 5500 (or equivalent annual report) filed, timely, with the appropriate Governmental Entity for each year of its existence, (C) has at all times complied with the bonding requirements of (i) Section 412 of ERISA, if applicable, or (ii) other applicable law (D) has no issue pending (other than the payment of benefits in the normal course) nor any issue resolved adversely to the Company or any of its Subsidiaries which may subject the Company or any of its Subsidiaries to the payment of a material penalty, interest, tax or other obligation, nor is there any basis for any imposition of any such liability, and (E) has been maintained in all respects in compliance with the applicable requirements of ERISA, the Code and other applicable law (including all rules and regulations issued thereunder) not otherwise covered hereunder so as not to give rise to any material liabilities to the Company or its Subsidiaries. (e) All voluntary employee benefit associations maintained by the Company or any of its Subsidiaries and intended to be exempt from federal income tax under Section 501(c)(9) of the Code have been submitted to and approved as exempt from federal income tax under Section 501(c)(9) of the Code by the IRS, and nothing has occurred or failed to occur which would cause the loss of such exemption. (f) The execution of this Agreement or the consummation of the transactions contemplated by this Agreement will not give rise to any, or trigger any, change of control, severance or other similar provisions in any Benefit Plan other than with respect to Company Stock Options. (g) Neither the Company nor any of its Subsidiaries provides material post-retirement medical, health, disability or death protection coverage or contributes to or maintains any employee welfare benefit plan which provides for medical, health, disability or death benefit coverage following termination of employment by any officer, director or employee except as is required by Section 4980B(f) of the Code or other applicable statute, nor has it made any representations, agreements, covenants or commitments to provide that coverage. AI-17 99 (h) No Pension Plan or pension plan subject to Title IV of ERISA (i) that the Company or any of its Subsidiaries maintains or maintained, or (ii) to which the Company or any of its Subsidiaries is or was obligated to contribute, other than any such plan that is or was a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA) had, as of its most recent annual valuation date, an "unfunded benefit liability" (as such term is defined in Section 4001(a)(18) of ERISA), based on actuarial assumptions which have been furnished to Parent. None of such plans subject to Section 302 of ERISA has an "accumulated funding deficiency" (as such term is defined in Section 302 of ERISA), whether or not waived. None of the Company, any of its Subsidiaries, any officer of the Company or any of its Subsidiaries or any of the Benefit Plans or prior benefit plans (including the Pension Plans and prior pension plans) which are subject to ERISA, or any trusts created thereunder, or any trustee or administrator thereof, has engaged in a "prohibited transaction" (as such term is defined in Section 406, 407 or 408 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject the Company, any of its Subsidiaries or any officer of the Company or any of its Subsidiaries to the tax or penalty on prohibited transactions imposed by such Section 4975 or to any liability under Section 502(i) or (1) of ERISA which would have a Material Adverse Effect on the Company. No "reportable event" (as that term is defined in Section 4043 of ERISA) with respect to which the 30-day notice requirement has not been waived has occurred and is continuing with respect to any such Pension Plan, other than as may arise as a result of the consummation of the Merger. Neither the Company nor any of its Subsidiaries has suffered a "complete withdrawal" or a "partial withdrawal" (as such terms are defined in Section 4203 and Section 4205, respectively, of ERISA) since the effective date of such Sections 4203 and 4205 for which the Company has any material liability outstanding. (i) With respect to any Benefit Plan that is a Welfare Plan, (A) each such Benefit Plan that is a group health plan, as such term is defined in Section 5000(b)(1) of the Code, complies in all material respects with any applicable requirements of Part 6 of Title I of ERISA and Section 4980B(f) of the Code and (B) each such Benefit Plan (including any such plan covering retirees or other former employees) may be amended or terminated with respect to health benefits without material liability to the Company or any of its Subsidiaries on or at any time after the consummation of the Merger. (j) All contributions required by law or by a collective bargaining or other agreement to be made under the Benefit Plans with respect to all periods through the Effective Date including a pro rata share of contributions due for the current plan year, will have been made by such date or provided for by adequate reserves by the Company and/or each Subsidiary. No changes in contribution rates or benefit levels have been implemented or negotiated (but not yet implemented), with respect to any Benefit Plan since the date on which the information provided in the attached schedule has been provided, and no such changes are scheduled to occur. (k) Neither the Company nor any Subsidiary has or will have any material liability or obligation for taxes, penalties, contributions, losses, claims, damages, judgments, settlement costs, expenses, costs, or any other liability or liabilities of any nature whatsoever arising out of or in any manner relating to any Benefit Plan or prior benefit plan (including but not limited to employee benefit plans such as foreign plans which are not subject to ERISA), that has been, or is, contributed to by any entity, whether or not incorporated, which is deemed to be under common control (as defined in Section 414 of the Code), with the Company or any Subsidiary. (l) Neither the Company nor any Subsidiary has incurred a liability for payment of premiums to the United Mine Workers of America Combined Benefit Fund pursuant to Section 9704 of the Code, which liability has not been satisfied in full. (m) All Benefit Plans for employees of the Company in Canada are registered as required and all reporting and filing requirements have been complied with on a timely basis. Further, none of the Benefit Plans in place for employees in Canada have, on the date of this Agreement, any accumulated funding deficiency. SECTION 3.9 Director, Officer and Employee Agreements. (a) Except as disclosed in the Company SEC Documents filed with the SEC prior to the date hereof, there exist no material employment, consulting, AI-18 100 severance, termination or indemnification agreements, arrangements or understandings between the Company or any of its Subsidiaries and any officer, director or key employee of the Company or any of its Subsidiaries. (b) Section 3.9 of the Company Disclosure Schedule lists as of the date hereof the 1994 base salary and targeted bonuses (including the maximum aggregate amount of such bonuses) and the 1995 base salary and targeted bonuses of each of the officers, directors and employees of the Company and each Subsidiary. From the date hereof through the Effective Date, there will be no increase in the compensation payable to any of such officers, directors or employees, except for budgeted increases set forth in such schedule. SECTION 3.10 Certain Business Practices. There are no situations with respect to the Company or any of its Subsidiaries which involved or involve (i) the use of any corporate funds or unlawful contributions, gifts or entertainment or other unlawful expenses related to political activity, (ii) the making of any direct or indirect unlawful payments to government officials or others from corporate funds or the establishment or maintenance of any unlawful or unrecorded funds, (iii) the violation of any of the provisions of the United States Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder, (iv) the receipt of any illegal discounts or rebates or any other violation of the antitrust laws, or (v) any investigation by the SEC or any Governmental Entity. SECTION 3.11 No Excess Parachute Payments or Compensation. (a) No deduction will be disallowed under Section 280G(a) of the Code for any amount that could be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of the Company or any of its Subsidiaries who is a "disqualified individual" (as such term is defined in proposed Treasury Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or Benefit Plan currently in effect. (b) No deduction for employee remuneration paid or payable to any covered employee (as defined in Section 162(m)(3) of the Code) of the Company or any of its Subsidiaries has been or will be disallowed under Section 162(m) of the Code. SECTION 3.12 Insider Interests. Except as disclosed in the Company SEC Documents filed with the SEC prior to the date hereof, no affiliate, officer or director of the Company or any of its Subsidiaries has any agreement with the Company or any interest in any property, real or personal, tangible or intangible, of the Company except for the normal rights as a stockholder or an employee and except for such other matters which, under the rules of the SEC, are not required to be disclosed. SECTION 3.13 Compliance with Laws. The Company and its Subsidiaries hold all required, necessary or applicable permits, licenses, grants, authorizations, easements, variances, exemptions, certificates, orders, franchises and approvals necessary to own, lease and operate its material properties and to carry on its material business as now being conducted (the "Company Permits") and there is no action, proceeding or investigation pending or threatened regarding the suspension or cancellation of any of the Company Permits. The Company and its Subsidiaries are in compliance in all material respects with the terms of the Company Permits except where the failure to so comply would not have a Material Adverse Effect on the Company. Neither the Company nor any of its Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule or order of any Governmental Entity, any arbitration award or any judgment, decree or order of any court or other Governmental Entity, applicable to the Company or any of its Subsidiaries or their respective business, assets or operations. SECTION 3.14 Intellectual Property. The Company and its Subsidiaries own, or are licensed or otherwise have the right to use, all Intellectual Property currently used in the conduct of the business and operations of the Company and its Subsidiaries, except where the failure to so own or otherwise have the right to use such Intellectual Property would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The use of such Intellectual Property by the Company and its Subsidiaries does not infringe on the rights of any person, subject to such claims and infringements as do not, individually or in the aggregate, give rise to any liability on the part of the Company and its Subsidiaries which could have a Material Adverse Effect on the Company, and no person is infringing on any right of the Company or any of its Subsidiaries with respect to any such Intellectual Property. No claims are pending or threatened that the AI-19 101 Company or any of its Subsidiaries is infringing or otherwise adversely affecting the rights of any person with regard to any Intellectual Property. SECTION 3.15 Labor Matters. There are no collective bargaining agreements or other labor union agreements or understandings to which the Company or any of its Subsidiaries is a party or by which any of them is bound, nor is the Company or any of its Subsidiaries the subject of any proceeding asserting that the Company or any Subsidiary has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions. Since September 30, 1994 neither the Company nor any of its Subsidiaries has encountered any labor union organizing activity, or had any actual or threatened employee strikes, work stoppages, slowdowns or lockouts. SECTION 3.16 Insurance. Section 3.16 of the Company Disclosure Schedule summarizes the amount and scope of insurance as to which the Company or any of its Subsidiaries has insurance contracts. All of the Company's insurance policies or contracts of insurance are sufficient for compliance with all requirements of law and of all agreements to which the Company or any of its Subsidiaries is a party. All insurance policies pursuant to which any such insurance is provided are in full force and effect, no notice of cancellation or termination has been given to the Company or any of its Subsidiaries by the carrier, and all premiums required to be paid have been paid in full. SECTION 3.17 Property Records and Title. (a) The information set forth in Section 3.17(a) of the Company Disclosure Schedule accurately reflects the following information contained in the Company's internal land records (the "Company Land Records"): (i) the working interest ("WI"); (ii) the distribution of properties as between freehold and crown lands; (iii) freehold property royalty burdens; (iv) overriding royalty burdens; (v) freehold property net profits interest burdens; (vi) royalties owned; (vii) overriding royalties owned; (viii) net profits interests owned; (ix) potential reversions of any of the interests described in (i) through (viii) hereinabove; and (x) any payout balances. (b) The information in the Company Land Records regarding the categories of information set forth in clauses (i) through (x) of Section 3.17(a) (the "Relevant Categories") is consistent with the information regarding the Relevant Categories contained or reflected in the Company's record of receipts and disbursements with respect to the Company's oil and gas properties as set forth in the Company's internal accounting and financial records. (c) The historical rates of production of oil and gas set forth in the Aries Database (as defined below) with respect to each well described therein accurately reflect the rates of production of oil and gas obtained by the Company from CD Pubco. The "Aries Database" shall mean the data recorded electronically by the Aries computer program on two magnetic files which were provided by the Company to Parent on three floppy diskettes (containing one file setting forth the proved reserve report database dated November 30, 1994) and one floppy diskette (containing one file setting forth the probable reserve report database dated December 1, 1994). (d) The Company and each of its Subsidiaries has Good and Defensible Title to the Leases, Wells and Units listed in Section 3.17(a) of the Company Disclosure Schedule, insofar as such Leases, Wells and Units cover the formations shown for such Wells in Section 3.17(a) of the Company Disclosure Schedule, together with the Leases or portions thereof attributable to such Wells and Units. (e) "Leases" means the oil and gas leases, oil, gas, and mineral leases, royalties, overriding royalties, production payments, net profits interests, fee minerals, and other oil, gas, and mineral interests (together with contractual rights, options or interests in and to any of the foregoing) owned by the Company or any of its Subsidiaries. "Units" means (i) all unitization and pooling agreements and orders covering the lands subject to the Leases, or any portion thereof, and the units and pooled areas created thereby, and (ii) all existing or projected future units and pooled areas set forth or referenced in Section 3.17(a) of the Company Disclosure Schedule. "Wells" means wells (including projected future wells) for the production of crude oil, natural gas, casinghead gas, coal bed methane, condensate, natural gas liquids and other gaseous and liquid hydrocarbons or any combination thereof ("Hydrocarbons") which are listed in Section 3.17(a) of the Company Disclosure AI-20 102 Schedule or which are located on the lands (the "Lands") covered by the Leases and the Units. "Properties" means, collectively, the Leases, Wells, Units and Lands. (f) "Good and Defensible Title" means, with respect to ownership of Leases attributable to the Lands, a Well or Unit, a legal or beneficial title that (i) entitles the Company or any of its Subsidiaries to receive, throughout the life of the Properties, the revenue interests attributable to the Properties and the Company's WI shown in Section 3.17(a) of the Company Disclosure Schedule; (ii) obligates the Company or any of its Subsidiaries, as applicable, to bear, throughout the life of a Well or Unit (and the plugging, abandonment and salvage thereof), no greater WI for such Well or Unit than the WI shown therefor in Section 3.17(a) of the Company Disclosure Schedule, except increases in such WI that result in at least a proportionate increase in the Company's or its applicable Subsidiaries' revenue interest attributable to such WI for such Well or Unit (including, without limitation, increases resulting from co-owner non-consents) and increases that result from contribution requirements with respect to defaulting co-owners; and (iii) is free and clear of all liens, security interests, collateral assignments, encumbrances, clouds on title, irregularities and defects except for Permitted Encumbrances. (g) "Permitted Encumbrances" means the following: (i) liens for taxes not yet due or, if due, being challenged in good faith by appropriate proceedings; (ii) materialmen's, mechanics', builders' and other similar liens or charges arising in the ordinary course of business for obligations that are not delinquent and that will be paid or discharged in the ordinary course of business or, if delinquent, that are being contested in good faith in the ordinary course of business; (iii) easements, rights-of-way, servitudes, permits, surface leases, and other rights in respect of surface operations that do not materially interfere with the Company's or its Subsidiary's, as applicable, operations of the portion of the Properties burdened thereby; (iv) rights reserved to or vested in any governmental authority to control or regulate any of the Wells or Units and all applicable laws, rules, regulations, and orders of such authorities so long as the same (i) do not decrease the Company's or its Subsidiary's, as applicable, revenue interest attributable to Properties shown in Section 3.17(a) of the Company Disclosure Schedule, or increase the Company's or its Subsidiary's, as applicable, WI above the WI shown in Section 3.17(a) of the Company Disclosure Schedule, without at least a proportionate increase in the Company's or its Subsidiary's, as applicable, revenue interest attributable to such WI, or (ii) create any liens in respect of such Wells or Units. (v) any title defects that Parent may have expressly waived in writing; (vi) liens arising under operating agreements, unitization, and pooling agreements, orders and statutes and production sales contracts securing amounts not yet due or, if due, being contested in good faith in the ordinary course of business; (vii) the terms and conditions of all contracts and agreements relating to the Properties, including exploration agreements, gas sales contracts, processing agreements, farmins, farmouts, operating agreements, and right-of-way agreements, to the extent such terms and conditions (i) do not decrease the Company's or its Subsidiary's, as applicable, revenue interest attributable to the Properties shown in Section 3.17(a) of the Company Disclosure Schedule, or increase the Company's WI above the WI shown in Section 3.17(a) of the Company Disclosure Schedule, without at least a proportionate increase in the Company's or its Subsidiary's, as applicable, revenue interest attributable to such WI, (ii) are normal and customary in the oil and gas industry, and (iii) would not conflict with any other portion of this definition of Permitted Encumbrances; (viii) royalties, overriding royalties, net profits interests, production payments, reversionary interests, and similar interests as shown in Section 3.17(a) of the Company Disclosure Schedule; (ix) conventional rights of reassignment requiring notice to the holders of the rights prior to surrendering or releasing a leasehold interest; AI-21 103 (x) calls on production exercisable only at prices substantially equivalent to then-current fair market value; (xi) consents to assignment and preferential rights to purchase any or all of the Properties other than any such consents or rights which (i) are applicable to the transactions contemplated by this Agreement or (ii) were applicable to a previous transaction involving the transfer of all or any portion of the Properties but were not complied with at the time of the consummation of such transaction; and (xii) those matters listed in Section 3.17(g) of the Company Disclosure Schedule. SECTION 3.18 Contracts. Set forth in Section 3.18 of the Company Disclosure Schedule is a true and correct description of each contract, agreement, lease or similar arrangement to which the Company or any of its Subsidiaries is a party or by which any of the assets of the Company or any of its Subsidiaries are bound and which: (i) is an agreement for the sale or purchase of any Hydrocarbons produced from or attributable to the Wells, the Lands or the Units, except those sales or purchase agreements which (i) by the terms of such agreement expire within six months or can be terminated by the Company or its Subsidiary, as applicable, upon not more than six months notice without penalty or (ii) involve aggregate expenditures or receipts not in excess of $50,000; (ii) creates any area of mutual interest with respect to the acquisition by the Company or any of its Subsidiaries or any of their respective assigns of any interest in any Hydrocarbons, lands or other assets; (iii) evidences an obligation to pay a deferred purchase price in excess of $150,000 for property or services; (iv) evidences a lease or rental of any land, building, or other improvements or portion thereof for a price in excess of $50,000 per year; (v) creates or evidences a mortgage, indenture, guarantee, note, loan agreement, pledge agreement, installment obligation, or other instrument for or relating to any borrowing of more than $50,000, except for inter-company borrowings between or among the Company and its Subsidiaries; (vi) subjects the Company or any of its Subsidiaries or the assets of the Company or any of its Subsidiaries to any partnership agreement or provisions requiring a partnership income tax return to be filed under Subchapter K of Chapter 1 of Subtitle A of the Code or a partnership information return under Section 229 of the Regulations to the Income Tax Act (Canada); (vii) creates or evidences an asset purchase or sale agreement involving aggregate consideration in excess of $50,000; (viii) creates or evidences an obligation to be or remain liable for any Environmental Liabilities (as defined below), excluding joint operating agreements entered into in the ordinary course of business; or (ix) is not described in items (i) through (viii) above and involves expenditures or receipts of $150,000 or more in any calendar year; (x) is not described in items (i) through (ix) above and the breach or loss of which would have a Material Adverse Effect on the Company. As to all such contracts, agreements, leases and arrangements, and except for such violations, breaches or other matters as do not involve amounts in excess of $50,000 in the aggregate as to individual contracts, agreements, leases and arrangements, (i) such contracts, agreements, leases and arrangements are in full force and effect; (ii) except to the extent that they are non-monetary and not material, there are no violations or breaches thereof, or existing facts or circumstances which upon notice or the passage of time or both will constitute a violation or breach thereof by the Company or any of its Subsidiaries or by any other party thereto; (iii) no notice of the exercise or attempted exercise of premature termination, price reduction, market-out or curtailment has been received by the Company or any of its Subsidiaries with respect thereto; AI-22 104 (iv) no notice has been received by the Company that any party thereto intends not to honor its obligations thereunder; and (v) except with regard to contracts as to which such delivery or access would violate the terms of such contract or any other agreement, true, correct and complete copies thereof have been made available to Parent by the Company and Company will, or will cause its applicable Subsidiaries to, promptly make requests of the parties for which delivery or access is so restricted and use reasonable best efforts to obtain or afford Parent access to such contracts. SECTION 3.19 Condition of Assets. Each of the Company and its Subsidiaries owns or has the right to use under customary industry terms the assets it needs to operate its business, including (a) plants, facilities, pipelines, gathering and processing systems, compressors and equipment, all of which have been maintained in a state of repair so as to be adequate for normal operations (b) easements, rights-of-way, surface leases, surface fee interests, licenses and permits and (c) seismic data (both proprietary and purchased from other persons). SECTION 3.20 Environmental Matters. The Company and its Subsidiaries have not received notice of any violation of or investigation relating to any U.S., Canadian, or other federal, state, provincial or local environmental or pollution law, regulation, or ordinance with respect to assets now or previously owned or operated by the Company or any of its Subsidiaries that has not been fully and finally resolved. All permits, licenses and other authorizations which are required under Environmental Laws relating to assets now owned or operated by the Company or any of its Subsidiaries, including Environmental Laws relating to actual or threatened emissions, discharges or releases of Pollutants have been obtained and are effective, and, with respect to assets previously owned or operated by the Company or any of its Subsidiaries, were obtained and were effective during the time of the Company's or any Subsidiaries' operation. No conditions exist on, in or about the properties now or previously owned or operated by the Company or any of its Subsidiaries or any third-party properties to which any Pollutants generated by the Company or any or its Subsidiaries were sent or released that give rise on the part of the Company or any of its Subsidiaries to liability under any Environmental Laws, claims by third parties under Environmental Laws or under common law or the incurrence of costs to avoid any such liability or claim (collectively, "Environmental Liabilities"). All operators of the Company's or any of its Subsidiaries' assets are in compliance with all terms and conditions of Environmental Laws, permits, licenses and authorizations, and are also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in such laws or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder, relating to the Company's or any of its Subsidiaries' assets. SECTION 3.21 Tax Matters. (a) "Company Group" shall mean as of any time any "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) that includes the Company as of that time. (b) With respect to each of the Company, the Company Group and each Subsidiary: (i) all Tax Returns required to be filed have been timely filed with the appropriate Governmental Entities in all jurisdictions in which such Tax Returns are required to be filed; (ii) all Taxes shown to be due on the Tax Returns referred to in clause (i) have been paid; (iii) none of the Company, the Company Group nor any Subsidiary has extended or waived the application of any statute of limitations of any jurisdiction regarding the assessment or collection of any Tax; (iv) none of the Company, the Company Group nor any Subsidiary is a party to any Tax allocation or sharing agreement (i.e., any agreement or arrangement for the payment of Tax liabilities or payment for Tax benefits with respect to a consolidated, combined or unitary Tax Return which includes the Company or any Subsidiary) with any corporation which is not directly or indirectly 100% owned by Company; (v) there are no claims, assessments, levies, administrative proceedings or lawsuits pending or threatened against the Company, the Company Group or any Subsidiary by any tax authority; (vi) there are no requests for rulings in respect of any Tax pending by the Company, the Company Group or any Subsidiary with any tax authority; (vii) none of the Company, the Company Group nor any Subsidiary has any liability for penalties with respect to the Tax Returns described in clause (i); (viii) no deficiency in respect of any Taxes which has been assessed against the Company, the Company Group or any Subsidiary remains unpaid and there are no audits or investigations pending against the Company, the Company Group or any Subsidiary with respect to any AI-23 105 Taxes; (ix) no claim has ever been made by any Governmental Entity in a jurisdiction in which the Company, the Company Group or any Subsidiary does not file Tax Returns that the Company, the Company Group or any Subsidiary is or may be subject to taxation by that jurisdiction; (x) there are no liens for Taxes upon any asset of the Company, the Company Group or any Subsidiary except for liens for current Taxes not yet due; (xi) the Tax Returns referred to in clause (i) relating to federal, state and provincial income Taxes have been examined by the Internal Revenue Service, Revenue Canada or the appropriate state, provincial or other tax authority or the period for assessment of the Taxes in respect of such Tax Returns has expired; (xii) there are no accounting method changes of the Company, the Company Group nor any Subsidiary that could reasonably be expected to give rise to an adjustment under Section 481 of the Code for periods after the Effective Date; (xiii) since January 1988, neither the Company nor any Subsidiary has ever been a member of any affiliated group as defined in Section 1504 of the Code, other than the Company Group; (xiv) the Company, the Company Group and each Subsidiary has paid (or accrued in the most recent financial statements filed with the Company SEC Documents) all Taxes attributable to all periods or portions thereof ending on or before September 30, 1994, except for any Taxes which are not material in amount; and (xv) the Company does not have an "excess loss account" (as determined pursuant to the regulations under Section 1502 of the Code) with respect to the stock of any Subsidiary or "deferred intercompany transactions" (as defined in the Code's Treasury Regulation Section 1.1502-13(a)(2)). (c) With respect to any spin-offs consummated by the Company and treated as tax free pursuant to Section 355 of the Code, the Company complied with the requirements of all letter rulings obtained from the IRS in respect thereto. (d) The Company and its Subsidiaries have not, as of the date of this Agreement, consummated any sales through any corporation intended to qualify as a "DISC" under Section 992 of the Code. SECTION 3.22 Tax-Free Reorganization. With respect to the qualification of the Merger as a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code: (a) to the best knowledge of the management of the Company, there is no plan or intention on the part of stockholders of the Company Stock to sell, exchange, or otherwise dispose of a number of shares of Parent Common Stock received in the Merger that would reduce the Company stockholders' ownership of Parent Common Stock to a number of shares having a value, as of the date of the Merger, of less than 50 percent of the value of all of the formerly outstanding shares of Company Stock as of the same date, provided, however, that shares of Company Stock exchanged for cash or other property surrendered by dissenters or exchanged for cash in lieu of fractional shares of Parent Common Stock will be treated as outstanding Company Stock on the date of the Merger, provided, further that shares of Company Stock and Parent Common Stock held by holders of Company Stock and otherwise sold, redeemed or disposed of prior or subsequent to the Merger will be considered in making this representation; (b) as of the Effective Time and immediately following the Merger, the Company will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Merger, provided that amounts paid by the Company to dissenters, amounts paid by the Company to holders of Company Stock who receive cash or other property, amounts used by the Company to pay reorganization expenses, and all redemptions and distributions (except for regular, normal dividends) made by the Company will be included as assets of the Company immediately prior to the Merger; (c) the Company will pay its respective expenses, if any, incurred in connection with the Merger; (d) at the time of the Merger, the Company will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire Company Stock that, if exercised or converted, would affect Parent's acquisition or retention of control of Company, as defined in Section 368(c) of the Code; (e) the Company is not an investment company as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code; (f) on the date of the Merger, the fair market value of the assets of the Company will exceed the sum of its liabilities plus (without duplication) the amount of liabilities, if any, to which the assets are subject; (g) the Company is not under the jurisdiction of a court in a title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code; (h) none of the compensation received by any shareholder-employees of the Company will be separate consideration for, or allocable to, any of their shares of Company Stock; (i) none of the Parent Common Stock received by any shareholder-employees of the Company will be separate consideration for, or allocable to, any employment AI-24 106 agreement; (j) the compensation paid to any shareholder-employees of the Company will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services; and (k) no intercorporate indebtedness between Parent and the Company or between Sub and the Company has been issued or acquired at a discount. SECTION 3.23 Hedging. The statement attached hereto as Section 3.23 of the Company Disclosure Schedule correctly sets forth for the periods shown obligations of the Company and each of its Subsidiaries as of the date of this Agreement for the delivery of Hydrocarbons attributable to any of the Company's or any of its Subsidiaries' properties in the future on account of prepayment, advance payment, take-or-pay or similar obligations without then or thereafter being entitled to receive full value therefor. Neither the Company nor any of its Subsidiaries is bound by futures, hedge, swap, collar, put, call, floor, cap, option or other contracts which are intended to benefit from or reduce or eliminate the risk of fluctuations in the price of commodities, including Hydrocarbons, or securities. SECTION 3.24 Accounts Receivable. Neither the Company nor any of its Subsidiaries has any account receivable which exceeds $50,000 and (i) is more than ninety days old as of October 31, 1994, (ii) is reasonably likely not to be collected by the Company or its applicable Subsidiary and (iii) as to which no specific reserve amount has been provided for and reflected on the Company's balance sheet as of September 30, 1994 previously provided to Parent. SECTION 3.25 Internal Financial Report. The consolidated financial report for the period ended October 31, 1994 prepared for the internal use of the Company's management (a true and correct copy of which has been furnished to Parent) was prepared in accordance with and consistent with past practice. SECTION 3.26 Undisclosed Liabilities. Except as set forth in the Company SEC Documents filed with the SEC prior to the date hereof, at the date of the most recent audited financial statements of the Company included in the Company SEC Documents, neither the Company nor any of its Subsidiaries had, and since such date neither the Company nor any of such Subsidiaries has incurred, any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by generally accepted accounting principles to be set forth or reflected on a financial statement or in the notes thereto or that, individually or in the aggregate, would have a Material Adverse Effect on the Company. SECTION 3.27 Takeover Defense Mechanisms. The Company has taken all action to assure that Section 203 of the DGCL shall not apply to prevent the Merger or any of the other transactions contemplated hereby (including prior approval by the Board of Directors of the Company of any "transaction which resulted in" Parent "becoming an interested stockholder" within the meaning of Section 203 of the DGCL). Except for the approval of the Merger as provided for in Section 6.1 of this Agreement, no other stockholder action on the part of the Company is required for approval of the Merger and the transactions contemplated hereby. No provision of the Certificate of Incorporation or Bylaws or other governing instruments of the Company or any of its Subsidiaries or the terms of any rights plan or other takeover defense mechanism of the Company or any of its Subsidiaries would, directly or indirectly, restrict or impair the ability of Parent to vote, or otherwise to exercise the rights of a stockholder with respect to, securities of the Company or any of its Subsidiaries that may be acquired or controlled by Parent or permit any stockholder to acquire securities of the Company or any of its Subsidiaries on a basis not available to Parent in the event that Parent were to acquire securities of the Company. SECTION 3.28 Fairness Opinion. The Board of Directors of the Company has received the opinion of Merrill Lynch & Co. to the effect that, as of the date of delivery of such opinion, the Exchange Ratio is fair, from a financial point of view, to the Company's stockholders. SECTION 3.29 No Misrepresentation. None of the factual information furnished in written or electronic form to Parent or its representatives by the Company in connection with this Agreement or the investigation by Parent with respect to this Agreement (i) was inaccurate or false in any material respect or (ii) knowingly omitted any portion of such information necessary to make the information that was furnished, in light of the circumstances, not misleading in any material respect. AI-25 107 ARTICLE IV REPRESENTATIONS AND WARRANTIES REGARDING SUB Parent and Sub jointly and severally represent and warrant to the Company as follows: SECTION 4.1 Organization and Standing. Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. Sub was organized solely for the purpose of entering into this Agreement and engaging in the transactions contemplated by this Agreement and has not engaged in any business since it was incorporated which is not in connection with this Agreement and the transactions contemplated by this Agreement. SECTION 4.2 Capital Structure. The authorized capital stock of Sub consists of 5,000 shares of common stock, par value $1.00 per share, 1,000 of which are validly issued and outstanding, fully paid and nonassessable and are owned by Parent free and clear of all liens, claims and encumbrances. SECTION 4.3 Authority. Sub has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement, the performance by Sub of its obligations hereunder and the consummation of the transactions contemplated hereby have been duly authorized by its Board of Directors and Parent as its sole stockholder, and, except for the corporate filings required by state law, no other corporate proceedings on the part of Sub are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Sub and (assuming the due authorization, execution and delivery hereof by the Company) constitutes a valid and binding obligation of Sub enforceable against Sub in accordance with its terms. ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS SECTION 5.1 Conduct of Business by the Company and Parent Pending the Merger. (a) During the period from the date of this Agreement through the Effective Time, each of Parent and the Company shall, and shall cause its Subsidiaries to, in all material respects carry on their respective businesses in, and not enter into any material transaction other than in accordance with, the ordinary course of business and, to the extent consistent therewith, use all reasonable efforts to preserve intact their current business organizations, keep available the services of their current officers and employees and preserve their relationships with customers, suppliers and others having business dealings with them with a view to retaining their goodwill and ongoing businesses unimpaired at the Effective Time. (b) Without limiting the generality of subparagraph (a), and, except as otherwise expressly contemplated by this Agreement, the Company shall not, and shall not permit any of its Subsidiaries to, without the prior written consent of Parent: (i)(x) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to stockholders of the Company in their capacity as such, other than dividends payable to the Company declared by any of the Company's wholly owned Subsidiaries, (y) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (z) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (ii) issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock, any other voting securities or equity equivalent or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities or equity equivalent (other than, in the case of the Company, the issuance of Company Stock during the period from the date of this AI-26 108 Agreement through the Effective Time upon the exercise of Company Stock Options outstanding on the date of this Agreement); (iii) amend its Certificate of Incorporation or amend its By-laws; (iv) acquire or agree to acquire by merging or consolidating with, or by purchasing all or substantially all of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof; (v) sell, lease or otherwise dispose of or agree to sell, lease or otherwise dispose of, any of its assets except for (x) sales of actual production in the ordinary course of business, (y) dispositions set forth in Section 5.1 of the Company Disclosure Schedule and (z) sales of assets (other than oil and gas properties or related plant, equipment, pipeline or gathering system assets or real property) made in the ordinary course of business consistent with past practice and not involving any asset with a value greater than $50,000 or assets with an aggregate value greater than $100,000; (vi) except in the ordinary course of business consistent with past practice and limited to borrowings under the existing principal revolving credit agreement of DEKALB Energy Canada Ltd. and other transactions not exceeding an aggregate amount equal to $100,000, (y) incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others or (z) make any loans, advances or capital contributions to, or investments in, any other person, other than to or in the Company or any wholly-owned Subsidiary of the Company; (vii) alter through merger, liquidation, reorganization, restructuring or in any other fashion the corporate structure or ownership of any Subsidiary of the Company; (viii) enter into, adopt or amend any severance plan, agreement or arrangement, any employee benefit plan or any employment or consulting agreement or hire any additional employees or consultants except as contemplated by Section 5.1(b)(viii) of the Company Disclosure Schedule; (ix) make or incur any capital expenditures or any expenditures in connection with this Agreement and the transaction contemplated hereby with regard to fees and expenses of investment bankers, legal counsel, accountants, experts and other consultants that are not set forth in Section 5.1 of the Company Disclosure Schedule (with appropriate contingencies) or in the Company's 1994 Capital Budget or the preliminary 1995 capital budget, a copy of which is attached to the Company Disclosure Schedule, or the superseding definitive 1995 capital budget to be prepared pursuant to Section 6.18, or make or incur any capital expenditure in an amount in excess of that set forth for any such item therein; (x) make any election relating to taxes or settle or compromise any tax liability; (xi) change any material accounting principle used by it, except for any change required by generally accepted accounting principles or by the rules of the SEC; (xii) waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement (except for any agreement with Parent) to which the Company or any Subsidiary is a party; or (xiii) authorize any of, or commit or agree to take any of, the foregoing actions; provided, however, that nothing herein shall be deemed to prohibit or prevent the Company from (A) if the Effective Time is not on or before April 15, 1995, incurring indebtedness on terms reasonably acceptable to Parent as required to redeem in whole or in part the Company's 10% Notes due 1998 which become redeemable April 15, 1995, (B) issuing Company Class A Stock or Company Class B Stock upon exercise of Company Stock Options outstanding on or prior to the Effective Time or (C) amending the Retirement Allowance Agreement of DEKALB Energy Canada Ltd. substantially in accordance with the proposed amendment heretofore furnished to Parent by the Company. AI-27 109 (c) Without limiting the generality of subparagraph (a), and, except as otherwise expressly contemplated by this Agreement, Parent shall not, and shall not permit any of its Subsidiaries to, without the prior written consent of the Company: (i) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to stockholders of Parent in their capacity as such, other than (1) ordinary quarterly cash dividends by Parent consistent with past practice in an amount not in excess of $.07 per share of Parent Common Stock, (2) dividends declared prior to the date of this Agreement, and (3) dividends payable to Parent declared by any of its Subsidiaries; (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock; or (iii) purchase, redeem or otherwise acquire any shares of capital stock of Parent or any of its Subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities. SECTION 5.2 No Solicitation. (a) The Company shall immediately cease and cause to be terminated all existing discussions and negotiations, if any, with any parties conducted heretofore with respect to any Takeover Proposal. As used in this Agreement, "Takeover Proposal" means any tender offer or exchange offer for 20% or more of the outstanding shares of Company Class A Stock or Company Class B Stock or any proposal or offer for a merger, consolidation, amalgamation or other business combination involving the Company or its Subsidiaries or any equity securities (or securities convertible into equity securities) of the Company, or any proposal or offer to acquire in any manner a 20% or greater equity or beneficial interest in, or a material amount of the assets or value of, the Company or its Subsidiaries, other than pursuant to the transactions contemplated by this Agreement. (b) Unless and until this Agreement shall have been terminated pursuant to Section 8.1 hereof, the Company will not, and will not permit any of its Subsidiaries or any of its or its Subsidiaries' officers, directors, employees, agents, financial advisors, counsel or other representatives (collectively, the "Company Representatives") to, directly or indirectly, (i) (A) solicit, (B) initiate or (C) (excluding any action referred to in clauses (ii) and (iii) of this sentence) encourage or take any action to facilitate the making of, any offer or proposal that constitutes or that is reasonably likely to lead to any Takeover Proposal, (ii) participate in any discussions (other than among the Company Representatives or as necessary to clarify the terms and conditions of any unsolicited offer, including any financing or other contingencies and other relevant facts with respect thereto) or negotiations regarding any Takeover Proposal or (iii) furnish to any person (other than the Company Representatives, Parent or its representatives) any nonpublic information or nonpublic data outside the ordinary course of conducting the Company's ordinary business; provided, however, that to the extent required by their fiduciary duties under applicable law and after consultation with and based upon the advice of outside legal counsel, the Company's Board of Directors and officers may in response to a person who initiates communication with the Company without there having occurred any action prohibited by clause (i) of this sentence take such actions as would otherwise be prohibited by clauses (ii) and (iii). The Company shall notify Parent orally and in writing of any such inquiries, offers or proposals (including the terms and conditions of any offer or proposal and the identity of the person making any inquiry, offer or proposal) and of any of the events described in Section 8.1(f) or 8.1(g) as promptly as possible and in any event within 24 hours after receipt thereof or the occurrence of such events, as appropriate, and shall give Parent five days' advance notice of any agreement to be entered into with or any information or data to be furnished to any person in connection with any such inquiry, offer or proposal. SECTION 5.3 Pooling of Interests; Reorganization. During the period from the date of this Agreement through the Effective Time, unless the other parties shall otherwise agree in writing, none of Parent, Sub, any other Subsidiary of Parent, the Company or any Subsidiary of the Company shall (a) knowingly take or fail to take any action which action or failure to act would jeopardize the treatment of Sub's combination with the Company as a pooling of interests for accounting purposes or (b) knowingly take or fail to take any action, AI-28 110 which action or failure to act would jeopardize qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. SECTION 5.4 Conduct of Business of Sub Pending the Merger. During the period from the date of this Agreement through the Effective Time, Sub shall not engage in any activities of any nature except as provided in or in furtherance of the transactions contemplated by this Agreement. SECTION 5.5 Notices of Certain Events. Each of the Company or Parent, as appropriate, shall promptly notify the other of receipt of: (a) any notice or other communication from any person other than a Governmental Entity alleging that the consent of such person is or may be required in connection with, or that any rights or properties of the Company may be lost or subjected to any preferential purchase or other similar rights by reason of, the transactions contemplated by this Agreement; (b) any notice or other communication from any Governmental Entity in connection with the transactions contemplated by this Agreement; and (c) notice of the inception of any actions, suits, claims, investigations or proceedings commenced or, to the best of its knowledge threatened, against, relating to or involving or otherwise affecting the Company or Parent or any respective Subsidiary which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 2.6 or Section 3.6 or which relate to the consummation of the transactions contemplated by this Agreement. ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.1 Company Stockholder Approval. The Company shall call a meeting of the holders of the Company Class A Stock (the "Stockholder Meeting") for the purpose of voting upon the Merger. The Stockholder Meeting shall be held as soon as practicable following the date upon which the Registration Statement becomes effective, and the Company will, through its Board of Directors recommend to the holders of the Company Class A Stock the approval of the Merger and not rescind its declaration that the Merger is advisable unless this Agreement is terminated pursuant to Article VIII. SECTION 6.2 Registration Statement; Proxy Statement. (a) As promptly as practicable after the execution of this Agreement, Parent shall prepare and file with the SEC the Registration Statement, containing a proxy statement/prospectus for stockholders of the Company (the "Proxy Statement/Prospectus") in connection with the registration under the Securities Act of the offer and sale of Parent Common Stock to be issued in the Merger and the other transactions contemplated by this Agreement. As promptly as practicable after the execution of this Agreement, the Company shall prepare and file with the SEC a proxy statement that will be the same as the Proxy Statement/Prospectus, and a form of proxy, in connection with the vote of the holders of the Company's Class A Stock with respect to the Merger (such proxy statement and form of proxy, together with any amendments thereof or supplements thereto, in each case in the form or forms mailed to the Company's stockholders, being the "Proxy Statement"). Unless this Agreement is terminated pursuant to Article VIII, each of Parent and the Company will use its best efforts to cause the Registration Statement to be declared effective as promptly as practicable, and shall take or cause to be taken any action required of it under any applicable federal or state securities laws in connection with the issuance of shares of Parent Common Stock in the Merger. Each of Parent and the Company shall furnish to the other all such information concerning it and the holders of its capital stock as the other may reasonably request in connection with such actions. As promptly as practicable after the Registration Statement shall have been declared effective, the Company shall mail the Proxy Statement (i) to its holders of Company Class A Stock entitled to notice of and to vote at the Stockholders Meeting and (ii) to its holders of Company Class B Stock. The Proxy Statement shall include the recommendation of the Company's Board of Directors in favor of the Merger and adoption of this Agreement. AI-29 111 (b) The information supplied by the Company for inclusion in the Registration Statement shall not, at the time the Registration Statement is declared effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. The information supplied by the Company for inclusion in the Proxy Statement to be sent to the stockholders of the Company in connection with the Stockholders Meeting shall not, at the date the Proxy Statement (or any supplement thereto) is first mailed to stockholders, at the time of the Stockholders Meeting or at the Effective Time contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time any event or circumstance relating to the Company or any of its affiliates, or its or their respective officers or directors should be discovered by the Company that should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, the Company shall promptly inform Parent thereof in writing. All documents that the Company is responsible for filing with the SEC in connection with the transactions contemplated herein will comply as to form in all material respects with the applicable requirements of the Securities Act and the rules and regulations thereunder and the Exchange Act and the rules and regulations thereunder. (c) The information supplied by Parent for inclusion in the Registration Statement shall not, at the time the Registration Statement is declared effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. The information supplied by Parent for inclusion in the Proxy Statement to be sent to the stockholders of the Company in connection with the Stockholders Meeting shall not, at the date the Proxy Statement (or any supplement thereto) is first mailed to stockholders, at the time of the Stockholders Meeting or at the Effective Time contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time any event or circumstance relating to Parent or any of its affiliates, or to their respective officers or directors, should be discovered by Parent that should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, Parent shall promptly inform the Company thereof in writing. All documents that Parent is responsible for filing with the SEC in connection with the transactions contemplated hereby will comply as to form in all material respects with the applicable requirements of the Securities Act and the rules and regulations thereunder and the Exchange Act and the rules and regulations thereunder. SECTION 6.3 Access to Information; Confidentiality; Standstill. (a) Each of Parent and the Company shall, and shall cause each of its Subsidiaries to, afford to the other, and to the other's accountants, counsel, financial advisors and other representatives, reasonable access and permit them to make such inspections as they may reasonably require during normal business hours during the period from the date of this Agreement through the Effective Time to all their respective properties, books, contracts, commitments and records and, during such period, each of Parent and the Company shall, and shall cause each of its Subsidiaries to, furnish promptly to the other (i) access to each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of U.S., Canadian, state, territorial, provincial or local laws and (ii) all other information concerning its business, properties and personnel as the other may reasonably request. In no event shall the Company be required to supply to Parent, or to Parent's accountants, counsel, financial advisors or other representatives, any information relating to indications of interest from, or discussions with, any other potential acquirors of the Company which were received or conducted prior to the date hereof except to the extent necessary for use in the Registration Statement. (b)(i) All data and information furnished by the Company to Parent or by Parent to the Company (with the party furnishing such being the "Disclosing Party" and the party receiving such being the "Receiving Party", as applicable) or by such Disclosing Party's directors, officers, employees, agents, consultants, attorneys, accountants, affiliates, or controlling persons (such persons collectively referred to herein as "Representatives", as applicable), whether furnished before or after the date hereof, and regardless of the manner in which it is furnished, is referred to in this Agreement as "Proprietary Information". Proprietary Information does not include, however, information which (x) is or becomes generally available to the public AI-30 112 other than as a result of a disclosure by the Receiving Party or its Representatives, (y) was available to the Receiving Party on a non-confidential basis prior to its disclosure by the Disclosing Party, or (z) becomes available to the Receiving Party on a non-confidential basis from a person other than the Disclosing Party who is not known by the Receiving Party to be (i) otherwise bound by a confidentiality agreement with the Disclosing Party, or (ii) not otherwise prohibited from transmitting the information to the Receiving Party. As used in this Agreement, the term "person" shall be broadly interpreted to include, without limitation, any corporation, company, partnership and individual. (ii) Unless otherwise agreed to in writing by the Disclosing Party, the Receiving Party agrees (x) except as otherwise required by law, to keep all Proprietary Information confidential and not to disclose or reveal any Proprietary Information to any person other than its Representatives and those employed by it who are actively and directly participating in the evaluation of the Merger contemplated by this Agreement or who otherwise need to know the Proprietary Information for the purpose of evaluating the Merger and to cause those persons to observe the terms of this Section and (y) not to use Proprietary Information for any purpose other than in connection with the consummation of the Merger in a manner which both parties have approved. The Receiving Party will be responsible for any breach of the terms hereof by it or the persons or entities referred to in clause (x) of the preceding sentence. In the event that the Receiving Party is requested pursuant to, or required by, applicable law or regulation or by legal process to disclose any Proprietary Information, the Receiving Party agrees to provide the Disclosing Party with prompt notice of such request(s) to enable the Disclosing Party to seek an appropriate protective order. (iii) In the event that this Agreement is terminated for any reason, the Receiving Party will, upon request, promptly (x) either deliver to the Disclosing Party or, at the election of the Disclosing Party, destroy all of the copies of the Disclosing Party's Proprietary Information as the same was furnished to the Receiving Party and (y) furnish to the Disclosing Party a copy of each summary, projection, analysis or extract prepared by the Receiving Party from or based on the Disclosing Party's Proprietary Information; provided, however, that the Receiving Party shall not be required to furnish any information pursuant to clause (y) in violation of any contractual or other applicable requirement not to disclose such summary, projection, analysis or extract. Without prejudice to the rights and remedies otherwise available to it, the Disclosing Party shall be entitled to equitable relief by way of injunction if the Receiving Party or any of its Representatives breach or threaten to breach any of the provisions of this Section 6.3(b); except that in no event shall a party be liable for punitive, special, consequential, or indirect damages. It is further understood and agreed that no failure or delay by a party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. (c) The Receiving Party also agrees that (except pursuant to the Merger) for a period of one (1) year from the date of this Agreement, neither the Receiving Party nor any of its Representatives will knowingly without the prior written consent of the Board of Directors of the Disclosing Party: (i) acquire, offer to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, any outstanding common stock or direct or indirect rights to acquire any such common stock of the Disclosing Party or any such common stock of the Disclosing Party or any subsidiary thereof, or of any successor to or person in control of the Disclosing Party, or (except in the ordinary course of business) any assets of the Disclosing Party or any subsidiary or division thereof or of any such successor or controlling person; (ii) make, or in any way participate, directly or indirectly, in any "solicitation" or "proxies" to vote (as such terms are used in the rules of the SEC), or seek to advise or influence any person or entity with respect to the voting of any voting securities of the Disclosing Party; (iii) make any public announcement unless otherwise required by law or stock exchange regulation with respect to, or submit a proposal for, or offer of (with or without conditions) any extraordinary transaction involving the Disclosing Party or its securities or assets; or (iv) form, join or in any way participate in a "group" as defined under Section 13(d) of the Exchange Act, in connection with any of the foregoing. AI-31 113 The Receiving Party will promptly advise the Disclosing Party of any inquiry or proposal made to the Receiving Party with respect to any of the foregoing. SECTION 6.4 Compliance with the Securities Act; Pooling. Section 6.4 to the Company Disclosure Schedule identifies all persons who, to the knowledge of the Company, may be deemed to be affiliates of the Company under Rule 145 of the Securities Act, including, without limitation, all directors and executive officers of the Company. Concurrently with the execution and delivery of this Agreement, Parent has received executed letter agreements, substantially in the form of Exhibit A hereto (the "Affiliate Agreements"), from certain of the persons identified on Section 6.4 to the Company Disclosure Schedule and the Company will use its reasonable best efforts to cause to be delivered to Parent within ten days after the date of this Agreement an executed Affiliate Agreement from each of the other persons identified thereon. Parent shall not be required to maintain the effectiveness of the Registration Statement for the purpose of resale by former stockholders of the Company who may be affiliates of the Company or Parent pursuant to Rule 145. SECTION 6.5 Stock Exchange Listing. Parent shall use its best efforts to list on the NYSE, upon official notice of issuance, the shares of Parent Common Stock to be issued in connection with the Merger and pursuant to the Company Stock Options. SECTION 6.6 Fees and Expenses. (a) Except as provided in Section 6.6(b), 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 costs and expenses. (b) The Company and Parent agree that if this Agreement is terminated for any reason, then (A) Parent shall pay (or reimburse the Company for) the fees and expenses of Ryder Scott Company Petroleum Engineers incurred by the Company pursuant to Section 6.15 hereof and (B) the Company and Parent shall share equally all out-of-pocket expenses incurred relating to (i) printing and mailing the Registration Statement and the Proxy Statement, (ii) the SEC and any "Blue Sky" filing fees in the United States or Canada incurred with filing the Registration Statement and (iii) the solicitation of stockholder approvals; provided, however, that if this Agreement is terminated by reason of a party's breach of this Agreement, such party shall not be entitled to reimbursement from the other party hereto pursuant to this Section 6.6(b). Within 10 days of termination of this Agreement, the Company and Parent shall deliver in writing to the other a schedule of expenses. As soon thereafter as practicable, but not later than 20 days after termination of this Agreement, either the Company or Parent as the case may be shall reimburse the other so as to comply with this Section 6.6(b). SECTION 6.7 Company Stock Options. (a) Parent and the Company shall take such actions as shall be required to permit Parent to, and Parent shall, effective at the Effective Time, (A) assume each option to purchase shares of Company Stock which is outstanding immediately prior to the Effective Time pursuant to the Company's Stock Option Plans, the long-term incentive plan or otherwise (each a "Company Stock Option") and which remains unexercised in whole or in part as of the Effective Time and (B) substitute shares of Parent Common Stock for the shares of Company Stock purchasable under each such assumed option ("Assumed Option"), which assumption and substitution shall be effected as follows: (i) the Assumed Option shall not give the optionee additional benefits which such optionee did not have under the Company Stock Option before such assumption, nor diminish the benefits which such options did have, and shall be assumed on the same terms and conditions as the Company Stock Option being assumed, subject to clauses (ii) and (iii) below; (ii) the number of shares of Parent Common Stock purchasable under the Assumed Option shall be equal to the number of shares of Parent Common Stock that the holder of the Company Stock Option being assumed would have received upon consummation of the Merger had such Company Stock Option been exercised (without regard to any vesting schedule restrictions) in full for Company Stock immediately prior to consummation of the Merger; and (iii) the exercise price per share of Parent Common Stock of such Assumed Option shall be an amount equal to (A) the exercise price per share of Company Common Stock of the Company Stock Option being assumed divided by (B) the Exchange Ratio. AI-32 114 (b) Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery upon exercise of the Assumed Options, and, immediately after the Effective Time, Parent shall file with the SEC a registration statement on Form S-8 (or other appropriate form) with respect to the shares of Parent Common Stock subject to the Assumed Options and use its reasonable efforts to maintain the effectiveness of such registration statement for so long as any of the Assumed Options remain outstanding. (c) Parent agrees to offer (the "Offer"), at the Effective Time, Parent Common Stock to the holders of Company Stock Options outstanding on the date hereof (each right to acquire a single share of Company Stock pursuant to a Company Stock Option being referred to herein as a "Company Option") in accordance with this Section 6.7(c) and Section 6.8. The number of shares of Parent Common Stock issuable in exchange for cancellation of each Company Option pursuant to the Offer shall be computed as follows: (i) the Market Price computed pursuant to Section 1.5(d) shall be multiplied by the Exchange Ratio determined pursuant to Section 1.5(c); (ii) the applicable exercise price of each Company Option shall be subtracted from the product obtained in clause (i) above; and (iii) the difference obtained in clause (ii) above shall be divided by the Market Price. In the event that the Offer is not accepted as to any Company Option, Parent shall assume such Company Option pursuant to Section 6.7(a) above. SECTION 6.8 Reasonable Efforts. Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger, the Offer and the other transactions contemplated by this Agreement, including (a) the obtaining of all necessary actions or non-actions, waivers, consents and approvals from Governmental Entities and the making of all necessary registrations and filings (including filings with Governmental Entities) and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by any Governmental Entity, (b) the obtaining of all necessary consents, approvals or waivers from third parties, (c) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay, temporary restraining order or injunction entered by any court or other Governmental Entity vacated or reversed, (d) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by this Agreement, (e) the preparing, filing and obtaining of a declaration of effectiveness of the Registration Statement under the Securities Act, (f) the preparing, filing, obtaining of SEC clearance and mailing to Company stockholders of the Proxy Statement and (g) the holding of the Stockholder Meeting. The Company and Parent shall confer on a regular and frequent basis between themselves and with representatives of one another to report on and to coordinate operational matters with regard to the Merger. SECTION 6.9 Public Announcements. Parent and Sub, on the one hand, and the Company, on the other hand, will consult with each other before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation, except upon the advice of counsel as may be required by applicable law or by obligations pursuant to any listing agreement with any national securities exchange. SECTION 6.10 State Takeover Laws. If any "fair price" or "control share acquisition" statute or other similar statute or regulation shall become applicable to the transactions contemplated hereby, the Company and the members of the Board of Directors of the Company shall use their best efforts to grant such approvals and take such actions as are necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and otherwise act to minimize the effects of such statute or regulation on the transactions contemplated hereby. SECTION 6.11 Directors and Officers Insurance; Indemnification. Parent will provide, or cause the Surviving Corporation to provide, for a period of not less than six years from the Effective Time, the Company's current directors and officers an insurance and indemnification policy that provides coverage for AI-33 115 events occurring through the Effective Time (the "D&O Insurance") that is no less favorable than the coverage provided to such directors under the Company's existing policy or, if substantially equivalent insurance coverage is unavailable, the best available comparable coverage; provided, however, that Parent and the Surviving Corporation shall not be required to pay an annual premium for the D&O Insurance in excess of five times the last annual premium paid by the Company prior to the date hereof, but in such case shall purchase as much coverage as possible for such amount. From and after the Effective Time, Parent (i) agrees to indemnify and hold harmless all past and present officers and directors of the Company and of its Subsidiaries to the same extent that such persons are currently entitled to be indemnified by the Company pursuant to the applicable provisions of the Company's Certificate of Incorporation or By-Laws or of any Company indemnification agreement for the benefit of any such officers or directors for acts or omissions occurring at or prior to the Effective Time, including those in connection with the Merger and (ii) shall advance reasonable litigation expenses incurred by such officers and directors in connection with defending any action arising out of such acts or omissions, and Parent agrees not to amend or modify any of such provisions after the Effective Time. SECTION 6.12 Employee Benefits. For at least 24 months following the Effective Time, Parent shall maintain employee benefits and programs for officers and employees of the Company and its Subsidiaries that are no less favorable than those being provided to such officers and employees on the date hereof. For purposes of eligibility to participate in and vesting in various benefits provided to employees, employees of the Company and its Subsidiaries will be credited with their years of service with the Company and its Subsidiaries. SECTION 6.13 Retention Bonuses; Severance Policy. (a) From the date hereof up to the Effective Time, the Company shall be permitted to offer and pay bonuses, in addition to any bonuses or payments pursuant to any existing bonus or incentive plans of the Company, payable to employees who remain in the employ of the Company or its Subsidiaries until the date three months after the Effective Time; provided, however, that such bonuses shall contain terms no more favorable than those described on Section 6.13(a) of the Company Disclosure Schedule. (b) Parent shall maintain the Company's severance policy for terminated employees as in effect on the date hereof, or shall replace such policy with a policy providing equal or more favorable compensation, for a period of at least 24 months following the Effective Time. The Company's severance policy is set forth in Section 6.13(b) of the Company Disclosure Schedule. SECTION 6.14 Signatory Stockholder Notice. If any Signatory Stockholder gives any notice under any of the Stockholder Agreements to any of the officers or directors of the Company, whether orally or in writing, such officer or director will immediately repeat or cause such notice to be conveyed to Parent. SECTION 6.15 Reserve Reports. Both Parent and the Company shall have Ryder Scott Company Petroleum Engineers ("Ryder Scott") undertake an audit of the respective parties' internal reports as of December 31, 1994 which shall set forth (a) the estimated volume and rate of production of hydrocarbons which may reasonably be expected to be produced from the proved reserves of their respective properties and (b) projections as to the amount of proved reserves for each property, showing separately proved developed producing reserves, proved developed non-producing reserves and proved undeveloped reserves. Each of the parties' respective audit reports shall be prepared in accordance with the accounting and reporting standards prescribed for use by independent petroleum engineers in making determinations and appraisals of hydrocarbon reserves, including, without limitation, assumptions, estimates and projections as to production expenses, availability of reserves and rates of production set forth in the SEC's Regulation S-X Part 210.4-10(a), as clarified by subsequent SEC Staff Accounting Bulletins; provided, however, that in preparing such report, Ryder Scott need only provide an audit opinion covering (i) Parent's properties comprising not less than 70% in value of the properties included in its most recent reserve report, (ii) 80% in value of Parent's properties not included in such reserve report, (iii) 80% in value of the Company's properties, and (iv) may review the evaluation by the respective parties' petroleum engineers in accordance with the foregoing criteria of the remainder of the respective parties' properties. Both parties shall prepare their December 31, 1994 financial statements consistently with the Ryder Scott audit reports provided for in this Section. Any impact of the adjustment of reserves of Parent or the Company attributable to such audit reports shall be disregarded for all AI-34 116 purposes in determining whether any representation or warranty has been breached by, or whether there has occurred any Material Adverse Change or Material Adverse Effect with respect to, Parent or the Company, as the case may be. SECTION 6.16 Accrual of Expenses. Both Parent and the Company shall accrue as liabilities on all financial statements prepared in accordance with generally accepted accounting principles ("GAAP") after the date hereof all expenses required by GAAP to be accrued in the event that the Merger is consummated and is accounted for as a pooling of interests for accounting purposes. SECTION 6.17 Publication of Financials. As promptly as reasonably practicable after the first complete calendar month after the Effective Time, Parent will cause to be publicly reported financial statements of Parent that include at least 30 days of combined operations of the Company and Parent after the Merger. SECTION 6.18 Capital Budget. The Company and Parent shall prepare a mutually acceptable 1995 budget of capital expenditures for the Company and its Subsidiaries as promptly as practicable and in any event by January 16, 1995. ARTICLE VII CONDITIONS PRECEDENT TO THE MERGER SECTION 7.1 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 Effective Time of the following conditions: (a) Stockholder Approval. The Merger shall have been approved by the requisite vote of the holders of Company Stock. (b) NYSE Listing. Parent Common Stock issuable in the Merger and pursuant to the Company Stock Options shall have been authorized for listing on the NYSE, upon official notice of issuance. (c) Registration Statement. The Registration Statement shall have become effective in accordance with the provisions of the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and remain in effect. All necessary authorizations by state, territorial or provincial securities regulatory authorities shall have been received. (d) No Order. No Governmental Entity or court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the Merger or the transactions contemplated hereby illegal. (e) Other Approvals. All authorizations, consents, orders, declarations or approvals of, or filings with, or terminations or expirations of waiting periods imposed by, any Governmental Entity shall have been obtained, shall have occurred or shall have been filed, except as would not (assuming consummation of the Merger) have a Material Adverse Effect on the Company. SECTION 7.2 Conditions to Obligation of the Company to Effect the Merger. The obligation of the Company to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions: (a) Performance of Obligations; Representations and Warranties. Parent and Sub shall have performed in all material respects each of their agreements contained in this Agreement required to be performed on or prior to the Effective Time. Each of the representations and warranties of Parent and Sub contained in this Agreement that is qualified by materiality shall be true and correct on and as of the Effective Time as if made on and as of such date and each of the representations and warranties that is not so qualified (except for the second sentence of Section 2.2) shall be true and correct in all material respects on and as of the Effective Time as if made on and as of such date, in each case as contemplated or permitted by this Agreement. AI-35 117 (b) Third Party Consents. All required authorizations, consents or approvals of any third party (other than a Governmental Entity), the failure to obtain which would (assuming the Merger had taken place) have a Material Adverse Effect on Parent, shall have been obtained. (c) Tax Opinion. The Company shall have received an opinion of Sidley & Austin, in form and substance satisfactory to the Company, dated the Effective Time, substantially to the effect that, for United States federal income tax purposes, on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing as of the Effective Time: (i) The Merger will constitute a reorganization for federal income tax purposes within the meaning of Section 368(a) of the Code and the Company, Parent and Sub will each be a party to that reorganization within the meaning of Section 368(b) of the Code; (ii) No gain or loss will be recognized by the Company for federal income tax purposes as a result of the Merger; (iii) No gain or loss will be recognized for federal income tax purposes by stockholders of the Company for federal income tax purposes who are United States persons (within the meaning of the Code) upon the conversion of their Company Stock into shares of Parent Common Stock pursuant to the Merger except with respect to cash, if any, received in lieu of fractional shares of Parent Common Stock or upon exercise of dissenters' rights of appraisal; (iv) The aggregate federal income tax basis of the shares of Parent Common Stock received in exchange for shares of Company Stock pursuant to the Merger will be the same as the aggregate federal income tax basis of such shares of Company Stock at the time of the Merger, decreased by the amount of any tax basis allocable to a fractional share interest for which cash is received or to shares with respect to which dissenters' rights of appraisal were exercised for which cash is received; and (v) The federal income tax holding period for shares of Parent Common Stock received in exchange for shares of Company Stock pursuant to the Merger will include the federal income tax holding period of such shares of Company Stock, provided such shares of Company Stock were held as capital assets by the holder on the Effective Date. In rendering such opinion, Sidley & Austin may receive and rely upon representations contained in certificates of the Company, Parent, Sub and others, and on the Affiliate Agreements. (d) Canadian Tax Opinion. The Company shall have received an opinion of Howard, Mackie, in form and substance satisfactory to the Company, dated the Effective Time, substantially to the effect that on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing as of the Effective Time and relying on an opinion of Sidley & Austin on the effect of the Merger under Delaware corporate law, no gain or loss will be recognized by Parent, Sub or the Company under the Income Tax Act (Canada) as a result of the Merger. (e) Officers' Certificate. Parent shall have furnished to the Company a certificate, dated the Effective Time, signed by the appropriate officers of Parent, certifying to the effect that to the best of the knowledge and belief of each of them, the conditions set forth in Section 7.1 and in this Section 7.2, insofar as they relate to Parent or Sub, have been satisfied. (f) Opinion of Counsel. The Company shall have received an opinion from Mayor, Day, Caldwell & Keeton, L.L.P., dated the Effective Time, substantially to the effect that: (i) The incorporation and good standing of Parent and Sub are as stated in this Agreement; the authorized shares of Parent and Sub are as stated in this Agreement; all outstanding shares of Parent Common Stock are duly and validly authorized and issued, fully paid and nonassessable and have not been issued in violation of any preemptive right of any stockholders. AI-36 118 (ii) Each of Parent and Sub has corporate power and authority to execute, deliver and perform this Agreement and this Agreement has been duly authorized, executed and delivered by Parent or Sub, as the case may be, and (assuming due and valid authorization, execution and delivery by the Company) constitutes the legal, valid and binding agreement of Parent or Sub enforceable against Parent or Sub in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws of general applicability relating to or affecting the enforcement of creditors' rights and by the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). (iii) The execution and performance by Parent and Sub of this Agreement will not violate the Certificates of Incorporation or By-Laws of Parent and Sub, respectively, and, to the knowledge of such counsel, will not violate, result in a breach of or constitute a default under any lease, mortgage, contract, agreement, instrument, law, rule, regulation, judgment, order or decree to which Parent and Sub is a party or by which they or any of their properties or assets may be bound. (iv) To the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental agency or body which has not been obtained is required on behalf of Parent and Sub for the consummation of the transactions contemplated by this Agreement. (v) To the knowledge of such counsel, there are no actions, suits or proceedings, pending or threatened against or affecting Parent and Sub, at law or in equity or before or by any court, governmental department, commission, board, bureau, agency or instrumentality, or before any arbitrator of any kind which seek to restrain, prohibit or invalidate the transactions contemplated by this Agreement. (vi) At the time the Registration Statement became effective, the Registration Statement (other than the financial statements, financial data, statistical data and supporting schedules included therein, and information relating to or supplied by the Company as to which such counsel expresses no opinion) complied as to form in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the SEC thereunder. (vii) The shares of Parent Common Stock to be issued pursuant to this Agreement will be, when so issued, duly authorized, validly issued and outstanding, fully paid and nonassessable. In addition, there shall be a statement to the effect that in the course of the preparation of the Registration Statement and the Proxy Statement such counsel has considered the information set forth therein in light of the matters required to be set forth therein, and has participated in conferences with officers and representatives of the Company and Parent, including their respective counsel and independent public accountants, during the course of which the contents of the Registration Statement and the Proxy Statement and related matters were discussed. Such counsel has not independently checked the accuracy or completeness of, or otherwise verified, and accordingly is not passing upon, and does not assume responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Proxy Statement; and such counsel has relied as to materiality, to a large extent, upon the judgment of officers and representatives of the Company and Parent. However, as a result of such consideration and participation, nothing has come to such counsel's attention which causes such counsel to believe that the Registration Statement (other than the financial statements, financial data, statistical data and supporting schedules included therein, and information relating to or supplied by the Company as to which such counsel expresses no belief), at the time it became effective, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Proxy Statement (other than the financial statements, financial data, statistical data and supporting schedules included therein, and information relating to or supplied by the Company, as to which such counsel expresses no belief), at the time the Registration Statement became effective, included any untrue statement of a material fact or AI-37 119 omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, counsel for Parent may rely as to matters of fact upon the representations of officers of Parent or Sub contained in any certificate delivered to such counsel and certificates of public officials, which certificates shall be attached to or delivered with such opinion. Such opinion shall be limited to the General Corporation Law of the State of Delaware and the laws of the United States of America. (g) Comfort Letters. The Company shall have received, in form reasonably satisfactory to the Company, comfort letters from Coopers & Lybrand and Arthur Andersen LLP covering such matters with respect to the Proxy Statement and the Registration Statement as reasonably requested by the Company. (h) Other Documents. Parent and Sub shall have furnished to the Company at the Closing such other customary documents, certificates or instruments as the Company may reasonably request. SECTION 7.3 Conditions to Obligations of Parent and Sub to Effect the Merger. The obligations of Parent and Sub to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions: (a) Performance of Obligations; Representations and Warranties. The Company shall have performed in all material respects each of its agreements contained in this Agreement required to be performed on or prior to the Effective Time. Each of the representations and warranties of the Company contained in this Agreement that is qualified by materiality shall be true and correct on and as of the Effective Time as if made on and as of such date and each of the representations and warranties that is not so qualified (except for the second sentence of Section 3.2 and clause (iii) of Section 3.5) shall be true and correct in all material respects on and as of the Effective Time as if made on and as of such date, in each case as contemplated or permitted by this Agreement. (b) Third Party Consents. All required authorizations, consents or approvals of any third party (other than a Governmental Entity), the failure to obtain which would (assuming the Merger had taken place) have a Material Adverse Effect on the Company, shall have been obtained. (c) Accounting. Based on the advice of Arthur Andersen LLP and such other advice as Parent may deem relevant, Parent shall have no reasonable basis for believing that following the Merger, the combination of the Company and Sub may not be accounted for as a "pooling of interests" in accordance with generally accepted accounting principles. (d) Tax Opinion. Parent shall have received an opinion of Mayor, Day, Caldwell & Keeton, L.L.P., in form and substance satisfactory to Parent, dated the Effective Time, substantially to the effect that for United States federal income tax purposes, on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing as of the Effective Time: (i) The Merger will constitute a reorganization for federal income tax purposes within the meaning of Section 368(a) of the Code and the Company, Parent and Sub will each be a party to that reorganization within the meaning of Section 368(b) of the Code; (ii) No gain or loss will be recognized by Parent, Sub or the Company for federal income tax purposes as a result of the Merger; (iii) No gain or loss will be recognized for federal income tax purposes by the stockholders of the Company for federal income tax purposes who are United States persons (within the meaning of the Code) upon the conversion of their Company Stock into shares of Parent Common Stock pursuant to the Merger except with respect to cash, if any, received in lieu of fractional shares of Parent Common Stock or upon exercise of dissenters' rights of appraisal; AI-38 120 (iv) The aggregate federal income tax basis of the shares of Parent Common Stock received in exchange for shares of Company Stock pursuant to the Merger will be the same as the aggregate federal income tax basis for such shares of Company Stock at the time of the Merger, decreased by the amount of any tax basis allocable to a fractional share interest for which cash is received or to shares with respect to which dissenters' rights of appraisal were exercised for which cash is received; and (v) The federal income tax holding period for shares of Parent Common Stock received in exchange for shares of Company Stock pursuant to the Merger will include the federal income tax holding period of such shares of Company Stock, provided such shares of Company Stock were held as capital assets by the holder on the Effective Date. In rendering such opinion, Mayor, Day, Caldwell & Keeton, L.L.P., may receive and rely upon representations contained in certificates of the Company, Parent, Sub and on the Affiliate Agreements. (e) Canadian Tax Opinion. Parent shall have received an opinion of Bennett Jones Verchere, in form and substance satisfactory to Parent, dated the Effective Time, substantially to the effect that on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing as of the Effective Time and relying on an opinion of Mayor, Day, Caldwell & Keeton, L.L.P. on the effect of the Merger under Delaware corporate law, no gain or loss will be recognized by Parent, Sub or the Company under the Income Tax Act (Canada) as a result of the Merger. (f) Officers' Certificate. The Company shall have furnished to Parent a certificate, dated the Effective Time, signed by the appropriate officers of the Company, certifying to the effect that to the best of the knowledge and belief of each of them, the conditions set forth in Section 7.1 and in this Section 7.3, insofar as they relate to the Company, have been satisfied. (g) Opinion of Counsel. Parent shall have received an opinion of counsel from Sidley & Austin, counsel to the Company, dated the Effective Time, substantially to the effect that: (i) The incorporation, good standing and capitalization of the Company are as stated in this Agreement; the authorized shares of Company Stock are as stated in this Agreement; all outstanding shares of Company Stock are duly and validly authorized and issued, fully paid and non-assessable and have not been issued in violation of any preemptive right of stockholders; and, to the knowledge of such counsel, there is no existing option, warrant, right, call, subscription or other agreement or commitment obligating the Company to issue or sell, or to purchase or redeem, any shares of its capital stock other than as stated in this Agreement. (ii) The Company has corporate power and authority to execute, deliver and perform this Agreement and this Agreement has been duly authorized, executed and delivered by the Company, and (assuming the due and valid authorization, execution and delivery by Parent and Sub) constitutes the legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws of general applicability relating to or affecting the enforcement of creditors' rights and by the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). (iii) To the knowledge of such counsel, there are no actions, suits or proceedings, pending or threatened against or affecting the Company or its Subsidiaries, at law or in equity or before or by any court, governmental department, commission, board, bureau, agency or instrumentality, or before any arbitrator of any kind which seek to restrain, prohibit or invalidate the transactions contemplated by this Agreement. (iv) The execution and performance by the Company of this Agreement will not violate the Certificate of Incorporation or By-laws of the Company or the charter or By-laws of any of its AI-39 121 Subsidiaries, and, to the knowledge of such counsel, will not violate, result in a breach of, or constitute a default under, any material lease, mortgage, contract, agreement, instrument, law, rule, regulation, judgment, order or decree to which the Company or any of its Subsidiaries is a party or to which they or any of their properties or assets may be bound. (v) To the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental agency or body which has not been obtained is required on behalf of the Company or any of its Subsidiaries for consummation of the transactions contemplated by this Agreement. (vi) At the time the Registration Statement became effective, the Registration Statement (other than the financial statements, financial data, statistical data and supporting schedules included therein, and information relating to or supplied by Parent or Sub as to which such counsel expresses no opinion) complied as to form in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the SEC thereunder. In addition, there shall be a statement to the effect that in the course of the preparation of the Registration Statement and the Proxy Statement such counsel has considered the information set forth therein in light of the matters required to be set forth therein, and has participated in conferences with officers and representatives of the Company and Parent, including their respective counsel and independent public accountants, during the course of which the contents of the Registration Statement and the Proxy Statement and related matters were discussed. Such counsel has not independently checked the accuracy or completeness of, or otherwise verified, and accordingly is not passing upon, and does not assume responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Proxy Statement; and such counsel has relied as to materiality, to a large extent, upon the judgment of officers and representatives of the Company and Parent. However, as a result of such consideration and participation, nothing has come to such counsel's attention which causes such counsel to believe that the Registration Statement (other than the financial statements, financial data, statistical data and supporting schedules included therein, and information relating to or supplied by Parent or Sub, as to which such counsel expresses no belief), at the time it became effective, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Proxy Statement (other than the financial statements, financial data, statistical data and supporting schedules included therein, and information relating to or supplied by Parent or Sub, as to which such counsel expresses no belief), at the time the Registration Statement became effective, included any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, counsel for the Company may rely as to matters of fact upon the representations of officers of the Company and its Subsidiaries contained in any certificate delivered to such counsel and certificates of public officials which certificates should be attached to and delivered with such opinion. Such opinion shall be limited to the General Corporation Law of the State of Delaware and the laws of the United States of America. (h) Comfort Letters. Parent shall have received, in form reasonably satisfactory to Parent, comfort letters from Arthur Andersen LLP and Coopers & Lybrand covering such matters with respect to the Registration Statement and the Proxy Statement as reasonably requested by Parent. (i) Other Documents. The Company shall have furnished to Parent at the closing such other customary documents, certificates or instruments as Parent may reasonably request. (j) Dissenting Stockholders. Holders of not more than 10% of the outstanding shares of Company Class A Stock shall have properly demanded appraisal rights for their shares as provided for in Section 1.11. AI-40 122 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after any approval by the stockholders of the Company: (a) by mutual consent of Parent and the Company; (b) by Parent if (i) the Company shall have failed to comply in any material respect with any of its covenants or agreements contained in this Agreement required to be complied with by the Company prior to the date of such termination, which failure to comply has not been cured within ten business days following receipt by the Company of notice of such failure to comply or (ii) the stockholders of the Company shall have failed to approve the Merger at the Stockholder Meeting; (c) by the Company if (i) Parent shall have failed to comply in any material respect with any of its covenants or agreements contained in this Agreement required to be complied with by Parent prior to the date of such termination, which failure to comply has not been cured within ten business days following receipt by Parent of notice of such failure to comply or (ii) the stockholders of the Company shall have failed to approve the Merger at the Stockholder Meeting; (d) by either Parent or the Company if (i) the Merger has not been effected on or prior to the close of business on June 30, 1995; provided, however, that the right to terminate this Agreement pursuant to this clause shall not be available to any party whose failure to fulfill any obligation of this Agreement has been the cause of, or resulted in, the failure of the Merger to have occurred on or prior to the aforesaid date; or (ii) any court of competent jurisdiction or any governmental, administrative or regulatory authority, agency or body shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; (e) (i) by the Company if there has been a breach by Parent (which breach has not been cured within ten business days following receipt by Parent of notice of the breach) of one or more representations or warranties (determined without regard to any qualification therein as to materiality) such that the adverse consequences of such breach or breaches would in the aggregate have a Material Adverse Effect on Parent; or (ii) by Parent if there has been a breach by the Company (which breach has not been cured within ten business days following receipt by the Company of notice of the breach) of one or more representations or warranties (determined without regard to any qualification therein as to materiality and in the case of Section 3.17, determined with reference to the net consequences of all variances whether favorable or adverse) such that the adverse consequences of such breach or breaches would in the aggregate have a Material Adverse Effect on the Company; (f) by Parent, (i) if the Company shall have taken or permitted any of the actions described in the first sentence of Section 5.2(b), (ii) if the Board of Directors of the Company shall have recommended, or shall have resolved to recommend, to the stockholders of the Company any Takeover Proposal or (iii) a tender offer or exchange offer for 20% or more of the outstanding shares of Company Class A Stock is commenced, and the Board of Directors of the Company does not recommend, within five days after the commencement of such offer, that stockholders not tender their shares into such tender or exchange offer; (g) by the Company if the Company's Board of Directors, to the extent required by their fiduciary duties under applicable law and after consultation with and based upon the advice of outside legal counsel, resolved to recommend to the stockholders of the Company, or agree to, a Takeover Proposal that provides stockholders of the Company a value per share of Company Stock in excess of a value equal to the product of (i) the Exchange Ratio (calculated as if the Effective Date were the date on which the Board of Directors of the Company is considering terminating this Agreement pursuant to this Section 8.1(g)) multiplied by (ii) the average of the per share closing prices of Parent Common Stock as AI-41 123 reported on the NYSE Composite Transactions Reporting System during the 10 consecutive trading days immediately preceding the day on which the Board of Directors of the Company is considering terminating this Agreement under this Section 8.1(g); or (h) by either Parent or the Company if the Market Price (calculated as if the Effective Date were the date of the Stockholder Meeting) is less than $22.00. In the event that either party may terminate this Agreement pursuant to more than one of the provisions set forth above, such party may terminate this Agreement pursuant to all of such provisions and may seek reimbursement and payments pursuant to Section 6.6 as such terminating party deems most favorable. SECTION 8.2 Effect of Termination. In the event of termination of this Agreement by either Parent or the Company, as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability hereunder on the part of the Company, Parent or Sub or their respective officers or directors (except for Sections 6.3(b), 6.3(c), 6.6 and 6.9, which shall to the extent provided therein survive the termination); provided, however, that nothing contained in this Section 8.2 shall relieve any party hereto from any liability for any breach of this Agreement. SECTION 8.3 Amendment. This Agreement may be amended by the parties hereto, by or pursuant to action taken by their respective Boards of Directors, at any time before or after approval of the Merger at the Stockholders Meeting, but after any such approval at the Stockholders Meeting no amendment shall be made which changes the Exchange Ratio as provided in Section 1.5 or which in any way materially adversely affects the rights of the stockholders of the Company, without the further approval of the holders of the Company Class A Stock. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. SECTION 8.4 Waiver. At any time prior to the Effective Time, any party hereto may (i) extend the time for the performance of any of the obligations or other acts of any other party hereto, (ii) waive any inaccuracies in the representations and warranties of any other party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements of any other party or any of the conditions to the obligations of such waiving party contained herein which may legally be waived. 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 and shall not constitute an amendment requiring the approval of the stockholders of the Company pursuant to Section 8.3 hereof. ARTICLE IX GENERAL PROVISIONS SECTION 9.1 Non-Survival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. SECTION 9.2 Written Notices. All written notices and other communications hereunder shall be and shall be deemed given if delivered personally, sent by overnight courier or telecopied (with a confirmatory copy sent by overnight courier) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or Sub, to: Apache Corporation 2000 Post Oak Blvd., Ste. 100 Houston, Texas 77056 Attention: James R. Bauman, Senior Vice President Telephone: (713) 296-6206 Telecopy: (713) 296-6457 AI-42 124 with copies (which shall not constitute notice) to: Apache Corporation 2000 Post Oak Blvd., Ste. 100 Houston, Texas 77056 Attention: Zurab S. Kobiashvili, General Counsel Telephone: (713) 296-6204 Telecopy: (713) 296-6458 Geoffrey K. Walker Mayor, Day, Caldwell & Keeton, L.L.P. 700 Louisiana, Suite 1900 Houston, Texas 77002-2778 Telephone: (713) 225-7023 Telecopy: (713) 225-7047 (b) if to the Company, to: DEKALB Energy Company 700-9th Avenue, SW 10th Floor Calgary, Alberta, Canada T2P 3V4 Attention: John H. Witmer, Jr., General Counsel Telephone: (403) 261-1200 Telecopy: (403) 266-5987 with a copy (which shall not constitute notice) to: Wilbur C. Delp, Jr. Sidley & Austin One First National Plaza Chicago, Illinois 60603 Telephone: (312) 853-7416 Telecopy: (312) 853-7036 SECTION 9.3 Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." SECTION 9.4 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. SECTION 9.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement, including the documents and instruments referred to herein, (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (b) except for provisions of Sections 6.11, 6.12 and 6.13, is not intended to confer upon any person other than the parties any rights or remedies hereunder. SECTION 9.6 Governing Law and Jurisdiction. (a) 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 laws thereof. AI-43 125 (b) Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought against any of the parties in any state court sitting in the City of Wilmington, Delaware, and each of the parties hereby consents to the exclusive jurisdiction of such court (and of the appropriate appellate courts) in any such suit, action or proceeding and waives any objection to venue. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the State of Delaware. Without limiting the foregoing, each of the parties hereto agrees that service of process upon such party at the address referred in Section 9.2 shall be deemed effective service of process upon such party. SECTION 9.7 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties without the prior written consent of the other parties, except that Sub may assign, in its sole discretion, any of or all its rights, interests and obligations under this Agreement to Parent or to any direct or indirect wholly-owned subsidiary of Parent, but no such assignment shall relieve Sub of any of 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. SECTION 9.8 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 are 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 shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions be consummated as originally contemplated to the fullest extent possible. SECTION 9.9 Enforcement of this Agreement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were 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 court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. SECTION 9.10 Further Assurances. If at any time after the Effective Time the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts or things are necessary, desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, its right, title or interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of either of the Constituent Corporations, or (b) otherwise to carry out the purposes of this Agreement, the Surviving Corporation and its proper officers and directors or their designees shall be authorized to execute and deliver, in the name and on behalf of either of the Constituent Corporations in the Merger, all such deeds, bills of sale, assignments and assurances and do, in the name and on behalf of such Constituent Corporations, all such other acts and things necessary, desirable or proper to vest, perfect or confirm its right, title or interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of such Constituent Corporations and otherwise to carry out the purposes of this Agreement. [SIGNATURE PAGE FOLLOWS] AI-44 126 IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized all as of the date first written above. APACHE CORPORATION By: /s/ RAYMOND PLANK -------------------------------- Name: Raymond Plank Title: Chairman of the Board XPX ACQUISITIONS, INC. By: /s/ RAYMOND PLANK -------------------------------- Name: Raymond Plank Title: Chairman of the Board DEKALB ENERGY COMPANY By: /s/ BRUCE P. BICKNER -------------------------------- Name: Bruce P. Bickner Title: Chairman of the Board AI-45 127 APPENDIX II Investment Banking Corp. World Financial Center North Tower New York, New York 10281-1324 212 449 1000 {MERRILL LYNCH LOGO} December 20, 1994 Board of Directors DEKALB Energy Company 700 9th Avenue SW Calgary, Alberta, Canada T2P 3V4 Gentlemen: DEKALB Energy Company (the "Company"), Apache Corporation ("Apache") and XPX Acquisitions, Inc., a wholly owned subsidiary of Apache (the "Merger Sub"), propose to enter into an agreement and plan of merger (the "Merger Agreement") pursuant to which the Company will be merged with the Merger Sub in a transaction (the "Merger") in which each outstanding share of the Company's voting Class A Stock, no par value, and each outstanding share of the Company's Class B (nonvoting) stock, no par value (together, the "Shares") (other than any Shares held in the treasury of the Company and any Shares owned by Apache, Merger Sub or any other wholly-owned subsidiary of Apache, all of which will be cancelled, and other than any Shares held by any wholly-owned subsidiary of the Company, which will remain outstanding), will be converted into the right to receive 0.85 shares of the Common Stock, par value $1.25 per share, of Apache (the "Apache Shares"), subject to adjustment as described in the Merger Agreement. The ratio at which the Shares will be converted into Apache Shares in accordance with the Merger Agreement is referred to herein as the "Exchange Ratio". You have asked us whether, in our opinion, the Exchange Ratio is fair to the holders of the Shares from a financial point of view. In arriving at the opinion set forth below, we have, among other things: (1) Reviewed the Company's Annual Reports, Forms 10-K and related financial information for the three fiscal years ended December 31, 1993 and the Company's Forms 10-Q and the related unaudited financial information for the quarterly periods ended March 31, 1994, June 30, 1994 and September 30, 1994; (2) Reviewed Apache's Annual Reports, Forms 10-K and related financial information for the three fiscal years ended December 31, 1993 and Apache's Forms 10-Q and the related unaudited financial information for the quarterly periods ended March 31, 1994, June 30, 1994 and September 30, 1994; AII-1 128 {MERRILL LYNCH LOGO} (3) Reviewed certain information relating to the business, earnings, cash flow and assets of the Company and Apache furnished to us by the Company and Apache, respectively; (4) Reviewed financial forecasts for the Company furnished to us by the Company; (5) Reviewed certain reserve and reserve production estimates for 1993 and 1994 for the Company and Apache prepared by the Company and Apache, respectively, and the reserve audit letters for l993 for the Company and Apache, respectively, prepared by Ryder Scott Company, and discussed such reserve and reserve production estimates with the Company, Apache, and Ryder Scott Company, respectively; (6) Considered the pro forma effect of the pending acquisitions by Apache of U.S. assets of Crystal Oil Company and certain oil and gas assets of Texaco Exploration & Production Inc.; (7) Conducted discussions with members of senior management of the Company and Apache concerning their respective businesses and prospects; (8) Reviewed the historical market prices and trading activity for the Shares and the Apache Shares and compared them with that of certain publicly traded companies which we deemed to be reasonably similar to the Company and Apache, respectively; (9) Compared the results of operations of the Company and Apache with that of certain companies which we deemed to be reasonably similar to the Company and Apache, respectively; (10) Compared the proposed financial terms of the Merger with the financial terms of certain other mergers and acquisitions which we deemed to be relevant; (11) Reviewed a draft dated December 18, 1994 of the Merger Agreement; and (12) Reviewed such other financial studies and analyses and performed such other investigations and taken into account such other matters as we deemed necessary, including our assessment of general economic, market and monetary conditions. AII-2 129 {MERRILL LYNCH LOGO} In preparing our opinion, we have relied on the accuracy and completeness of all information supplied or otherwise made available to us by the Company and Apache, and we have not independently verified such information or undertaken an independent appraisal of the assets of the Company or Apache. With respect to the reserve-related information furnished by the Company and Apache, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of the managements of the Company and Apache as to the reserves of the Company or Apache, as the case may be. With respect to the financial forecasts furnished by the Company, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of the Company's management as to the expected future financial performance of the Company. We have also assumed (i) that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the U.S. Internal Revenue Code of 1986, as amended, and will not result in any liability to the Company under the Income Tax Act (Canada), and (ii) that the Merger will be accounted for as a pooling-of-interests in accordance with generally accepted accounting principles. Our opinion is based upon market, economic, financial and other conditions as they exist and can be evaluated as of the date hereof. In connection with the preparation of this opinion, we have not been authorized by the Company or its Board of Directors to solicit, nor have we solicited, third-party indications of interest for the acquisition of all or any part of the Company. We have, however, had discussions with a number of parties who submitted unsolicited indications of interest in acquiring the Company. We have, in the past, provided financial advisory and financing services to the Company and Apache and have received fees for the rendering of such services. We have acted as financial advisor to the Company in connection with the Merger and will receive a fee for our services upon consummation of the Merger. In the ordinary course of business, we may actively trade the securities of both the Company and Apache for our own account and for the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities. On the basis of, and subject to the foregoing, we are of the opinion that, as of the date hereof, the Exchange Ratio is fair to the holders of the Shares from a financial point of view. Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED AII-3 130 APPENDIX III SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW Appraisal Rights. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to sec.228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to sec.251, 252, 254, 257, 258, 263 or 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the holders of the surviving corporation as provided in subsection (f) of sec.251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under sec.253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. AIII-1 131 (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to sec. 228 or 253 of this title, the surviving or resulting corporation, either before the effective date of the merger or consolidation or within 10 days thereafter, shall notify each of the stockholders entitled to appraisal rights of the effective date of the merger or consolidation and that appraisal rights are available for any or all of the shares of the constituent corporation, and shall include in such notice a copy of this section. The notice shall be sent by certified or registered mail, return receipt requested, addressed to the stockholder at his address as it appears on the records of the corporation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of the notice, demand in writing from the surviving or resulting corporation the appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of AIII-2 132 their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall AIII-3 133 be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. (Last amended by Ch. 262, L. '94, eff. 7-1-94.) AIII-4 134 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL, inter alia, authorizes a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) because the person is or was a director, officer, employee or agent of another corporation or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the suit or proceeding if the person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reason to believe his conduct was unlawful. Similar indemnity is authorized against expenses (including attorneys' fees) actually and reasonably incurred in defense or settlement of any pending, completed or threatened action or suit if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and provided further that (unless a court of competent jurisdiction otherwise provides) the person shall not have been adjudged liable to the corporation. The indemnification may be made only as authorized in each specific case upon a determination by the stockholders or disinterested directors that indemnification is proper because the indemnitee has met the applicable standard of conduct. Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against him and incurred by him in any capacity, or arising out of his status as such, whether or not the corporation would otherwise have the power to indemnify him. Apache maintains policies insuring the officers and directors of Apache and its subsidiaries against certain liabilities for actions taken in their capacities, including liabilities under the Securities Act. Article VII of Apache's Bylaws provides, in substance, that directors, officers, employees and agents of Apache shall be indemnified to the extent permitted by Section 145 of the DGCL. Additionally, Article Seventeen of Apache's Charter eliminates in certain circumstances the monetary liability of directors of Apache for a breach of their fiduciary duty as directors. These provisions do not eliminate the liability of a director (i) for a breach of a director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions by a director not in good faith; (iii) for acts or omissions by a director involving intentional misconduct or a knowing violation of the law; (iv) under Section 174 of the DGCL (relating to the declaration of dividends and purchase or redemption of shares in violation of the DGCL); and (v) for transactions from which the director derived an improper personal benefit. II-1 135 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following exhibits are filed herewith unless otherwise indicated: 2.1 -- Agreement and Plan of Merger among Apache Corporation, XPX Acquisitions, Inc., and DEKALB Energy Company dated December 21, 1994 (included as Appendix I to the Proxy Statement/Prospectus filed as part of this Registration Statement) 2.2 -- Form of Stockholder Agreement dated December 21, 1994 (incorporated by reference to Exhibit 7(b) to Schedule 13D relating to DEKALB Class A Stock, filed with the Commission on January 3, 1995) 2.3 -- Form of Affiliate Agreement dated December 21, 1994 (incorporated by reference to Exhibit 7(c) to Schedule 13D relating to DEKALB Class A Stock, filed with the Commission on January 3, 1995) 4.1 -- Restated Certificate of Incorporation of Apache Corporation (incorporated by reference to Exhibit 3.1 to Apache's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File No. 1-4300) 4.2 -- Bylaws of Apache Corporation (incorporated by reference to Exhibit 3.3 to Apache's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File No. 1-4300) 4.3 -- Form of Apache Common Stock Certificate (incorporated by reference to Exhibit 4.4 to Apache's Registration Statement on Amendment No. 1 to Form S-3, Registration No. 33-5097, filed with the Commission on May 16, 1986) 4.4 -- Rights Agreement dated as of January 10, 1986, between Apache and First Trust Company, Inc., rights agent, relating to the declaration of Rights to Apache's common stockholders of record on January 24, 1986 (incorporated by reference to Exhibit 4.9 to Apache's Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4300) 4.5 -- Indenture dated as of May 15, 1992, among Apache and Norwest Bank, Minnesota, N.A. as trustee, relating to Apache's 9.25% Notes due 2002 (incorporated by reference to Exhibit 4.01 to Apache's Registration Statement on Form S-3, Registration No. 33-47363, filed with the Commission on April 21, 1992) 4.6 -- Indenture dated as of July 15, 1986, and First Supplemental Indenture dated as of October 5, 1988, between Apache, Key Production Company, Inc. and NCNB Texas National Bank, as trustee, relating to the 9% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 4.16 to Apache's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, Commission File No. 1-4300) 4.7 -- Fiscal Agency Agreement dated as of January 4, 1995, between Apache and Chemical Bank, as fiscal agent, relating to the 6% Convertible Subordinated Debentures due 2002 (incorporated by reference to Exhibit 99.2 to Apache's Current Report on Form 8-K/A dated December 6, 1994, Commission File No. 1-4300) 5.1* -- Form of opinion of Mayor, Day, Caldwell & Keeton, L.L.P., as to legality of issuance of Apache Common Stock 8.1* -- Form of opinion of Mayor, Day, Caldwell & Keeton, L.L.P., as to certain U.S. tax issues 8.2* -- Form of opinion of Sidley & Austin as to certain U.S. tax issues 8.3* -- Form of opinion of Bennett Jones Verchere as to certain Canadian tax issues 8.4* -- Form of opinion of Howard, Mackie as to certain Canadian tax issues
II-2 136 13.1 -- Annual Report of DEKALB Energy Company on Form 10-K for the fiscal year ended December 31, 1993 13.2 -- Quarterly Report of DEKALB Energy Company on Form 10-Q for the period ended September 30, 1994 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Coopers & Lybrand 23.3* -- Consent of Mayor, Day, Caldwell & Keeton, L.L.P. 23.4* -- Consent of Sidley & Austin 23.5* -- Consent of Bennett Jones Verchere 23.6* -- Consent of Howard, Mackie 23.7* -- Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated 24.1 -- Power of Attorney (included as a part of the signature pages in Part II of this Registration Statement) 99.1 -- Form of Proxy Card 99.2 -- Opinion dated December 20, 1994 of Merrill Lynch, Pierce, Fenner & Smith Incorporated as to the fairness of the Exchange Ratio to the holders of DEKALB Stock (included as Appendix II to the Proxy Statement/Prospectus filed as part of this Registration Statement) 99.3 -- Letter of Coopers & Lybrand regarding review of interim financial information
- --------------- * To be filed by pre-effective amendment ITEM 22. UNDERTAKINGS The undersigned registrant hereby undertakes as follows: (a) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (b) (1) That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person who is deemed to be an underwriter within the meaning of Rule 145 (c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form; (2) That every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of section 10(a) (3) of the Securities Act of 1933, and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such II-3 137 indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue; (d) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request; and (e) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired therein, that was not the subject of and included in the Registration Statement when it became effective. II-4 138 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS. APACHE CORPORATION Date: January 17 1995 By: RAYMOND PLANK ------------------------------------- --------------------------------- Chairman and Chief Executive Officer
POWER OF ATTORNEY The officers and directors of Apache Corporation, whose signatures appear below, hereby constitute and appoint Raymond Plank, G. Steven Farris, Z.S. Kobiashvili and Mark A. Jackson, and each of them (with full power to each of them to act alone), the true and lawful attorney-in-fact to sign and execute, on behalf of the undersigned, any amendment(s) to this registration statement and each of the undersigned does hereby ratify and confirm all that said attorneys shall do or cause to be done by virtue thereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.*
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------ ---------------- RAYMOND PLANK Chairman and Chief Executive January 17, 1995 - --------------------------------------------- Officer (Principal Executive Raymond Plank Officer) MARK A. JACKSON Vice President, Finance January 17, 1995 - --------------------------------------------- Mark A. Jackson R. KENT SAMUEL Controller and Chief January 17, 1995 - --------------------------------------------- Accounting Officer R. Kent Samuel - --------------- * Apache Corporation does not have a Principal Financial Officer.
(continued) 139
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------ ---------------- FREDERICK M. BOHEN Director January 17, 1995 - --------------------------------------------- Frederick M. Bohen VIRGIL B. DAY Director January 17, 1995 - --------------------------------------------- Virgil B. Day G. STEVEN FARRIS Director January 17, 1995 - --------------------------------------------- G. Steven Farris RANDOLPH M. FERLIC Director January 17, 1995 - --------------------------------------------- Randolph M. Ferlic EUGENE C. FIEDOREK Director January 17, 1995 - --------------------------------------------- Eugene C. Fiedorek W. BROOKS FIELDS Director January 17, 1995 - --------------------------------------------- W. Brooks Fields ROBERT V. GISSELBECK Director January 17, 1995 - --------------------------------------------- Robert V. Gisselbeck STANLEY K. HATHAWAY Director January 17, 1995 - --------------------------------------------- Stanley K. Hathaway JOHN A. KOCUR Director January 17, 1995 - --------------------------------------------- John A. Kocur JAY A. PRECOURT Director January 17, 1995 - --------------------------------------------- Jay A. Precourt JOSEPH A. RICE Director January 17, 1995 - --------------------------------------------- Joseph A. Rice
140 INDEX TO EXHIBITS
EXHIBIT NUMBER - --------------------- 2.1 -- Agreement and Plan of Merger among Apache Corporation, XPX Acquisitions, Inc., and DEKALB Energy Company dated December 21, 1994 (included as Appendix I to the Proxy Statement/Prospectus filed as part of this Registration Statement) 2.2 -- Form of Stockholder Agreement dated December 21, 1994 (incorporated by reference to Exhibit 7(b) to Schedule 13D relating to DEKALB Class A Stock, filed with the Commission on January 3, 1995) 2.3 -- Form of Affiliate Agreement dated December 21, 1994 (incorporated by reference to Exhibit 7(c) to Schedule 13D relating to DEKALB Class A Stock, filed with the Commission on January 3, 1995) 4.1 -- Restated Certificate of Incorporation of Apache Corporation (incorporated by reference to Exhibit 3.1 to Apache's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File No. 1-4300) 4.2 -- Bylaws of Apache Corporation (incorporated by reference to Exhibit 3.3 to Apache's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File No. 1-4300) 4.3 -- Form of Apache Common Stock Certificate (incorporated by reference to Exhibit 4.4 to Apache's Registration Statement on Amendment No. 1 to Form S-3, Registration No. 33-5097, filed with the Commission on May 16, 1986) 4.4 -- Rights Agreement dated as of January 10, 1986, between Apache and First Trust Company, Inc., rights agent, relating to the declaration of Rights to Apache's common stockholders of record on January 24, 1986 (incorporated by reference to Exhibit 4.9 to Apache's Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4300) 4.5 -- Indenture dated as of May 15, 1992, among Apache and Norwest Bank, Minnesota, N.A. as trustee, relating to Apache's 9.25% Notes due 2002 (incorporated by reference to Exhibit 4.01 to Apache's Registration Statement on Form S-3, Registration No. 33-47363, filed with the Commission on April 21, 1992) 4.6 -- Indenture dated as of July 15, 1986, and First Supplemental Indenture dated as of October 5, 1988, between Apache, Key Production Company, Inc. and NCNB Texas National Bank, as trustee, relating to the 9% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 4.16 to Apache's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, Commission File No. 1-4300) 4.7 -- Fiscal Agency Agreement dated as of January 4, 1995, between Apache and Chemical Bank, as fiscal agent, relating to the 6% Convertible Subordinated Debentures due 2002 (incorporated by reference to Exhibit 99.2 to Apache's Current Report on Form 8-K/A dated December 6, 1994, Commission File No. 1-4300) 5.1* -- Form of opinion of Mayor, Day, Caldwell & Keeton, L.L.P., as to legality of issuance of Apache Common Stock 8.1* -- Form of opinion of Mayor, Day, Caldwell & Keeton, L.L.P., as to certain U.S. tax issues 8.2* -- Form of opinion of Sidley & Austin as to certain U.S. tax issues 8.3* -- Form of opinion of Bennett Jones Verchere as to certain Canadian tax issues 8.4* -- Form of opinion of Howard, Mackie as to certain Canadian tax issues
141
EXHIBIT NUMBER - --------------------- 13.1 -- Annual Report of DEKALB Energy Company on Form 10-K for the fiscal year ended December 31, 1993 13.2 -- Quarterly Report of DEKALB Energy Company on Form 10-Q for the period ended September 30, 1994 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Coopers & Lybrand 23.3* -- Consent of Mayor, Day, Caldwell & Keeton, L.L.P. 23.4* -- Consent of Sidley & Austin 23.5* -- Consent of Bennett Jones Verchere 23.6* -- Consent of Howard, Mackie 23.7* -- Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated 24.1 -- Power of Attorney (included as a part of the signature pages in Part II of this Registration Statement) 99.1 -- Form of Proxy Card 99.2 -- Opinion dated December 20, 1994 of Merrill Lynch, Pierce, Fenner & Smith Incorporated as to the fairness of the Exchange Ratio to the holders of DEKALB Stock (included as Appendix II to the Proxy Statement/Prospectus filed as part of this Registration Statement) 99.3 -- Letter of Coopers & Lybrand regarding review of interim financial information
- --------------- * To be filed by pre-effective amendment EX-13.1 2 A/R DEKALB 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K (MARK ONE) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE /X/ SECURITIES EXCHANGE ACT OF 1934 ___ FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF ____ THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0-2886 DEKALB ENERGY COMPANY (Exact name of registrant as specified in its charter) DELAWARE 36-0987809 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700-9TH AVENUE S.W. T2P 3V4 CALGARY, ALBERTA CANADA (Postal Code) (Address of principal executive offices) Registrant's telephone number, including area code: (403) 261-1200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Class A Stock, no par value Class B (nonvoting) Stock, no par value Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ___ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ ___ As of January 31, 1994, 2,337,208 shares of the registrant's Class A Stock and 7,269,017 shares of Class B (nonvoting) Stock were outstanding and the aggregate market value of all voting stock held by non-affiliates was $12,345,744 based upon the closing price on the NASDAQ Over-the-Counter markets on the last trading day of January. (The officers, directors and 10% shareholders of the registrant are considered affiliates for purposes of this calculation.) DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement pertaining to the annual shareholders' meeting to be held on May 18, 1994 are incorporated herein by reference into Part III. EXHIBIT INDEX IS LOCATED ON PAGES 49 TO 51. TOTAL NUMBER OF PAGES IS 63. 2 DEKALB ENERGY COMPANY TABLE OF CONTENTS
PAGE ---- PART I - -------- Item 1. Business..................................................................... 3 Item 2. Properties................................................................... 5 Item 3. Legal Proceedings............................................................ 7 Item 4. Submission of Matters to a Vote of Security Holders Executive Officers of the Registrant................................................................. 8 PART II - -------- Item 5. Market for Registrant's Stock and Related Stockholders' Matters.............. 10 Item 6. Selected Financial Data...................................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 14 Item 8. Financial Statements and Supplementary Financial Information................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................. 48 PART III - -------- Item 10. Directors and Executive Officers of the Registrant........................... 48 Item 11. Executive Compensation....................................................... 48 Item 12. Security Ownership of Certain Beneficial Owners and Management............... 48 Item 13. Certain Relationships and Related Transactions............................... 48 PART IV - -------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 49 Signatures................................................................... 52 APPENDIX - -------- Documents Filed in Paper Format Under Form SE.......................................... 63
2 3 PART I ITEM 1. BUSINESS (a) On July 2, 1990, DEKALB Energy Company ("DEKALB" or the "Company") purchased from Royal Producing Corp.-Texas for $130.2 million, an interest in thirty-six onshore oil and gas fields, most of which were located in the Texas Gulf Coast. On July 3, 1990, the Company transferred its interest in certain of these acquired fields in exchange for $5.2 million and an increased interest in one of the fields obtained through the acquisition. The purchase price was funded through the Company's revolving credit agreement. On July 12, 1990, the Company issued $75 million of 9 7/8% notes due July 15, 2000, in a public offering. The net proceeds of $74.4 million were used to reduce the line of credit borrowing. On October 16, 1992, the Company sold substantially all of its U.S. oil and gas properties to Louis Dreyfus Gas Holdings Inc. The effective date of the transaction was July 1, 1992. The Company did not sell its Canadian or California properties. Proceeds from the transaction were used primarily to reduce the Company's long-term debt. On August 5, 1993, the Company sold all of its California gas wells to Samedan Oil Corporation for $5.1 million. The effective date of the transaction was July 1, 1993. Proceeds from the transaction were used to repurchase long-term debt. The Company's only remaining assets in the U.S. are a non-operated interest in an oil well in California and acreage adjacent thereto. In 1994, the Company will concentrate on exploration and development of Canadian prospects in the provinces of Alberta and British Columbia. To take advantage of strong natural gas demand and prices, the Company will direct most of its activities toward natural gas prospects. Oil prospects will be pursued where there is potential for significant additions and immediate opportunities for development. (b) DEKALB is engaged in only one industry segment on a continuing basis. (c) DEKALB is engaged in the exploration for, and the development and production of, crude oil and natural gas in Canada and in California. The Company's wholly-owned Canadian subsidiary, DEKALB Energy Canada Ltd., concentrates its exploration and development activity in the provinces of Alberta and British Columbia. Since the disposition of the U.S. assets in 1992 and 1993, DEKALB's only U.S. activity is in the state of California. DEKALB's operations are largely dependent upon its ability to discover or acquire reserves of oil and natural gas, to produce oil and natural gas in commercial quantities, and to obtain additional unproved oil and gas lands by lease, option, concession, or otherwise. The prices obtained for the sale of oil and natural gas depend upon numerous factors, most of which are beyond the control of the Company, including the domestic and foreign production rates of oil and natural gas, market demand, and the effect of government regulations and incentives. 3 4 ITEM 1. BUSINESS -- (CONTINUED) COMPETITION There is a high degree of competition in the oil and gas industry for the acquisition of prospective oil and gas properties and oil and gas reserves, and in the marketing and transportation of natural gas. A number of the companies with which DEKALB competes are substantially larger and have greater financial resources than DEKALB. MARKETING Oil produced by DEKALB is sold to crude oil purchasers or refiners at market prices which depend on worldwide crude prices adjusted for location and quality of the oil. Natural gas produced by DEKALB is sold to major aggregators of natural gas, gas marketers and direct users under long and short-term contracts. These contracts provide for sales at specified prices, or at prices which are subject to change due to market conditions. Also, the Company enters into hedge contracts from time to time to reduce the Company's exposure to oil and gas price fluctuations. It is a Company goal to diversify markets for Canadian gas by exporting directly to the United States. The Company began exporting gas into the U.S. Midwest market area from Canada in June 1989 using interruptible transportation. In 1990, 1991 and 1992 the Company used a combination of interruptible transportation and storage in Michigan to provide Midwest customers with gas. This program was discontinued in 1992 due to lack of transportation into the Midwest marketplace from Canada. In November 1993, the Company began flowing gas subject to a long term transportation agreement for 12 million cubic feet per day of Canadian gas to California. This gas is being sold to end users. Based on 1993 volumes, this volume represents approximately 16.3% of the annual Canadian production. ENVIRONMENTAL MATTERS In general, the exploration and production activities of the Company are subject to certain federal, provincial, state, and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the cost of these activities and may prevent or delay the commencement, or continuance of a given operation. The Company charged $0.6 million in 1992 and $0.6 million in 1993 against income for future removal and site restoration costs. These amounts related primarily to the Canadian operations for both years. GENERAL In 1993, the Company had three Canadian customers who accounted for 11%, 16% and 18% of sales, respectively. The Company does not believe that the loss of these customers would have a material adverse effect upon the Company. At December 31, 1993, the Company had 90 employees in Canada, and 2 employees in the United States. (d) Geographic Segment Information for 1992 and 1991 is included in Part II, Item 8, Footnote K of the financial statements. Information for the U.S and Canada has been combined for 1993 due to the immateriality of the U.S. information in relation to the Company as a whole. 4 5 ITEM 2. PROPERTIES OFFICES DEKALB leases approximately 40,000 square feet of office space in Calgary, Alberta, Canada from which it directs its business. DEKALB closed its exploration office in Bakersfield in 1993. The Denver and Houston offices were closed in 1992. DEKALB is committed to lease payments on the Bakersfield office until mid-1995. These future lease payments have been accrued in the financial statements as of December 31, 1993. ACREAGE The following table summarizes DEKALB's interest in developed and undeveloped oil and gas acreage as of December 31, 1993. U.S. acreage is not significant and has been combined with the Canadian acreage.
UNDEVELOPED ACREAGE(A) DEVELOPED ACREAGE - --------------------- --------------------- GROSS NET GROSS NET ACRES ACRES ACRES ACRES - -------- -------- -------- -------- 242,165 157,612 328,654 218,261
- --------------- (a) Undeveloped acreage represents leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or gas. PRODUCTIVE WELLS AND DRILLING ACTIVITY The Company owns varying working interests in producing oil and gas wells located in the Provinces of Alberta and British Columbia, Canada and in the State of California. The Company also owns interests in twelve gas processing plants located in the province of Alberta, Canada. The following table summarizes DEKALB's interest in productive oil and gas wells as of December 31, 1993. The number of U.S. wells is not significant and has been combined with the Canadian well count.
OIL WELLS(1) GAS WELLS(1) - -------------- -------------- GROSS NET GROSS NET - ----- ---- ----- ---- 857 140 365 228
- --------------- (1) One or more completions in the same well bore are counted as one well. The data in the above table includes 20 oil wells (12 net) and 53 gas wells (49 net) that are multiple completions in Canada. The only U.S. well is completed in one zone. 5 6 ITEM 2. PROPERTIES -- (CONTINUED) The following table summarizes the number of net productive exploratory and development wells in which DEKALB participated, the number of net dry exploratory and development wells drilled and the net total wells drilled for the years ended December 31, 1993, 1992, and 1991:
Net Productive Wells Drilled Net Dry Wells Drilled Net Total Wells Drilled --------------------------- ------------------------- ------------------------- Exploratory Development Exploratory Development Exploratory Development ----------- ----------- ----------- ----------- ----------- ----------- 1993(1) 8 6 11 1 19 7 1992 Canada 2 1 3 2 5 3 United States 1 3 1 3 2 6 -- -- -- -- -- -- TOTAL 3 4 4 5 7 9 1991 Canada 3 0 5 0 8 0 United States 2 14 5 3 7 17 -- -- -- -- -- -- TOTAL 5 14 10 3 15 17
- --------------- As of December 31, 1993 DEKALB was participating in the completion of 3 gross (1.8 net) wells in Canada. (1) 1993 U.S. well data is not significant and has been combined with the Canadian well data. SALES The following table summarizes DEKALB's net oil and gas sales for the years ended December 31, 1993, 1992, and 1991:
1993 1992 1991 ------- ----------------- ----------------- (1) CANADA U.S.(2) CANADA U.S. ------- ------ ------- ------ ------- Oil and Condensate (MBBLS) 742 776 633 797 1,502 Natural Gas Liquids (MBBLS) 247 220 132 228 354 Gas (MMCF) 20,969 17,309 6,671 17,030 12,511
- --------------- (1) 1993 U.S. volumes are not significant and have been combined with the Canadian volumes. (2) 1992 includes six months of U.S. sales on divested properties, and 12 months of California properties. 6 7 ITEM 2. PROPERTIES -- (CONTINUED) AVERAGE PRICES AND COST PER UNIT OF SALES The following table shows the average sales prices received by DEKALB for its sales and the lease operating expense per equivalent barrel of oil for the years ended December 31, 1993, 1992, and 1991:
1993 1992 1991 ------ ---------------- ---------------- (1) CANADA U.S. CANADA U.S. ------ ------ ------ ------ ------ Avg. price/bbl of oil and condensate* $15.98 $18.37 $16.97 $19.97 $18.97 Avg. price/bbl of natural gas liquids $ 9.82 $ 9.79 $11.00 $10.45 $12.54 Avg. price/MCF of natural gas* $ 1.44 $ 1.16 $ 1.58 $ 1.22 $ 1.67 Lease operating expense/equivalent bbl of oil $ 2.78 $ 2.98 $ 3.85 $ 3.19 $ 4.41
- --------------- (1) 1993 U.S. operating data is not significant and has been combined with the Canadian data. * Includes effect of hedging contracts. Oil and condensate prices before the effect of hedging were $18.74 for Canada and $17.45 for the U.S. in 1992, and $19.75 for Canada and $18.77 for the U.S. in 1991. A hedging contract for natural gas began in December 1993 and had no effect on 1993 prices. RESERVES The estimated proved developed and undeveloped oil and gas reserves of DEKALB, as of December 31, 1993, 1992, and 1991 and the standardized measure of discounted future net cash flows attributable thereto are included in Supplementary Financial Information. Reserve estimates for U.S. operated wells were reported by the Company to the U.S. Department of Energy during the last year and were prepared on a basis consistent with the reserve estimates contained herein. Reserve Estimates submitted to the U.S. Department of Energy were prepared as of December 31, 1991 and 1992 based on December 31, 1991 and 1992 reserve reports, respectively and represent the gross remaining recoverable reserves assigned to the properties operated by DEKALB. Effective July 1, 1992 DEKALB sold substantially all of its U.S. holdings to Louis Dreyfus Gas Holdings Inc. Effective July 1, 1993 DEKALB sold substantially all of its remaining U.S. holdings to Samedan Oil Corporation. The only U.S. assets retained by DEKALB are a single non-operated oil well in California and acreage adjacent thereto. December 31, 1993 reserve forecasts utilized December 1993 actual prices for gas and natural gas liquids and the December 31st postings for oil and condensate. The Company has also incorporated future abandonment costs of $6.9 million ($0.8 million present value) as of December 31, 1993, and $7.7 million ($1.1 million present value) as of December 31, 1992 into the forecasts. Since December 31, 1993, there have been no material discoveries, extensions or revisions which would either favorably or adversely affect the Company's proved reserve quantities. ITEM 3. LEGAL PROCEEDINGS Management is of the opinion there are no pending legal proceedings that would have a material effect on the consolidated financial position of the Company. 7 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters have been submitted to a vote of the security holders in the fourth quarter of 1993. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, and positions of the executive officers of the Company, with their business experience during the past five years, are shown below. Officers are elected annually by the Board of Directors.
OFFICER AGE - --------------------------------------------------------------------------------------- --- BRUCE P. BICKNER....................................................................... 50 CHAIRMAN OF THE BOARD AND DIRECTOR Mr. Bickner has served as Chairman of the Board of the Company since March 1988. He was elected President of the Company commencing on January 1, 1992. He relinquished the titles of President and Chief Executive Officer on November 11, 1992. In June 1988, he was elected Chairman, Chief Executive Officer, President, and a Director of DEKALB Genetics Corporation. He relinquished the title of President of DEKALB Genetics Corporation in January, 1990. VINCENT J. TKACHYK..................................................................... 49 PRESIDENT Mr. Tkachyk was elected President of the Company on November 11, 1992. From January 21, 1992, to November 11, 1992, he served as Executive Vice President, Canada. From March 2, 1989 to January 21, 1992, he served as Senior Vice President, Production and Engineering. Prior to that, he served as a manager or officer of one or more of the oil and natural gas subsidiaries of the Company. JOHN H. WITMER, JR..................................................................... 53 VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY Mr. Witmer was elected Senior Vice President, General Counsel and Secretary on March 2, 1989. Prior to that, he served as Vice President, General Counsel and Secretary of the Company. He relinquished the title of Senior Vice President and was elected Vice President on November 11, 1992. On February 9, 1989, he was elected Senior Vice President and General Counsel of DEKALB Genetics Corporation. He served as Vice President and General Counsel of DEKALB Genetics Corporation from June 1988, until that date. He has served as Secretary of DEKALB Genetics Corporation since June 1988. RICHARD G. NASH........................................................................ 51 VICE PRESIDENT, EXPLORATION AND LAND Mr. Nash has served as Vice President, Exploration and Land of the Company since July 22, 1992. Since November 11, 1992, he has served in the additional position of Assistant Secretary of the Company. He joined DEKALB Energy Canada Ltd. as Vice President, Exploration in 1986.
8 9
OFFICER AGE - --------------------------------------------------------------------------------------- --- MICHAEL E. FINNEGAN.................................................................... 37 VICE PRESIDENT, FINANCE AND TREASURER Mr. Finnegan was elected Vice President, Finance and Treasurer on November 11, 1992. He has also served as DEKALB Energy Canada Ltd.'s Vice President, Finance and Treasurer since December 1990, and as Assistant Vice President, Finance and Treasurer from December 1988 until December 1990. Prior to that, he served as Assistant Corporate Controller of the Company. LARRY G. EVANS......................................................................... 38 VICE PRESIDENT, PRODUCTION -- DEKALB ENERGY CANADA LTD. Mr. Evans has served as Vice President, Production of DEKALB Energy Canada Ltd. since August 1993. From August 1990 to August 1993, he served as Vice President, Engineering. Prior to that date, he served as Manager of Engineering. BRUCE A. CRAIG......................................................................... 40 VICE PRESIDENT, MARKETING -- DEKALB ENERGY CANADA LTD. Mr. Craig has served as Vice President, Marketing of DEKALB Energy Canada Ltd. since November 1992 when he joined the Company. Prior to joining DEKALB Energy Canada Ltd., he served as Manager, Oil and Gas Marketing for Kerr-McGee Canada Ltd. (formerly Maxus Energy Canada Ltd.) EDDY Y. TSE............................................................................ 43 CHIEF ACCOUNTING OFFICER Mr. Tse was elected Chief Accounting Officer on November 11, 1992. He has also served as Chief Accounting Officer of DEKALB Energy Canada Ltd. since November 1992 and as Controller since July 1991. Prior to that date, he had served DEKALB Energy Canada Ltd. as the Manager of Taxes.
9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S STOCK AND RELATED STOCKHOLDERS' MATTERS A. As of January 31, 1994 there were approximately 950 record holders of Class A Stock and approximately 2,300 record holders of Class B (nonvoting) Stock. Class B shares are currently being traded on NASDAQ/NMS over-the-counter market.
1ST 2ND 3RD 4TH B. STOCK DATA QTR. QTR. QTR. QTR. - ------------------------------------------------- ------ ------ ------ ------ FOR THE YEAR ENDED DECEMBER 31, 1993 Market price range -- Low 10.75 14.25 15.75 13.00 -- High 15.00 18.75 17.25 17.375 FOR THE YEAR ENDED DECEMBER 31, 1992 Market price range -- Low 11.75 12.00 12.00 10.25 -- High 14.50 15.75 14.25 13.25
10 11 ITEM 6. SELECTED FINANCIAL DATA
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1993 1992 1991 1990(8) 1989 --------- --------- --------- --------- --------- ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATIONS Operating revenues Oil and liquids sales $ 14,291 $ 28,605 $ 51,231 $ 60,107 $ 44,178 Natural gas sales 30,215 30,678 41,718 40,773 34,308 Other 1,397 1,450 1,743 2,023 2,534 --------- --------- --------- --------- --------- Total Operating Revenues 45,903 60,733 94,692 102,903 81,020 Operating expenses Lease operations and other direct charges 12,467 18,833 29,802 28,699 24,699 Depreciation, depletion and amortization 15,142 22,522 41,080 39,933 30,585 Provision for impairment of oil and gas properties -- 53,320 94,241 -- -- General and administrative expense 3,468 6,441 12,656 13,555 10,803 (Gain) loss on disposal of U.S. assets (513) 34,942 -- -- -- --------- --------- --------- --------- --------- Income (loss) from operations 15,339 (75,325) (83,087) 20,716 14,933 Non-operating expense (income) 3,672 3,716 4,652 (5,732 (66) Income tax expense (benefit) 5,995 (9,788) (25,153) 10,922 5,527 --------- --------- --------- --------- --------- Earnings (loss) from continuing operations 5,672 (69,253) (62,586) 15,526 9,472 Earnings (loss) from discontinued operations -- (1,050) -- 11,633 16,456 Earnings on cumulative effect of change in accounting principle 5,334 -- -- -- -- --------- --------- --------- --------- --------- $ 11,006 $ (70,303) $ (62,586) $ 27,159 $ 25,928 ========= ========= ========= ========= ========= RETURNS Return on sales(1) 12.36% (114.03)% (66.1)% 15.1% 11.7% Return on assets(2) 2.59% (16.29)% (11.3)% 3.8% 2.4% Return on equity(3) 5.93% (37.56)% (24.9)% 6.4% 4.4% FINANCIAL POSITION Working capital $ 6,611 $ 11,020 $ (2,570) $ 2,680 10,576 Current ratio 1.27 1.58 0.92 1.06 1.25 Net property, plant and equipment $ 177,915 $ 182,130 $ 383,362 $ 500,848 352,449 Total assets $ 210,089 $ 218,985 $ 425,031 $ 558,892 416,263 Net long-term debt $ 51,325 $ 69,725 $ 167,407 $ 191,799 51,765 Shareholders' equity $ 100,599 $ 95,587 $ 184,357 $ 251,251 242,321 Total debt as a % of capitaliza- tion(4) 36.16% 42.30% 47.9% 43.4% 19.9% Oil and gas capital expendi- tures(9) $ 19,461 $ 17,031 $ 34,157 $ 201,803 46,133 Standardized measure of dis- counted future net cash flows (pre-tax) $ 266,979 $ 210,373 $ 325,561 $ 503,760 363,997
11 12 ITEM 6. SELECTED FINANCIAL DATA (continued) OPERATING DATA
AVERAGE PRICES -------------------------------------------------------------------- Oil & Condensate As Of Or For The Year ($ Per Natural Gas Liquids Natural Gas Ended December 31, Barrel)(7) ($ Per Barrel) ($ Per Thousand Cubic Feet) - ------------------------------------ ---------------- ------------------- --------------------------- 1993 15.98(10) 9.82(10) 1.44(10) 1992 -- Canada 18.37 9.79 1.16 -- U.S. 16.97(10) 11.00(10) 1.58(10) 1991 -- Canada 19.97 10.45 1.22 -- U.S. 18.97 12.54 1.67 1990 -- Canada 21.72 11.80 1.37 -- U.S. 21.22 10.78 1.83 1989 -- Canada 17.16 6.29 1.36 -- U.S. 16.60 8.16 1.83
SALES -------------------------------------------------------------------------------------------------- Oil & Condensate Natural Gas Liquids Natural Gas Oil & Gas Equivalents (Thousands Of Barrels) (Thousands Of Barrels) (Million Cubic Feet) (Thousands Of Barrels)(5) ---------------------- ---------------------- -------------------- ------------------------- 1993 742(10) 247(10) 20,969(10) 4,484(10) 1992 -- Canada 776 220 17,309 3,881 -- U.S. 633(10) 132(10) 6,671(10) 1,877(10) ------- ----- -------- ------- TOTAL 1,409 352 23,980 5,758 1991 -- Canada 797 228 17,030 3,863 -- U.S. 1,502 354 12,511 3,941 ------- ----- -------- ------- TOTAL 2,299 582 29,541 7,804 1990 -- Canada 835 214 14,626 3,487 -- U.S. 1,780 155 11,354 3,827 ------- ----- -------- ------- TOTAL 2,615 369 25,980 7,314 1989 -- Canada 770 174 13,382 3,174 -- U.S. 1,731 139 8,825 3,341 ------- ----- -------- ------- TOTAL 2,501 313 22,207 6,515
PROVED RESERVES
Oil, Condensate & Natural Gas Liquids Natural Gas Oil & Gas Equivalents (Thousands Of Barrels) (Million Cubic Feet) (Thousands Of Barrels)(5) ---------------------- -------------------- ------------------------- 1993(11) 13,234 277,411 59,469 1992 -- Canada 13,984 271,825 59,288 -- U.S. -- 4,518 753 -------- ----------- -------- TOTAL 13,984 276,343 60,041 1991 -- Canada 14,384 280,730 61,172 -- U.S. 11,693 80,464 25,104 -------- ----------- -------- TOTAL 26,077 361,194 86,276 1990 -- Canada 15,381 295,110 64,566 -- U.S. 13,881 93,732 29,503 -------- ----------- -------- TOTAL 29,262 388,842 94,069 1989 -- Canada 16,946 296,573 66,375 -- U.S. 10,021 55,170 19,216 -------- ----------- -------- TOTAL 26,967 351,743 85,591
12 13 ITEM 6. SELECTED FINANCIAL DATA (continued)
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------ 1993 1992 1991 1990(8) 1989 ------ ------ ------ ------- ------- ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Data per Share Book value per share(6) $10.47 $ 9.93 $19.19 $ 25.72 $ 23.49 Cash dividends declared $ -- $ -- $ 0.08 $ 0.29 $ 0.20 Weighted average shares outstanding 9,675 9,630 9,618 10,351 10,444 Earnings (loss) from continuing operations $ 0.59 $(7.19) $(6.51) $ 1.50 $ 0.91 Earnings (loss) from discontinued operations -- (0.11) -- 1.12 1.57 Earnings on cumulative effect of change in accounting principle 0.55 -- -- -- -- ------ ------ ------ ------- ------- Net Earnings (loss) $ 1.14 $(7.30) $(6.51) $ 2.62 $ 2.48 ====== ====== ====== ======= =======
- --------------- NOTES: (1) Return on sales was calculated by dividing earnings (loss) from continuing operations by total operating revenues. (2) Return on assets was calculated by dividing earnings (loss) from continuing operations by beginning total continuing assets. (3) Return on equity was calculated by dividing earnings (loss) from continuing operations by beginning shareholders' equity. (4) Total debt as a % of capitalization was calculated by dividing total debt by shareholders' equity plus total debt. (5) Gas is converted to oil at 6,000 cubic feet per barrel. (6) Book value per share was calculated by dividing shareholders' equity by total shares outstanding. (7) Includes the effect of hedge contracts. Prices before the effect of hedging were $17.45 for the U.S and $18.74 for Canada in 1992, $18.77 for the U.S. and $19.75 for Canada in 1991, $22.07 for the U.S. and $22.73 for Canada in 1990, and $17.19 for the U.S. and $17.75 for Canada in 1989. (8) Includes the effect of the Royal acquisition. (9) 1992 includes six months of U.S. expenditures on all divested properties, and 12 months of California properties; 1993 includes six months of U.S. expenditures on divested California properties, and 12 months of all expenditures in Canada and on the one remaining oil well in California. (10) 1992 includes six months of U.S. operating data on divested properties, and 12 months of California properties. For 1993, six months of U.S. operating data on divested California properties and 12 months of the remaining California property has been combined with Canadian operating data due to the immateriality in relation to the operating results as a whole. (11) U.S. reserve data has been combined with Canada for 1993 due to the immateriality of the U.S. reserves in relation to the total Company reserves as a whole. Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations and to the Financial Statements and Supplementary Financial Information for a discussion of the Company's operations and financial position. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY OF FINANCIAL DATA -------------------------
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 1993 1992 1991 ----- ------ ------ ($ IN MILLIONS) Revenues $45.9 $ 60.7 $ 94.7 Income (loss) from operations $15.3 $(75.3) $(83.1) Earnings (loss) from continuing operations $ 5.7 $(69.3) $(62.6) Loss from discontinued operations $ -- $ (1.1) $ -- Earnings on cumulative effect of change in accounting principle $ 5.3 $ -- $ -- Net earnings (loss) $11.0 $(70.3) $(62.6) Cash flows from continuing operations $31.5 $ 28.7 $ 43.4
Overview In 1993, with the strengthening of natural gas prices and increased production in Canada, the Company has returned to profitability. The Company reported net earnings of $11 million, including a one time tax benefit of $5.3 million due to the adoption of Statement of Financial Accounting Standard (SFAS) 109 "Accounting for Income Taxes" in the first quarter of 1993. Prior years' losses were primarily due to the disposition of substantially all of the Company's U.S. oil and gas properties to Louis Dreyfus Gas Holding Inc. in 1992, and the writedown of oil and gas properties of $53.3 million pre-tax ($40.6 million after-tax) and $94.2 million pre-tax ($66.0 million after-tax) in 1992 and 1991, respectively. Disposition of U.S. Assets -------------------------- Effective July 1, 1993, the Company sold all of its California gas wells to Samedan Oil Corporation for $5.1 million. The Company, in the third quarter of 1993, recorded a $0.5 million pre-tax and after-tax gain on the disposition of the California gas wells. Also in the same quarter, the exploration office in Bakersfield was closed down. The Company's only remaining assets in the U.S. are a non-operated working interest oil well in California and acreage adjacent thereto. 14 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) Disposition of U.S. Assets (Continued) --------------------------------------- On July 9, 1992, the Company announced that it had entered into a definitive agreement to sell substantially all of its U.S. oil and gas properties to Dreyfus. On October 16, 1992, the Dreyfus transaction was approved by the shareholders at a special shareholders' meeting, and the closing of the transaction was completed on the same day. The Company did not sell its California properties in this transaction. The Company received $104.0 million of gross proceeds from the sale, which included approximately $6.0 million of cash flow from the properties from the effective date (July 1, 1992). In addition, Dreyfus assumed certain liabilities. In 1992 a loss on the disposition of $34.9 million was recorded ($32.3 million after-tax). Sales revenues and volumes, lease operating expenses and DD&A associated with the divested properties for the six months ended June 30, 1992 and 1993, are shown under Note B, Disposition of U.S. Assets in the Notes to the Consolidated Financial Statements. Operating Revenues ------------------ TOTAL COMPANY PRICE AND SALES DATA(1) -------------------------------------
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1993 1992 1991 ------- ------- ------- Oil price ($ per Bbl)* $ 15.98 $ 17.74 $ 19.32 Oil volumes (M Bbls) 742 1,409 2,299 Natural gas liquids price ($ per Bbl) $ 9.82 $ 10.26 $ 11.72 Natural gas liquids volumes (M Bbls) 247 352 582 Gas price ($ per MCF) $ 1.44 $ 1.28 $ 1.41 Gas volumes (MMCF) 20,969 23,980 29,541
- --------------- * Includes the effect of hedging contracts (1) 1993 includes sales on divested California properties for 6 months, and 12 months of sales in Canada and one remaining oil well in California. 1992 includes 6 months of U.S. sales on divested properties, and 12 months of Canadian and California properties sales. 1991 includes the U.S. and Canada for the full year. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) Operating Revenues (Continued) ------------------------------ 1993 revenues of $45.9 million declined 24.4% from 1992 and 51.5% from 1991 due to the disposition of the U.S. oil and gas properties. In Canada, 1993 gas revenues increased 42.7% and 37.8% compared to 1992 and 1991, respectively. Gas prices rose to an average of $1.42 per thousand cubic feet (MCF) from $1.16 and $1.22 in 1992 and 1991, respectively. Gas volumes increased to 20,111 MMCF compared to 17,309 MMCF in 1992 and 17,030 MMCF in 1991. In 1990 and 1991, the Company utilized interruptible transportation and stored Canadian gas in Michigan (April-October) for sale during the following winter season (November-March). During the period from April 1992 to October 1992, interruptible transportation was, for the most part, unavailable, preventing the Company from utilizing storage capacity. As a result, the storage contracts were terminated. Due to increased gas prices, previously curtailed gas was on full production in 1993. Compared to 1992, 1993 system gas prices were 11.6% higher and sales volumes were relatively constant. Non-system (short-term and spot) gas prices increased 41.5% and the Company increased sales volumes by 50.8% over 1992. Eight gas wells were tied in and commenced production during 1993 in the province of Alberta. In addition, the Company brought one new well on production in late 1992 in the province of British Columbia. To protect the Company from fluctuations of natural gas prices, the Company entered into a hedge contract for a portion of its 1993 gas. The result of this hedge contract did not have a significant impact on 1993 operating revenues. For the Canadian operations, compared to 1992 and 1991, oil and condensate volumes remained relatively constant. Production commenced in 1993 from two new oil wells in the province of Alberta and one in the province of British Columbia. One additional well was brought on production in late 1992 in the province of British Columbia. However, the average price per barrel of oil and condensate declined to $16.00 per barrel compared to $18.37 in 1992 and $19.97 in 1991. To protect the Company against exposure to lower oil prices, the Company entered into hedge contracts in 1992 and 1991. The results of these contracts were included in revenues as oil was produced, increasing revenue by $0.5 million in 1991 and decreasing revenue by $0.6 million in 1992. There were no hedge contracts for oil in 1993. Both prices and volumes for natural gas liquids remained relatively constant for the three years. Operating Expenses ------------------ In Canada, 1993 lease operating expenses increased 9.1% to $12.1 million from 1992, due to the increase in production offset in part by the lower Canadian dollar rate in 1993. In addition, the 1993 increase included a prior period third party gas processing fee adjustment of $0.6 million. However, on a barrel of oil equivalent ("BOE") basis, 1993 lease operating expenses of $2.79 were down 6.4% compared to 1992. Since 1991, the Company's field fixed expenses have been kept constant. Besides the Company's increased production, more third party gas was processed through Company operated gas plants. 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) Operating Expenses (Continued) ------------------------------ 1993 depreciation, depletion and amortization expense ("DD&A") fell $7.4 million from 1992, due to the disposition of the U.S. assets, a lower Canadian DD&A rate due to lower exchange rates, and the writedown of oil and gas properties in 1992. In the first quarter of 1992, the Company recorded a $24.7 million pre-tax and after-tax writedown of its U.S. oil and gas properties and a $28.6 million ($15.9 million after-tax) writedown of its Canadian oil and gas properties. 1993 DD&A expenses decreased $25.9 million from 1991, principally due to the sale of U.S. assets and writedowns of oil and gas properties in 1992, and the writedown of oil and gas properties by $94.2 million ($66 million after-tax) in 1991. 1993 general and administrative expense decreased by $3.0 million and $9.2 million compared to 1992 and 1991, respectively. This was primarily due to the closure of the Denver office in 1992. In addition, in late 1991, the decision was made to reduce the Company's U.S. staff by approximately 30%, restructure its management team and close its Houston office. As a result, the Company recorded $2.5 million in 1991 for these restructuring expenses. A $0.5 million gain resulting from the sale of the California gas wells to Samedan Oil Corporation was reflected in the third quarter of 1993. The $34.9 million loss in the prior year related to the sale of U.S. assets to Dreyfus. Non-operating Items ------------------- Interest expense, net of interest income and capitalized interest, decreased $3.1 million in 1993 compared to 1992, mainly due to the repurchase of $18.4 million in 1993 and $55.3 million in 1992 of the Company's public notes and the reduction of borrowing on the Company's line of credit, partly offset by a decrease in capitalized interest. 1991 net interest expense was $7.1 million higher than 1993 because of the public notes outstanding and increased borrowing on the line of credit, which resulted from the Royal acquisition in 1990. Net other income in 1993 mainly related to a gas contract settlement. In 1992, the Company recorded a $2.0 million gain on the sale of its 5% interest in Natural Gas Clearinghouse ("NGC"). Equity earnings from the partnership interest in NGC of $0.8 million and $2.0 million were recognized in 1992 and 1991, respectively. There was no income effect in 1993 and 1992 associated with the Phantom Stock Plan compared to income of $4.0 million in 1991. Income Taxes ------------ The Company adopted the Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes" as of January 1, 1993. A one time benefit adjustment of $5.3 million was recognized in the first quarter of 1993. In 1993, the income tax expense reflected a different effective tax rate (51.4%) from the statutory Canadian income tax rate of 44.34% due to the lack of tax benefits associated with interest and other costs incurred in the U.S. 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) Income Taxes (Continued) ------------------------ The tax benefit of $9.8 million and $25.2 million for 1992 and 1991 respectively resulted from the disposition of U.S. assets in 1992 and the oil and gas writedown in each of the two years. For Canadian income tax purposes, the Large Corporation Tax ("LCT") is creditable against the federal surtax (3% of federal income tax). Any unused LCT may be carried back three years and forward seven years. In 1993, based on estimated future taxable income in Canada, the Company recognized a portion of the LCT paid ($0.6 million) as a tax asset for the deferred tax computation. Cash Flows From Operating Activities ------------------------------------ 1993 cash flow from continuing operations increased $2.9 million from 1992 and decreased $11.9 million from 1991. 1993 reflected the Company as a primarily Canadian operation, while 1992 and 1991 include revenues from the U.S. assets which were subsequently sold. Furthermore, the Company in 1993 received U.S. tax refunds of $5.6 million from tax loss carrybacks. The income tax paid in 1992 and 1991 predominantly related to U.S. taxes, while the 1993 payment represents mainly the current Canadian Large Corporation Tax, withholding taxes and U.S. franchise taxes. Cash Flows from Investing Activities ------------------------------------ Additions to property, plant and equipment (excluding capitalized interest and acquisitions) were $19.2 million in 1993 compared to $21.5 million in 1992 and $42.8 million in 1991. In 1993, acquisitions in Canada were $2.1 million compared to $2.0 million in 1992. 1993 proceeds of $0.9 million from the sale of property, plant and equipment were received primarily as a result of the sale of several small Canadian properties. 1993 proceeds of $6.2 million from the sale of U.S. assets were composed of $5.1 million from the sale of the California gas wells to Samedan Oil Corporation in the third quarter of 1993, and additional proceeds received in the first quarter of 1993 of $1.1 million relating to the 1992 disposition of U.S. assets to Dreyfus. Proceeds from the disposition of U.S. assets to Dreyfus, excluding post effective date revenues retained and offset against the purchase price, were $97.1 million in 1992. Additional 1992 divestiture proceeds of $7.8 million were received primarily as a result of the sale of some smaller U.S. properties. Also, $7.5 million was received during the second quarter of 1992 from the sale of the Company's interest in NGC. Divestitures of non-strategic properties in 1991 generated $17.2 million and $1.8 million of proceeds in the U.S. and Canada, respectively. Proceeds in 1991 also included $2.4 million from the sale of gas plants in the U.S. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) Cash Flows from Financing Activities ------------------------------------ Cash flows from financing activities resulted in an outflow of $13.0 million in 1993 compared with an outflow of $99.6 million and $27.5 million for 1992 and 1991, respectively. In 1993, the Company repurchased $18.4 million of its long-term notes ($1.9 million of its 9 7/8% and $16.5 million of its 10% notes) and 7,191 shares of its stock. In December 1993, the Company borrowed $5.7 million on its line of credit. During 1992, the Company used proceeds from asset sales to pay down a net $99.3 million in debt. It repurchased $55.3 million of its notes ($43.9 million of its 9 7/8% notes and $11.4 million of its 10% notes). The Company also repaid its line of credit in full, representing a net $42.0 million reduction during 1992, and repaid other debt totalling $2.0 million. During 1991, the Company paid down debt by a net $22.7 million. The Company repurchased 31,365 and 170,500 shares of its stock in the open market for $0.3 million and $4.0 million during 1992 and 1991, respectively. The Company suspended its dividend in May 1991. During 1991, the Company's dividend payments were $0.8 million. Liquidity --------- The Company plans to fund its capital expenditures, working capital needs and interest payments through its operating cash flow and its revolving line of credit. At December 31, 1993, the Company had $17 million available under its Canadian line of credit. (See Note F to the Consolidated Financial Statements for further information on the revolving line of credit.) Future Trends and Uncertainties ------------------------------- The prices obtained for the sale of oil and natural gas have a significant impact on the Company's future earnings and cash flows. The Company sells its gas on the spot market and under short and long-term contracts. A majority of gas contracts do not have prices fixed for more than twelve months; therefore, gas prices are subject to volatility depending on fluctuations in the gas market. Oil prices generally follow worldwide oil prices, which are subject to fluctuations resulting from world supply and demand and other factors such as events occurring in the Middle East. Oil and gas prices also affect the estimated present value of the Company's reserves, which is a component of the quarterly full cost ceiling test. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) FUTURE TRENDS AND UNCERTAINTIES (Continued) ------------------------------------------- The Company's future oil and gas production is dependent in part on the replacement of production with new reserves and its ability to market its deliverable quantities of production. The Company plans to concentrate on adding gas reserves and to continue to develop shut-in properties in Canada. The Company will continue to pursue oil prospects where there is potential for significant reserve additions and immediate opportunities for development. In marketing gas reserves, the Company plans to increase geographical diversity within the customer portfolio targeting in particular California and the Pacific Northwest. In addition, the Company intends to shift more natural gas production into direct sales contracts, which generally are one year in length. 1994 production volumes are expected to be approximately equal to 1993 volumes. To protect against exposure to natural gas price fluctuations in 1994, the Company has entered into hedge contracts for a portion of its gas. In 1993, the Company replaced its reserves due to active exploration, development and acquisitions programs. For 1994, the Company's capital spending is anticipated to be approximately $28.0 million. Approximately $18.0 million will be directed towards exploration, development and acquisition activities, while approximately $10.0 million has been reserved for maintenance, tie-ins, compression and plant facilities. The Company believes its future operating cash flow and future credit availability will be adequate to fund its planned capital expenditures and working capital needs. In addition, the Company anticipates sufficient funds will be available to call a portion if not all of the 10% long-term notes payable, which are redeemable at the option of the Company after April 15, 1995. 20 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of DEKALB Energy Company: We have audited the accompanying consolidated balance sheets of DEKALB Energy Company as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DEKALB Energy Company as of December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with United States generally accepted accounting principles. As discussed in Note D of the financial statements for the year ended December 31, 1993, the Company has changed its method of accounting for deferred income taxes. COOPERS & LYBRAND Calgary, Alberta February 18, 1994 21 22 RESPONSIBILITIES FOR FINANCIAL STATEMENTS The financial statements on the following pages for the years ended December 31, 1993, 1992, and 1991, were prepared by management in conformity with generally accepted accounting principles appropriate in the circumstances. The integrity and objectivity of data in these financial statements and related financial data are the responsibility of management. The financial statements are presented on the accrual basis of accounting and, accordingly, include some amounts based on judgements of management. Management maintains what it believes to be an adequate system of internal accounting controls. More fundamentally, the Company seeks to ensure objectivity and integrity of its accounts by its selection of qualified personnel, by organizational arrangements that provide an appropriate division of responsibility, and by communicating its policies and standards throughout the organization. DEKALB Energy Company has engaged Coopers & Lybrand, Independent Accountants, to audit these financial statements. Their report is included herein which advises that the audit was conducted in accordance with generally accepted auditing standards. Those standards require that they plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. They include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. They also include assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. The Board of Directors pursues its responsibility for these financial statements through its Audit Committee composed of outside directors. Coopers & Lybrand has full and free access to the Audit Committee and has met with it to discuss auditing and financial reporting matters. Vincent J. Tkachyk Michael E. Finnegan President Vice President, Finance and Treasurer Eddy Y. Tse Chief Accounting Officer 22 23 DEKALB ENERGY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 -------- --------- --------- OPERATING REVENUES Oil and liquids sales $ 14,291 $ 28,605 $ 51,231 Natural gas sales 30,215 30,678 41,718 Other 1,397 1,450 1,743 -------- --------- --------- TOTAL OPERATING REVENUES 45,903 60,733 94,692 OPERATING EXPENSES Lease operations and other direct charges 12,467 18,833 29,802 Depreciation, depletion and amortization 15,142 22,522 41,080 Provision for impairment of oil and gas properties -- 53,320 94,241 General and administrative expense 3,468 6,441 12,656 (Gain) loss on disposal of U.S. assets (513) 34,942 -- -------- --------- --------- INCOME (LOSS) FROM OPERATIONS 15,339 (75,325) (83,087) Interest expense, net of interest income and capitalized interest 3,795 6,938 10,902 Other income, net (123) (3,222) (6,250) -------- --------- --------- Earnings (loss) from continuing operations before income taxes 11,667 (79,041) (87,739) Income tax expense (benefit) 5,995 (9,788) (25,153) -------- --------- --------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS 5,672 (69,253) (62,586) Loss from discontinued operations (net of applicable income taxes) -- (1,050) -- Earnings on cumulative effect of change in accounting principle 5,334 -- -- -------- --------- --------- NET EARNINGS (LOSS) $ 11,006 $ (70,303) $ (62,586) ======== ========= ========= Earnings (loss) per share: Earnings (loss) from continuing operations $ 0.59 $ (7.19) $ (6.51) Loss from discontinued operations -- (0.11) -- Earnings on cumulative effect of change in accounting principle 0.55 -- -- -------- --------- --------- NET EARNINGS (LOSS) PER SHARE $ 1.14 $ (7.30) $ (6.51) ======== ========= ========= Weighted average shares outstanding 9,675 9,630 9,618
The accompanying notes are an integral part of the financial statements. 23 24 DEKALB ENERGY COMPANY CONSOLIDATED BALANCE SHEETS ($ IN THOUSANDS) ASSETS
AS OF DECEMBER 31, 1993 1992 -------- --------- Current assets: Cash and cash equivalents $ 22,664 $ 18,872 Receivables 7,874 10,116 Other current assets 781 989 -------- --------- Total current assets 31,319 29,977 Other assets 855 6,878 Property, plant, and equipment: Oil and gas assets, full cost method Proved properties, being amortized 298,235 313,122 Unproved properties and properties under development, not being amortized 9,048 15,729 Other property and equipment 2,817 2,847 Less accumulated depreciation, depletion and amortization (132,185) (149,568) -------- --------- Net property, plant and equipment 177,915 182,130 -------- --------- TOTAL ASSETS $210,089 $ 218,985 ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit and notes payable $ 5,663 $ 360 Accounts payable, trade 13,868 10,799 Other current liabilities 5,177 7,798 -------- --------- Total current liabilities 24,708 18,957 Other long-term liabilities 10,612 10,352 Deferred income taxes 22,845 24,364 Long-term debt 51,325 69,725 -------- --------- TOTAL LIABILITIES 109,490 123,398 -------- --------- Commitments and contingencies (Notes A and G) Shareholders' equity: Capital stock: Class A; $.625 stated value; 6,000,000 shares authorized; 2,418,000 shares issued at December 31, 1993; 2,544,304 shares issued at December 31, 1992 1,511 1,590 Class B (nonvoting); $.625 stated value; 13,000,000 shares authorized; 11,260,483 shares issued at December 31, 1993; 11,134,179 shares issued at December 31, 1992 7,038 6,959 Capital in excess of stated value 51,657 51,765 Retained earnings 142,554 131,548 Currency translation adjustments (12,141) (6,225) -------- --------- 190,619 185,637 Treasury shares, at cost (4,072,258 shares in 1993 and 4,067,371 shares in 1992) (90,020) (90,050) -------- --------- TOTAL SHAREHOLDERS' EQUITY 100,599 95,587 -------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $210,089 $ 218,985 ======== =========
The accompanying notes are an integral part of the financial statements. 24 25 DEKALB ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS ($ IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 -------- -------- -------- CASH FLOWS from OPERATING ACTIVITIES Net income (loss) $ 11,006 $(69,253) $(62,586) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 15,142 22,522 41,080 Provision for impairment of oil and gas properties -- 53,320 94,241 Provision (benefit) for deferred income taxes 5,226 (8,342) (27,291) Cumulative effect of change in accounting principle (5,334) -- -- (Gain) Loss on disposal of U.S. assets (513) 34,942 -- Other (86) (1,176) (1,544) -------- -------- -------- 25,441 32,013 43,900 Changes in assets and liabilities: Receivables 840 8,833 8,331 Other current assets 196 2,817 197 Other assets 6,024 (4,553) -- Accounts payable and other current liabilities 596 (16,887) (6,873) Other long term liabilities (1,560) 3,427 (2,508) Current taxes payable -- 2,635 1,421 Deferred income taxes -- -- (1,070) Other assets and liabilities -- 367 23 -------- -------- -------- Cash flows from continuing operations 31,537 28,652 43,421 -------- -------- -------- Cash flows from discontinued operations 840 480 919 -------- -------- -------- NET CASH FLOWS from OPERATING ACTIVITIES 32,377 29,132 44,340 -------- -------- -------- CASH FLOWS from INVESTING ACTIVITIES Purchases of property, plant and equipment (22,875) (25,106) (48,470) Proceeds from sale of property, plant and equipment 912 7,750 23,234 Proceeds from sale of U.S. assets 6,175 97,181 -- Proceeds from sale of investments -- 7,500 -- -------- -------- -------- NET CASH FLOWS from INVESTING ACTIVITIES (15,788) 87,325 (25,236) -------- -------- -------- CASH FLOWS from FINANCING ACTIVITIES Purchases of common stock (79) (328) (4,121) Proceeds from exercise of stock options 1 79 67 Proceeds from debt -- 35,000 10,000 Net short-term borrowings 5,455 (1,631) 1,744 Payments made on long-term debt and net capital lease changes (18,400) (132,688) (34,461) Dividends paid -- -- (768) -------- -------- -------- NET CASH FLOWS from FINANCING ACTIVITIES (13,023) (99,568) (27,539) -------- -------- -------- NET EFFECT of EXCHANGE RATES on CASH 226 (134) 65 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 3,792 16,755 (8,370) Cash and cash equivalents, prior year 18,872 2,117 10,487 -------- -------- -------- CASH and CASH EQUIVALENTS, CURRENT YEAR $ 22,664 $ 18,872 $ 2,117 ======== ======== ======== Note: Cash paid during the period for: Income taxes $ 371 $ 713 $ 2,744 Interest $ 6,472 $ 9,708 $ 11,936 Capitalized interest $ 1,515 $ 2,961 $ 5,686
The accompanying notes are an integral part of the financial statements. 25 26 DEKALB ENERGY COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($ THOUSANDS)
ISSUED ------------------------------------ CLASS A CLASS B (NONVOTING) CAPITAL IN STOCK STOCK EXCESS OF CURRENCY TREASURY STOCK ---------------- ----------------- STATED RETAINED TRANSLATION ------------------- SHARES AMOUNT SHARES AMOUNT VALUE EARNINGS ADJUSTMENTS SHARES AMOUNT ------ ------- ------- ------- ---------- --------- ----------- ------- --------- DECEMBER 31, 1990 2,683 $1,677 10,992 $6,870 $ 52,640 $265,205 $ 11,502 (3,907) $ (86,643) Net Loss (62,586) Dividends ($.08 per share) (768) Exchange Class A for Class B (35) (22) 35 22 Exercise of Stock Options (245) 13 304 Treasury Shares Purchased (173) (4,121) Translation Adjustment 514 Other 1 (18) 26 ------ ------- ------- ------- --------- --------- ----------- ------- --------- DECEMBER 31, 1991 2,649 $1,655 11,027 $6,892 $ 52,377 $201,851 $ 12,016 (4,067) $ (90,434) Net Loss (70,303) Exchange Class A for Class B (107) (67) 107 67 Exercise of Stock Options (665) 31 712 Treasury Shares Purchased (31) (328) Translation Adjustment (18,241) Other 2 2 53 ------ ------- ------- ------- --------- --------- ----------- ------- --------- DECEMBER 31, 1992 2,544 $1,590 11,134 $6,959 $ 51,765 $131,548 $ (6,225) (4,067) $ (90,050) Net Income 11,006 Exchange Class A for Class B (126) (79) 126 79 Exercise of Stock Options (108) 2 109 Treasury Shares Purchased (7) (79) Translation Adjustment (5,916) ------ ------- ------- ------- --------- --------- ----------- ------- --------- DECEMBER 31, 1993 2,418 $1,511 11,260 $7,038 $ 51,657 $142,554 $ (12,141) (4,072) $ (90,020) ====== ======= ======= ======= ========= ========= =========== ======= =========
The accompanying notes are an integral part of the financial statements. 26 27 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. ACCOUNTING POLICIES AND PROCEDURES (1) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions between consolidated companies have been eliminated. (2) Statement of Cash Flows The Company classifies highly liquid investments with maturities of three months or less as cash and cash equivalents. Cash equivalents are stated at cost which approximates market. The cash flows from contracts that have been accounted for as hedges have been classified as cash flows from operating activities. (3) Oil and Gas Properties The Company uses the full cost method of accounting, under which the cost of all exploration and development activities (both successful and unsuccessful) is capitalized and subsequently amortized to expense using the unit-of-production method based upon production and estimates of proved reserve quantities. Unevaluated costs and related capitalized interest costs are excluded from the amortization base until the properties associated with these costs are evaluated and determined to be productive or impaired. Should the net evaluated capitalized costs (net of deferred income taxes) exceed the estimated after-tax present value of oil and gas reserves and unimpaired value of unevaluated properties on a country-by-country basis, the excess would be charged to expense. Included in the estimated present value are Canadian tax credits expected to be realized beyond the scheduled expiration date of the legislation (see Supplemental Financial Information). Proceeds from disposals of oil and gas properties are applied as reductions of capitalized costs. Gain or loss is recognized only on the sale of oil and gas properties involving significant amounts of reserves. (4) Future Removal and Site Restoration Costs Estimated dismantlement, abandonment and clean-up costs, net of estimated salvage values, are expensed on the unit-of-production basis using proved oil and gas reserves. (5) Other Property, Plant and Equipment It is the policy of the Company to capitalize expenditures for major renewals and betterments at cost and to charge to operating expenses the cost of current maintenance and repairs. Provisions for depreciation have been computed principally on the straight-line method based on expected useful lives. Rates used for depreciation are based principally on the following expected lives: Equipment -- 2 to 10 years; Other -20 years; and Leasehold improvements -- term of lease. 27 28 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. ACCOUNTING POLICIES AND PROCEDURES The cost and accumulated allowances for depreciation and amortization relating to assets retired or otherwise disposed of are eliminated from the respective accounts at the time of disposition. The resultant gain or loss is included in current operating results. (6) Income Taxes Effective January 1, 1993, the Company adopted the liability method of accounting for income taxes under Statement of Financial Accounting Standard (SFAS) No. 109. The adoption of SFAS No. 109 resulted in a one time benefit adjustment of $5.3 million in the first quarter of 1993. Prior to 1993, income taxes were calculated in accordance with Accounting Principles Board Opinion No. 11. Investment tax credits were recognized using the flow through method whereby current income tax expense was reduced by investment tax credits utilized. Deferred taxes arose from timing differences between financial and tax reporting. No taxes have been accrued on the unremitted earnings of the Canadian subsidiary as these are intended to be permanently invested in Canada. (7) Foreign Currency Translation The Company's reporting currency is U.S. dollars. Translation adjustments resulting from translating foreign currency financial statements into U.S. dollar equivalents are reported separately and accumulated in a separate component of shareholders' equity. Aggregate exchange gains and losses arising from the translation of foreign currency transactions, excluding intercompany debt, are included in income. (8) Earnings Per Share Calculation Earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average shares outstanding during each year. The 1992 and 1991 computation of weighted average shares outstanding exclude anti-dilutive shares. (9) Gas Balancing The Company uses the sales method to account for gas imbalances. Under this method, revenue is recorded on the basis of the Company's share of actual gas sold. The Company did not have any significant gas imbalances outstanding at December 31, 1992 or 1993. 28 29 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A. ACCOUNTING POLICIES AND PROCEDURES -- (CONTINUED) (10) Concentration of Credit Risk Substantially all of the Company's receivables are within the oil and gas industry. Although diversified within many companies, collectibility is dependent upon the general economic conditions of the industry. Effective December 1992, the Company has invested excess cash in high-grade securities through a U.S. investment firm in New York City, and in term deposits with a Canadian chartered bank. (11) Hedge Contracts The Company enters into various contracts to hedge a portion of its oil and gas production against fluctuating prices. The results of these contracts are included in revenues as the oil or gas is produced. B. DISPOSITION OF U.S. ASSETS On July 9, 1992, the Company announced that it had entered into a definitive agreement to sell substantially all of its U.S. oil and gas properties to Louis Dreyfus Gas Holdings Inc. ("Dreyfus"). On October 16, 1992, the Dreyfus transaction was approved by the shareholders at a special shareholders' meeting and the closing of the transaction was completed on the same day. The Company did not sell its California properties. The Company received $104 million of gross proceeds from the sale, which included approximately $6.0 million of cash flow from the properties from the effective date (July 1, 1992). In addition, Dreyfus assumed certain liabilities. A pre-tax loss of $34.9 million ($32.3 million after-tax) was recorded on the sale in 1992. Revenues, lease operating expense, DD&A and sales volumes for the 1992 divested properties were as follows:
Six Months Ended June 30, 1992 ---------------- ($ IN MILLIONS) Revenues $ 20.1 Lease Operating Expense $ 6.6 DD&A $ 8.3 Sales Volumes ------------- Oil and Condensate (MBbls) 494 Natural Gas Liquids (MBbls) 125 Natural Gas (MMCF) 5,006
29 30 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) B. DISPOSITION OF U.S. ASSETS -- (CONTINUED) On August 5, 1993, the Company announced the sale of all its California gas wells to Samedan Oil Corporation for $5.1 million, effective July 1, 1993. The Company, in the third quarter of 1993, recorded a $0.5 million pre-tax and after-tax gain on the disposition of the California gas wells. Also, the Company closed down its exploration office in Bakersfield. The only U.S. property retained by the Company after this sale is the working interest in a single non-operated oil well in California and adjacent acreage. Revenues, lease operating expenses, DD&A and sales volumes for the 1993 divested properties were as follows:
Six Months Ended June 30, 1993 ---------------- ($ IN MILLIONS) Revenue $1.6 Lease Operating Expense $0.3 DD&A $0.9 Sales Volumes Natural Gas (MMCF) 850
C. NON-OPERATING ITEMS ($ IN THOUSANDS) (1) Interest Expense, Net
For The Years Ended December 31, -------------------------------- 1993 1992 1991 ------- ------- -------- Interest expense* $ 4,588 $ 7,456 $ 11,694 Interest income (793) (518) (792) ------- ------- -------- Total interest expense, net $ 3,795 $ 6,938 $ 10,902 ------- ------- --------
- --------------- * Interest of $1,515, $2,961, and $5,686 was capitalized in 1993, 1992 and 1991, respectively. In 1992 interest of $2,067 was charged to the loss on the sale of the U.S. assets. (2) Other Income, Net
For The Years Ended December 31, 1993 1992 1991 ------- -------- -------- Gas contract settlements $ (91) $ 300 $ -- Phantom stock income -- -- (4,015) Equity in earnings -- (756) (2,035) Gain on sale of equity investment -- (1,914) -- Adjustment to prior accruals -- (960) -- All other, net (32) 108 (200) ------- -------- -------- Total other income, net $ (123) $ (3,222) $ (6,250) ======= ======== ========
30 31 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) D. INCOME TAX PROVISION (BENEFITS) ($ IN THOUSANDS)
For The Years Ended December 31, 1993 1992 1991 -------- --------- --------- Current: Federal $ 140 $ (4,786) $ (1,050) State 50 46 58 Foreign 579 3,293 3,130 -------- --------- --------- 769 (1,447) 2,138 Deferred: Federal -- 2,340 (27,332) Foreign 5,226 (10,681) 41 -------- --------- --------- 5,226 (8,341) (27,291) -------- --------- --------- Income tax provision (benefit) $ 5,995 $ (9,788) $ (25,153) -------- --------- --------- SFAS No. 109 adjustment (5,334) -- -- -------- --------- --------- Total income tax provision (benefit) $ 661 $ (9,788) $ (25,153) ======== ========= =========
The income tax provision for continuing operations was a provision of $5,995 in 1993 and a benefit of $9,788 in 1992 and $25,153 in 1991. Deferred tax expense (benefit) results from the following types of differences in the timing of the recognition of revenues and expense for tax and financial statement purposes.
For The Years Ended December 31, 1993 1992 1991 ------- --------- --------- Related to oil and gas operations including depletion and intangible drilling costs $ 5,326 $ 4,534 $ 622 Tax depreciation greater than (less than) book depreciation (412) (3,172) 1,872 Provision for impairment of oil and gas properties -- (21,108) (28,201) Asset dispositions (515) 1,135 (5,325) Foreign tax -- -- 41 Phantom stock accruals -- -- 875 Deferred compensation -- -- (198) Bad debts -- -- (60) Capitalized interest 515 475 869 Capitalized overhead -- 366 1,558 Deferred tax benefit not realizable -- 2,340 -- Losses for which no U.S. tax benefits were recorded -- 7,934 -- Other accruals 312 (845) 656 ------- --------- --------- Total timing differences from continuing operations $ 5,226 $ (8,341) $ (27,291) ======= ========= =========
31 32 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) D. INCOME TAX PROVISION -- (CONTINUED) Total tax provisions (benefits) resulted in effective tax rates differing from that of the statutory income tax rates. The reasons for these differences are:
PERCENT OF PRETAX EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 ------ ------- ------- % % % Statutory rate* 44.3 (34.0) (34.0) Statutory deductions in excess of accounting charges (5.3) -- Tax refund limitation** 8.2 19.6 -- Other non-income tax 4.4 0.1 -- Other (0.2) 1.9 5.3 ------ ------- ------- Effective rate for continuing operations 51.4 (12.4) (28.7) SFAS No. 109 adjustment (45.7) -- -- ------ ------- ------- $ 5.7 $ (12.4) $ (28.7) ====== ======= =======
- --------------- * 1993 Canadian statutory rate; 1992 and 1991 U.S. federal statutory rate. ** Tax refund limitations result from losses for which no U.S. tax benefit has been recorded.
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 -------- --------- --------- U.S. $ (2,151) $ (59,707) $ (94,086) Canada 13,818 (19,334) 6,347 -------- --------- --------- Earnings (loss) from continuing operations before taxes $ 11,667 $ (79,041) $ (87,739) ======== ========= =========
For U.S. tax purposes there are approximately $21.2 million in tax operating loss carryforwards remaining as at December 31, 1993. These losses, if not utilized, will expire in 2007. Investment tax credits of approximately $1.5 million are available to offset taxable U.S. income after December 31, 1993. If not utilized, these credits will expire by 2003. Effective January 1, 1993, the Company adopted the liability method of accounting for income taxes under Statement of Financial Accounting Standards (SFAS) No. 109. Prior to 1993, income tax was calculated in accordance with Accounting Principle Board Opinion No. 11. The adoption of SFAS 109 resulted in a one time benefit adjustment of 5.3 million which was recorded in the first quarter of 1993. 32 33 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) D. INCOME TAX PROVISION -- (CONTINUED) The components of the net deferred tax liabilities under SFAS No. 109 are as follows:
FOR THE YEARS ENDED DECEMBER 31, 1993 1992(1) -------- ------- Deferred Tax Assets Current allowance for uncollectible accounts receivable $ (241) $ (231) Non Current Liabilities (3,423) (3,241) Tax net operating loss carryforward (7,201) (3,570) -------- ------- Total deferred assets (10,865) (7,042) Valuation allowance 9,472 6,746 -------- ------- Net deferred tax assets (1,393) (296) Deferred Tax Liabilities Non-current oil & gas properties 24,238 19,326 -------- ------- Net deferred tax liability $ 22,845 $19,030 ======== =======
- --------------- (1) The components of the net deferred tax liabilities reflect those after the SFAS No. 109 adjustment. The Company has recorded a valuation allowance for all U.S. federal tax operating loss carryforwards and U.S. future deductible amounts under SFAS No. 109 since the Company has limited future taxable income in the United States to realize these benefits. E. OTHER CURRENT LIABILITIES ($ IN THOUSANDS)
AS OF DECEMBER 31, ----------------- 1993 1992 ------ ------ Interest $1,772 $2,219 Compensation 371 432 Insurance reserves 1,285 1,356 Taxes 247 368 Liabilities on disposition of U.S. assets 718 2,397 Other 784 1,026 ------ ------ Total other current liabilities $5,177 $7,798 ====== ======
33 34 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) F. DEBT ($ IN THOUSANDS)
As Of December 31, ------------------- 1993 1992 ------- ------- Term debt: Notes -- 10.0% interest, due in 1998 $22,100 $38,600 Notes -- 9.875% interest, due in 2000 29,225 31,125 Line of credit debt 5,663 0 Notes payable -- majority at an interest rate of 7.25%, payable in varying instalments through 1993 0 360 ------- ------- 56,988 70,085 Less current maturities 5,663 360 ------- ------- Net long-term debt $51,325 $69,725 ======= =======
Aggregate maturities for the years ending December 31, 1994 through 1997 and thereafter, are as follows in thousands: 1994 1995 1996 1997 Thereafter - ------- ------ ------ ------ ---------- $5,663 $ -- $ -- $ -- $ 51,325
The $22.1 million of 10.0% notes may be redeemed at the option of the Company any time after April 15, 1995 at 100% of the principal amount thereof plus accrued interest to the date of redemption. The term debt agreements contain restrictions on the disposition of assets of the Company and limitations on the amount of sale and leaseback transactions. Effective November 19, 1992, DEKALB Energy Canada Ltd. ("DECL") entered into a revolving term credit facility with the Royal Bank of Canada, which allows borrowings of up to $30.0 million Canadian funds or the equivalent amount in U.S. funds. DECL may borrow in Canadian dollars at Canadian prime (5.50% at December 31, 1993), in U.S. dollars at U.S. prime (6% at December 31, 1993) plus one-eighth of one percent or under a number of other financing alternatives. Commitment fees are paid on the unused portion of the commitment to the extent it exceeds $10.0 million Canadian dollars. This agreement replaced DECL's $13 million Canadian funds facility. At December 31, 1993, DECL had $7.5 million Canadian funds ($5.7 million U.S.) outstanding under this revolving term credit facility. The facility is guaranteed by DEKALB Energy Company. The current term of the facility expires on June 30, 1994, at which time the Company expects a twelve month extension. If the term is not extended by the bank, the commitment will be reduced to the amount of the borrowings then outstanding or two-thirds of DECL's reserve value, whichever is less. DECL is then required to pay down the commitment in 20 quarterly installments. The first installment is due six months after the cancellation date. The Company intends to repay the outstanding line of credit debt within the next twelve months. 34 35 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) F. DEBT -- (CONTINUED) The revolving term credit facility contains a debt to equity covenant for DECL during the term of the agreement, and a cash flow covenant during the repayment period after the termination of the facility. DECL must notify the bank when various adverse events occur. The bank, at its discretion, may require DECL to collateralize certain of its properties. At December 31, 1993, the Company had no collateralized oil and gas properties. In 1992, upon receipt of the proceeds from the disposition of U.S. assets, the Company repaid its U.S. line of credit. The Company also used the proceeds to repurchase a portion of its public debt. The Company repurchased $55.3 million of such public debt during 1992, and an additional $18.4 million was repurchased during 1993. G. COMMITMENTS AND CONTINGENCIES AND OFF-BALANCE SHEET RISKS COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries are defendants in various legal actions arising in the course of their current and discontinued business activities. In the opinion of management, these actions will not result in a material effect on the Company's consolidated financial position. The Company has noncancellable agreements with terms ranging from 1 to 10 years to lease office space and equipment, and for terms ranging from 15 to 30 years for pipeline transportation capacity. Minimum payments due under the term of the agreements are as follows:
($ IN THOUSANDS) 1994 1995 1996 1997 1998 THEREAFTER ------ ------ ------ ------ ------ ---------- Lease commitments $ 316 $ 367 $ 380 $ 414 $ 414 $ 587 Pipeline commitments $3,077 $3,077 $3,077 $3,077 $3,077 $ 14,873 ------ ------ ------ ------ ------ -------- Total $3,393 $3,444 $3,457 $3,491 $3,491 $ 15,460 ====== ====== ====== ====== ====== ========
Rental expense for operating leases for the years ended December 31, 1993, 1992, and 1991 was $370,000, $1,054,000 and $967,000 respectively. OFF-BALANCE SHEET RISKS At December 31, 1993, the Company had in its name stand-by letters of credit in the amount of $0.4 million which covered 18 months of pipeline demand charges with Alberta Natural Gas Co. Ltd. 35 36 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) G. COMMITMENTS AND CONTINGENCIES AND OFF-BALANCE SHEET RISKS The Company has entered into the following NYMEX price based hedge contracts for its gas: 10,000 MMBTU per day for the term December 1993 through November 1994. 10,000 MMBTU per day for the term March 1994 through December 1994. The fair value of the hedges approximate contract values based on terms currently available to the Company. H. CAPITAL STOCK AND INCENTIVE PLANS Class A and Class B (Nonvoting) Stock The holders of Class A Stock and Class B (nonvoting) Stock have the same rights in all respects, including rights with respect to dividends and other distributions, except that (i) the holders of Class B (nonvoting) Stock have no voting rights other than as required by the Delaware General Corporation Law, (ii) the holders of Class A Stock may exchange, at their election, any of their shares for an equal number of shares of Class B (nonvoting) Stock on a continuing basis and (iii) the Board of Directors of the Company may distribute (1) voting stock of subsidiaries of the Company to the holders of Class A Stock of the Company and (2) non-voting stock of subsidiaries of the Company to the holders of Class B (nonvoting) Stock of the Company. PREFERRED STOCK The Company has 500,000 shares of $1 par value preferred stock authorized and unissued. INCENTIVE PLANS In 1990, the Company adopted a Long-Term Incentive Plan (the "Plan") which provides for the awarding, from time to time, of stock options, restricted stock, stock appreciation rights (SARs), performance awards and stock indemnification rights (SIRs). The Compensation Committee of the Board may make awards of SARs, SIRs, restricted stock, performance awards, or stock options to certain officers and other key employees of the Company. Stock options may be granted at no less than fair market value of the Company's stock at the date of grant and are exercisable within periods specified by the Compensation Committee. The Plan replaced an Incentive Stock Option Plan and a non-qualified stock option plan. All stock options granted prior to December 31, 1990, were granted under these latter two plans and continue in effect, but no new stock options may be awarded under these plans. At December 31, 1993, there were no longer any options outstanding under the Incentive Stock Option Plan. At December 31, 1993, 203,198 shares of Class A Stock subject to options and 7,050 shares of Class B (nonvoting) Stock subject to options were exercisable under the Plan. The Company had 136,564 shares available for future grants either as Class A or Class B shares, under the Plan at December 31, 1993. 36 37 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) H. CAPITAL STOCK AND INCENTIVE PLANS -- (CONTINUED) DEKALB ENERGY COMPANY CAPITAL STOCK AND INCENTIVE PLAN
Class Prices ----------------- ---------------------- A B A B -------- ----- ------------- ----- Shares under option at December 31, 1990 243,173 7,050 $1.00-$31.75 $7.39 Activity: Granted 92,850 -- $20.00-$25.00 -- Cancelled (85,750) -- $2.10-$31.75 -- Reissued 64,500 -- $20.00 -- Exercised (16,528) -- $1.00-$22.25 -- -------- ----- ------------- ----- Shares under option at December 31, 1991 298,245 7,050 $1.00-$31.75 $7.39 -------- ----- ------------- ----- Activity: Granted 219,850 -- $11.50-$16.50 -- Cancelled (132,370) -- $13.00-$31.75 -- Reissued 13,875 -- $13.00-$16.00 -- Exercised (33,980) -- $1.00- $7.39 -- -------- ----- ------------- ----- Shares under option at December 31, 1992 365,620 7,050 $2.096-$22.25 $7.39 -------- ----- ------------- ----- Activity: Granted 103,725 -- $12.25-$16.75 -- Cancelled (154,037) -- $12.25-$22.25 -- Exercised (15,843) -- $2.096-$16.00 -- -------- ----- ------------- ----- Shares under option at December 31, 1993 299,465 7,050 $2.096-$22.25 $7.39 ======== ===== ============= =====
Certain current and former officers of the Company were participants in a Phantom Stock Plan. Income of $4.0 million was included in earnings from continuing operations for 1991 resulting from price fluctuations in the stock of the Company, DEKALB Genetics Corporation and Pride Petroleum Services Inc. The Phantom Stock Plan expired in November of 1992. The Company paid $.5 million to the remaining participants. The Company previously granted 77,380 phantom units exercisable in 1993 at $16.00 per unit, to certain former officers of the Company. All of the phantom units were exercised in 1993, resulting in a $.1 million payment. This payment had been accrued as part of the loss on the sale of the U.S. assets in 1992. 37 38 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) I. PENSION PLANS Prior to the sale of the U.S. assets in 1992, the Company's U.S. employees participated in a noncontributory pension plan which was designed to provide benefits based on such employees' career earnings. As part of the sale of the U.S. assets, this plan was terminated, and assets were distributed. The Company maintains a noncontributory pension plan covering certain management employees which is not funded. Benefits are based on each participant's years of service, final average compensation (in the U.S.), or average of three highest paid years (in Canada) and estimated benefits received from certain other plans. At December 31, 1993, the U.S. did not have any active employees in the plan. Eight previous U.S. employees continue to receive benefits under the plan. The 1993 interest cost of $203,000 associated with the U.S. employees was accumulated as part of the loss on the sale of U.S. assets in 1992 and therefore did not result in an expense in 1993. Total pension expense for the years ended December 31, 1993, 1992, and 1991, was $85,000, $2,134,000, and $740,000, respectively. The components of total pension expense for 1993 are as follows ($ in thousands): Service cost -- benefits earned during the year $19 Interest cost on projected benefit obligations 65 Net amortization and deferral 1 --- Total pension expense $85 ===
Actuarial assumptions for December 31, 1993 and December 31, 1992 are as follows:
DECEMBER 31, DECEMBER 31, 1993 1992 ------------ ------------ Discount rate 7.00% 8.00% Average salary growth rate 4.50% 5.50%
38 39 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) I. PENSION PLANS -- (CONTINUED) A reconciliation of accrued pension liability, included in other long-term liabilities on the financial statements, is as follows ($ in thousands):
Unfunded Plan As Of ----------------------------- 12/31/93 12/31/92 ------------ ------------ Actuarial present value of benefits based on service to date and present pay levels: Vested $ 2,952 $ 2,866 Nonvested -- -- ----------- ----------- Accumulated benefit obligation 2,952 2,866 Additional amounts related to projected pay increases 241 648 ----------- ----------- Projected benefit obligation 3,193 3,514 Plan assets at fair value -- -- ----------- ----------- Plan assets (less than) benefit obligation (3,193) (3,514) Unrecognized loss from experience 31 251 Unrecognized net (asset) liability (58) (68) ----------- ----------- Accrued pension (liability) included in the Consolidated Balance Sheets $ (3,220) $ (3,331) =========== ===========
J. DEFINED CONTRIBUTION PLANS Prior to the sale of the U.S. assets in 1992, the Company's U.S. employees participated in a voluntary thrift plan which provided that the Company contribute a minimum of $.50 for every dollar contributed by employees up to 6% of their salaries. Additional discretionary amounts could have been contributed when warranted by results of operations. Company contributions charged to expense under this plan were $243,000 and $173,000 for the years ended December 31, 1992 and 1991, respectively. Following the sale of the U.S. assets in 1992, this plan was discontinued and the assets were distributed to the individuals. The remaining U.S. eligible employees participated in a voluntary thrift plan with the same basic design as the previous plan; however, it contained an aged based contribution in addition to the $.50 match and the additional discretionary payments. Following the 1993 sale of assets in California, this plan is no longer active. The Company has applied to the U.S. Internal Revenue Service for the right to distribute the assets of this plan. Company contributions charged to expense under this plan were $38,000 and $9,000 for the years ended December 31, 1993 and 1992, respectively. 39 40 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) J. DEFINED CONTRIBUTION PLANS -- (CONTINUED) The Company's Canadian employees participate in a voluntary retirement savings plan established in 1991. The Company contributes not less than 1% and not greater than 5.5% of the salary for each employee who participates in the plan, regardless of the employees' contribution to the plan. In addition, the Company contributes a minimum of $.50 for every dollar contributed by employees up to 3% of their salaries. Additional discretionary amounts may also be contributed when warranted by results of operations. Company contributions charged to expense under this plan were $507,000, $375,000, and $357,000 for the years ended December 31, 1993, 1992, and 1991 respectively. K. OPERATIONS BY GEOGRAPHIC AREA Information on the Company's continuing operations by geographic area for the years ended December 31, 1992 and 1991, is shown below. U.S. operations have been combined with Canada for 1993 due to the immateriality of the U.S. operations in relation to the Company's operations as a whole. Operating earnings from continuing operations are total revenues less operating expenses of the geographic area, excluding interest and general corporate expenses. In 1993, the Company had three Canadian customers who accounted for 18%, 16% and 11% of sales, respectively. In 1992, the Company had one Canadian customer who accounted for 11% of sales. In 1991, the Company had one U.S. customer who accounted for 16% of sales.
OPERATING AS OF OR FOR THE YEARS OPERATING EARNINGS IDENTIFIABLE ENDED DECEMBER 31, REVENUES (LOSS) ASSETS -------- --------- ------------ ($ IN THOUSANDS) 1993 $45,903 $ 15,339 $210,089 ======== ========= ========= 1992 United States $22,773 $ (57,801) $ 29,787 Canada 37,960 (17,524) 189,198 -------- --------- ---------- $60,733 $ (75,325) $218,985 ======== ========= ========= 1991 United States $54,313 $ (93,852) $193,816 Canada 40,379 10,765 229,413 Discontinued operations -- -- 1,802 -------- --------- ---------- $94,692 $ (83,087) $425,031 ======== ========= =========
- --------------- Note: Included in 1992 and 1991 Canadian operating revenues were $1.6 million and $10.5 million, respectively, of sales of natural gas from Canada to the U.S. which were recorded at fair market value. The resale of such gas to outside parties was eliminated from U.S. sales. Excluded from 1991 Canadian operating revenues was $1.2 million of natural gas sales to the U.S. which was still in inventory at December 31, 1991. The intercompany gross (loss) profit on such sales excluded from operating earnings was ($.3) million in 1991. 40 41 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) L. DISCONTINUED OPERATIONS SUMMARY OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1993 1992 1991 -------- -------- -------- ($ in thousands) Lindsay Manufacturing Co. Pre-tax (loss) on divestiture $ -- $ (300) $ -- Commodities Brokerage (Loss) on divesture -- (750) -- -------- -------- -------- Earnings (loss) from Discontinued Operations $ -- $ (1,050) $ -- ======== ======== ========
OTHER The Company sold the stock of its commodities brokerage business in 1986 and Lindsay Manufacturing Co. in 1989. The 1992 losses resulted from changes in estimated future expenses related to the above transactions. As a result of the Company's cumulative loss position, no tax benefit was recognized for the accruals. M. OIL AND GAS DISCLOSURES Capitalized costs at December 31, 1993, (all of which are located in Canada) which have been excluded from the amortization base as prescribed by the Securities and Exchange Commission Financial Reporting Release No. 14 for the years ended December 31, 1993, 1992, and 1991 ($ in thousands) are as follows:
INTEREST FISCAL YEAR LEASEHOLD EXPLORATION RELATED TO OF ACQUISITION COSTS COSTS EXCLUDED COSTS TOTAL - -------------- --------- ----------- -------------- ------- CANADA Prior 53 360 110 523 1991 15 638 172 825 1992 425 896 351 1,672 1993 2,645 2,120 1,263 6,028 -------- --------- ------------ ------- Total $ 3,138 $ 4,014 $1,896 $ 9,048 ======== ========= ============ ======
41 42 DEKALB ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) M. OIL AND GAS DISCLOSURES -- (CONTINUED) The properties associated with the above excluded costs are being evaluated in the normal course of the Company's exploration activities. While it is not possible to determine the exact period in which these costs will be transferred to the amortization base, it is estimated that the majority will be included within five years after the costs were incurred. Any material impairment to the properties associated with the excluded costs will be moved to the full cost amortization base. N. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND SHORT TERM INVESTMENTS The carrying amount approximates the fair value because of the short term maturity of those instruments. LONG-TERM DEBT The fair value of the Company's long-term debt is estimated to be $54.5 million, or $3.2 million over stated book value, based upon current rates offered to the Company for debt of the same remaining maturities. 42 43 DEKALB ENERGY COMPANY SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) ESTIMATED NET QUANTITIES OF PROVED RESERVES*
AS OF OR FOR THE YEARS ENDED DECEMBER 31, 1993(1) 1992 1991 ------- ----------------------------- ----------------------------- TOTAL U.S. CANADA TOTAL U.S. CANADA ------- ------- ------- ------- ------- ------- OIL, CONDENSATE AND NATURAL GAS LIQUIDS (THOUSANDS OF BARRELS) Proved developed and undeveloped reserves: Beginning of year 13,984 26,077 11,693 14,384 29,262 13,881 15,381 Revisions of previous estimates (300) (12) -- (12) 973 1,152 (179) Sales of reserves (46) (10,928) (10,928) -- (1,997) (1,954) (43) Purchase of minerals in place 188 382 -- 382 -- -- -- Extensions, discoveries and other additions 397 227 -- 227 720 470 250 Production (989) (1,762) (765) (997) (2,881) (1,856) (1,025) ------- ------- ------- ------- ------- ------- ------- End of year 13,234 13,984 -- 13,984 26,077 11,693 14,384 ======= ======== ======== ======== ======== ======== ======== Proved developed reserves: Beginning of year 13,972 25,094 10,723 14,371 28,182 12,813 15,369 ======= ======== ======== ======== ======== ======== ======== End of year 13,221 13,972 0 13,972 25,094 10,723 14,371 ======= ======== ======== ======== ======== ======== ======== NATURAL GAS (MILLIONS OF CUBIC FEET) Proved developed and undeveloped reserves: Beginning of year 276,343 361,194 80,464 280,730 388,842 93,732 295,110 Revisions of previous estimates 2,198 1,026 732 294 (3,704) (6,333) 2,629 Sales of reserves (3,660) (71,429) (71,342) (87) (10,625) (4,150) (6,475) Purchase of minerals in place 4,405 1,617 -- 1,617 -- -- -- Extensions, discoveries and other additions 19,094 7,239 1,335 5,904 16,226 9,726 6,500 Production (20,969) (23,304) (6,671) (16,633) (29,545) (12,511) (17,034) ------- ------- ------- ------- ------- ------- ------- End of year 277,411 276,343 4,518 271,825 361,194 80,464 280,730 ======== ======== ======== ======== ======== ======== ======== Proved developed reserves: Beginning of year 263,305 341,353 73,962 267,391 366,640 84,608 282,032 ======== ======== ======== ======== ======== ======== ======== End of year 263,070 263,305 4,518 258,787 341,353 73,962 267,391 ======== ======== ======== ======== ======== ======== ========
- --------------- * Proved oil and gas reserve quantities for all three years presented were estimated by the Company's engineers. The reserve quantities for 1993, 1992 and 1991 were reviewed and determined to be reasonable by Ryder Scott Company Petroleum Engineers, independent petroleum engineers, in accordance with Securities and Exchange Commission guidelines. (1) U.S. reserve information has been combined with Canada for 1993 due to the immateriality of the U.S. reserves in relation to the total Company reserves. 43 44 DEKALB ENERGY COMPANY SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
AS OF OR FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 ($ IN MILLIONS*) TOTAL ------ 1993(5) Future cash inflows $672.0(4) Future production costs 134.8 Future development costs 20.4 ------ Future net cash flows before income taxes 516.8 Discount at 10% per annum 249.8 ------ Present value of future net cash flows before income taxes 267.0(4) Present value of future income taxes** 64.6 ------ Standardized measure of discounted future net cash flows $202.4 ======
UNITED STATES CANADA TOTAL ------ ------ ------ 1992 Future cash inflows $ 8.9 $648.1(4) $657.0 Future production costs 2.0 172.1 174.1 Future development costs 0.4 22.2 22.6 ------ ------ ------ Future net cash flows before income taxes 6.5 453.8 460.3 Discount at 10% per annum 1.3 248.6 249.9 ------ ------ ------ Present value of future net cash flows before income taxes 5.2 205.2(4) 210.4 Present value of future income taxes** -- 44.7 44.7 ------ ------ ------ Standardized measure of discounted future net cash flows $ 5.2 $160.5 $165.7 ====== ====== ====== 1991 Future cash inflows $335.8 $646.2(4) $982.0 Future production costs 124.0 194.0 318.0 Future development costs 9.2 17.8 27.0 ------ ------ ------ Future net cash flows before income taxes 202.6 434.4 637.0 Discount at 10% per annum 75.9 235.6 311.5 ------ ------ ------ Present value of future net cash flows before income taxes 126.7 198.8(4) 325.5 Present value of future income taxes** 12.4 37.8 50.2 ------ ------ ------ Standardized measure of discounted future net cash flows $114.3 $161.0 $275.3 ====== ====== ======
- --------------- * As prescribed in the statement of Financial Accounting Standards No. 69 and developed by using the following conventions: (1) Estimates are made of quantities of proved reserves at fiscal year-end and for future periods during which these reserves are expected to be produced, based on year-end economic conditions. (2) Pricing of future production of proved reserves is based on the prices in effect at fiscal year-end. Estimated future production and development costs reflect current economic conditions. (3) The provision for income taxes has been computed by applying future statutory tax rates under the present law to the future taxable income to be generated from producing proved reserves giving effect to applicable permanent differences. (4) Included in future cash inflows is approximately $39.4 million, $45.6 million and $50.6 million ($12.0 million, $14.1 million and $16.0 million after discount at 10% per annum) for 1993, 1992 and 1991 respectively of Canadian tax credits expected to be realized beyond the scheduled expiration date of legislation. (5) U.S. net cash flows have been included with Canada for 1993 due to their immateriality in relation to the total net cash flows for the Company as a whole. ** U.S. undiscounted future income taxes in 1991 were $18.6 million. Canadian undiscounted future income taxes in 1993, 1992, and 1991 were $135.3 million, $119.8 million and $103.2 million, respectively. 44 45 DEKALB ENERGY COMPANY SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth the changes in the Standardized Measure of Discounted Future Cash Flow relating to Proved Oil and Gas Reserves ($ IN MILLIONS)
AS OF OR REVISION PURCHASES FOR THE CURRENT CHANGES OF DISCOVERIES OF SALES OF ACCRETION YEARS ENDED BEGINNING YEAR IN PRICES ESTIMATED AND MINERALS MINERALS OF INCOME END OF DECEMBER 31, OF YEAR SALES AND COSTS QUANTITIES EXTENSIONS IN PLACE* IN PLACE DISCOUNT TAXES OTHER YEAR - ------------ --------- ------- --------- --------- ----------- --------- -------- --------- ------- ------- ------ 1993(1) Total $ 165.7 $ (31.8) $ 54.1 $ 2.6 $ 20.3 $ 4.8 $ (4.2) $ 18.3 $ (19.9) $ (7.5) $ 202.4 ======= ====== ======== ======= ========= ======== ======== ========= ======= ======= ======= 1992 U.S. $ 114.3 $ (15.0) $ (1.3) -- $ 2.1 -- $ (95.3) $ 0.4 -- -- $ 5.2 Canada 161.0 (27.4) 22.5 2.4 5.8 3.3 -- 16.6 6.9 (16.8) 160.5 -------- ------- --------- -------- --------- -------- -------- --------- ------- ------- ------- Total $ 275.3 $ (42.4) $ 21.2 $ 2.4 $ 7.9 $ 3.3 $ (95.3) $ 17.0 $ (6.9) $ (16.8) $ 165.7 ======= ====== ======== ======= ========= ======== ======== ========= ======= ======= ======= 1991 U.S. $ 186.4 $ (35.7) $ (78.6) $ (8.3) $ 14.3 -- $ (13.3) $ 14.6 $ 34.9 -- $ 114.3 Canada 202.3 (25.4) (75.9) 0.3 6.4 -- (2.7) 25.3 29.9 0.8 161.0 -------- ------- --------- -------- --------- -------- -------- --------- ------- ------- ------- Total $ 388.7 $ (61.1) $ (154.5) $ (8.0) $ 20.7 -- $ (16.0) $ 39.9 $ 64.8 $ 0.8 $ 275.3 ======= ====== ======== ======= ========= ======== ======== ========= ======= ======= =======
- --------------- * Includes any unevaluated costs associated with acquired properties. (1) U.S. data has been included with Canada for 1993 due to its immateriality in relation to the total data for the Company as a whole. CAPITALIZED COSTS RELATED TO OIL AND GAS PROPERTIES ($ IN THOUSANDS)
AS OF DECEMBER 31, 1993(2) 1992 --------- ---------------------------------- TOTAL U.S. CANADA --------- -------- --------- Evaluated Properties $ 298,235 $ 313,122 $ 29,337 $ 283,785 Unevaluated Properties(1) 9,048 15,729 -- 15,729 --------- --------- -------- --------- Total properties 307,283 328,851 29,337 299,514 Less reserves for accumulated depreciation, depletion and amortization 130,079 147,564 24,899 122,665 --------- --------- -------- --------- End of year $ 177,204 $ 181,287 $ 4,438 $ 176,849 ========= ========= ======== =========
- --------------- (1) Unevaluated costs represent acquisition and exploration costs which are excluded from the current amortization base as described in Note M. (2) U.S. costs have been included with Canada for 1993 due to their immateriality in relation to the total costs for the Company as a whole. 45 46 DEKALB ENERGY COMPANY SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) COSTS INCURRED IN PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES(1) ($ IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993(2) 1992 1991 -------- ----------------------------- ------------------------------ TOTAL U.S. CANADA TOTAL U.S. CANADA -------- ------- -------- -------- -------- -------- Leasehold costs $ 2,686 $ 906 -- $ 906 $ 3,949 $ 2,437 $ 1,512 Purchases of minerals in place 2,075 1,912 -- 1,912 -- -- -- Exploration 8,168 7,709 2,649 5,060 13,590 6,355 7,235 Development 6,532 6,504 3,361 3,143 16,618 12,743 3,875 -------- -------- ------- -------- -------- -------- -------- Total $ 19,461 $ 17,031 $ 6,010 $ 11,021 $ 34,157 $ 21,535 $ 12,622 ======== ======== ====== ======== ======== ======== ========
- --------------- (1) Costs do not include capitalized interest (2) U.S. costs for 1993 have been combined with Canada due to the immateriality of the U.S. costs in relation to the total Company costs as a whole. RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES ($ IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993(5) 1992 1991 -------- -------------------------------- -------------------------------- TOTAL U.S. CANADA TOTAL U.S. CANADA --------- --------- -------- --------- --------- -------- Revenues(4) $ 45,903 $ 60,733 $ 22,773 $ 37,960 $ 94,692 $ 54,313 $ 40,379 Lease operations and other direct charges(1) 12,467 18,833 7,218 11,615 29,802 17,463 12,339 Depreciation, depletion and amortization 15,142 22,522 9,683 12,839 40,865 26,238 14,627 Provision for impairment of oil and gas properties -- 53,320 24,728 28,592 94,241 94,241 -- Income tax expense (benefit)(2) 8,164 (13,756) (7,067) (6,689) (25,461) (31,341) 5,880 -------- --------- --------- -------- --------- --------- -------- Results of Operations for oil and gas producing activities $ 10,130 $ (20,186) $ (11,789) $ (8,397) $ (44,755) $ (52,288) $ 7,533 ======== ========= ========= ======== ========= ========= ======== "Full Cost" Amortization Rate(3) $ 3.37 $ 5.16 $ 3.31 $ 6.66 $ 3.79 ======== ========= ======== ========= ========
- --------------- (1) Excludes general and administrative and interest costs. (2) This provision is not an indication of the total corporate income tax provision and is provided at statutory tax rates. (3) Dollars per equivalent barrel (gas converted to oil at 6,000 cubic feet per barrel). (4) Included in 1992 and 1991 Canadian operating revenues were $1.6 million and $10.5 million, respectively, of sales of natural gas from Canada to the U.S. which were recorded at fair market value. The resale of such gas to outside parties was eliminated from U.S. sales. Excluded from 1991 Canadian operating revenues were $1.2 million of natural gas sales to the U.S. which were still in inventory at December 31, 1991. (5) U.S. results of operations for 1993 have been combined with Canada due to the immateriality of the U.S. results in relation to the total Company results as a whole. 46 47 DEKALB ENERGY COMPANY SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) QUARTERLY RESULTS OF OPERATIONS
THREE MONTHS ENDED THE LAST DAY OF MARCH JUNE SEPTEMBER DECEMBER -------- -------- --------- -------- $ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Year ended December 31, 1993 Operating revenues $ 11,827 $ 11,949 $ 10,245 $ 11,882 Operating expenses 7,443 8,514 6,902 7,705 Earnings from continuing operations 1,413 1,336 1,074 1,849 Net earnings 6,747 1,336 1,074 1,849 ========= ========= ========= ========= Earnings per common share: Earnings from continuing operations $ 0.15 $ 0.14 $ 0.11 $ 0.19 Net earnings $ 0.70 $ 0.14 $ 0.11 $ 0.19 ========= ========= ========= ========= Year ended December 31, 1992 Operating revenues $ 19,268 $ 19,437 $ 9,041 $ 12,987 Operating expenses 70,904 47,843 9,462 7,849 Earnings (loss) from continuing operations (41,727) (26,145) (3,778) 2,397 Net earnings (loss) (41,727) (26,145) (4,828) 2,397 ========= ========= ========= ========= Earnings per common share: Earnings (loss) from continuing operations $ (4.34) $ (2.71) $ (0.39) $ 0.25 Net earnings (loss) $ (4.34) $ (2.71) $ (0.50) $ 0.25 ========= ========= ========= =========
The Following Quarterly Items Are All Pre-tax Amounts: The quarters ended March 31 and June 30, 1993 included Canadian and California operations. The quarters ended September 30 and December 31, 1993 included Canadian operations and the remaining California well subsequent to the sale of the California gas assets effective July 1, 1993. A pre-tax and after-tax gain of $0.5 million was recognized in income in the third quarter of 1993 in connection with the sale. The first quarter of 1993 also included a one time benefit adjustment of $5.3 million as a result of the Company's adoption of Financial Accounting Standard No. 109 "Accounting for Income Taxes" as of January 1, 1993. The quarter ended March 31, 1992 included $24.7 million (U.S. operations) and $28.6 million (Canadian operations) of expenses related to the writedowns of oil and gas properties. The quarter ended June 30, 1992 included $33.1 million related to the loss on the disposal of U.S. assets. The quarter ended September 30, 1992 included an additional $1.8 million related to the loss on disposal of U.S. assets and a recognition of $1.1 million on legal accruals for discontinued operations. The quarters ended September 30 and December 31, 1992 included only Canadian and California operations. For further discussion, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note L to the Consolidated Financial Statements. 47 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company will file with the Securities and Exchange Commission a definitive Proxy Statement not later than 120 days after the close of its fiscal year ended December 31, 1993. The information required by this Item is incorporated by reference from the Proxy Statement. Information about Executive Officers is shown on Page 8 and 9 of this filing. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the Proxy Statement. 48 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following financial statements of DEKALB Energy Company are included in part II, Item 8:
PAGE ----- Report of Independent Accountants(8) 21 Consolidated Statements of Operations for the years ended December 31, 1993, 1992, and 1991 23 Consolidated Balance Sheets as of December 31, 1993 and 1992 24 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992, and 1991 25 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993, 1992, and 1991 26 Notes to Consolidated Financial Statements 27-42 Unaudited Supplementary Financial Information 43-47 (a)(2) Financial Statement Schedules Report of Independent Accountants (8) 53 Schedule II -- Amounts Receivable from Related parties and Underwriters, Promoters, and Employees other than Related Parties 54 Schedule V -- Property, Plant, and Equipment 55 Schedule VI -- Accumulated Depreciation and Amortization of Property, Plant, and Equipment 56 Schedule VIII -- Valuation and Qualifying Account 57 Schedule IX -- Short-Term Borrowings 58 Schedule X -- Supplementary Income Statement Information 59
Financial statements and schedules other than those listed are omitted for the reason that they are not required, are not applicable, or that equivalent information has been included in the financial statements or notes thereto. 49 50 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(3) Exhibits
PAGE ----------- 3.1 Restated Certificate of Incorporation of the registrant(2) 3.2 Restated By-laws of the registrant(1) 4.1 Indenture dated as of April 1, 1988, between the registrant and Continental Illinois Bank and Trust Company of Chicago as Trustee relating to $50 million long-term notes at 10% and $75 million of long-term notes at 9.875%(3) 4.2 Extendible Revolving Term Credit Agreement between DEKALB Energy Canada Ltd. and the Royal Bank of Canada.(7) 10.1 Stock Option Plan(1)* 10.2 Form of Stock Option Agreement(1)* 10.3 Letter Agreement between DEKALB Energy Company and Vincent J. Tkachyk(7)* 10.4 Deferred Management Compensation Plan(2)* 10.5 Employment Agreement between DEKALB Energy Company and Bruce P. Bickner(5)* 10.6 Employment Agreement between DEKALB Energy Company and John H. Witmer, Jr.(5)* 10.7 Long-Term Incentive Plan(4)* 10.8 Employment Agreement between DEKALB Energy Company and Michael E. Finnegan(7)* 10.9 Firm Transportation Service Agreement between the registrant and Pacific Gas Transmission Company(7) 10.10 Asset purchase and Sale Agreement (U.S. properties) between the registrant and Louis Dreyfus Gas Holdings Inc.(6) 10.11 DEKALB Energy Company Profit Based Thrift Plan(7) 11 Statement re computation of per share earnings 60 21 Subsidiaries of Registrant 61 24.1 Consent of Independent Accountants(8) 62 24.2 Consent of Independent Petroleum Engineers(8) 28 Report of Independent Petroleum Engineers(8)
50 51 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K -- (a)(3) Exhibits (CONTINUED) Footnotes: - ---------- (1) Incorporated by reference to Exhibit to Amendment No. 1 to Form 10-K for the fiscal year ended August 31, 1986, dated May 19, 1987. (2) Incorporated by reference to Exhibit to Form 10-K for the fiscal year ended December 31, 1988, dated March 13, 1989. (3) Incorporated by reference to Exhibit 4 A to Registration Statement on Form S-3 (Registration No. 33-12534). (4) Incorporated by reference to Exhibit to Form 10-Q for the quarter ended March 31, 1990, dated May 11, 1990. (5) Incorporated by reference to Exhibit to Form 10-K for the fiscal year ended December 31, 1991, dated March 11, 1992. (6) Incorporated by reference to Exhibit to Form 8-K dated October 16, 1992. (7) Incorporated by reference to Exhibit to Form 10-K for the fiscal year ended December 31,1992 dated March 12, 1993. (8) Filed in paper format under Form SE. * Indicates management contracts, compensatory plans or arrangements. (b) Reports on Form 8-K. No Form 8-K was filed in 1993. 51 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DEKALB Energy Company Date: March 4, 1994 By: /s/ VINCENT J. TKACHYK -------------------------------- Vincent J. Tkachyk President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on this 4th day of March, 1994.
SIGNATURE TITLE - --------------------------------------------- -------------------------------------------- /s/ MICHAEL E. FINNEGAN Vice President, Finance and Treasurer ------------------------------------------- Michael E. Finnegan /s/ EDDY Y. TSE Chief Accounting Officer ------------------------------------------- Eddy Y. Tse DIRECTORS /s/ BRUCE P. BICKNER /s/ THOMAS H. ROBERTS, JR. ------------------------------------------- --------------------------------------- Bruce P. Bickner Thomas H. Roberts, Jr. /s/ DONALD McMORLAND /s/ H. BLAIR WHITE ------------------------------------------- --------------------------------------- Donald McMorland H. Blair White /s/ CHARLES C. ROBERTS /s/ WILLIAM J. WOOTEN ------------------------------------------- --------------------------------------- Charles C. Roberts William J. Wooten
52 53 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of DEKALB Energy Company: Our report on the consolidated financial statements of DEKALB Energy Company is included on page 21 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed on page 49 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Calgary, Alberta February 18, 1994 COOPERS & LYBRAND 53 54 DEKALB ENERGY COMPANY SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 ($ IN THOUSANDS)
Column A Column B Column C Column D Column E - ---------------------------------- ---------- -------- -------------------- ------------------ Deductions Balance At -------------------- End of Period Balance At Amounts ------------------ Beginning Amounts Written Not Name Of Debtor Of Period Additions Collected Off Current Current - ---------------------------------- ---------- -------- --------- ------- ------- ------- Year ended December 31, 1993: $ -- $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ======= ====== ====== Year ended December 31, 1992: Vincent Tkachyk(a) $167 $ -- $ 167 $ -- $ -- $ -- Edward Aabak(b) 182 -- 182 -- -- -- Terry Sherban(c) 208 -- 208 -- -- -- -------- -------- -------- ------- ------ ------ TOTAL $557 $ -- $ 557 $ -- $ -- $ -- ======== ======== ======== ======= ====== ====== Year ended December 31, 1991: Vincent Tkachyk(a) $224 $ -- $ 57 $ -- $ 167 $ -- Edward Aabak(b) 183 -- 1 -- 182 -- Terry Sherban(c) 209 -- 1 -- 208 -- ---------- -------- -------- ------- ------ ------ TOTAL $616 $ -- $ 59 $ -- $ 557 $ -- ======== ======== ======== ======= ====== ======
- --------------- Notes: All of the above loans were made in conjunction with employee relocations. (a) Loan was paid in full in 1992. Interest accrued at 10%. Collateralized in whole by security agreements on certain real property. (b) Loan was paid in full in 1992. $46 of principal was non-interest bearing, with the remainder accruing interest at 10%. (c) Loan was paid in full in 1992. $52 of the principal was non-interest bearing, with the remainder accruing interest at 10%. 54 55 DEKALB ENERGY COMPANY SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT (C) YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 ($ IN THOUSANDS)
Column A Column B Column C Column D Column E Column F ---------------------------------- ---------- -------- ----------- ------------------------- ---------- Balance At Other Charges Balance At Beginning Additions ------------------------- End Of Classification Of Period At Cost Retirements Additions Deductions Period ---------------------------------- ---------- -------- ----------- --------- ---------- ---------- Year ended December 31, 1993: Land $ 43 $ -- $ -- $ -- $ 1 $ 42 Equipment 2,455 303 290 -- 97 2,371 Oil and gas properties and equipment 328,851 21,252 31,301(e) -- 11,519 307,283 Other 348 70 -- -- 14 404 ---------- -------- ----------- --------- ---------- ---------- $331,697 $21,625 $ 31,591 $ -- $ 11,631(d) $310,100 ========= ======== ========= ======== ========= ========= Year ended December 31, 1992: Land $ 53 $ -- $ 6 $ -- $ 4 $ 43 Equipment 6,522 415 4,240 -- 242 2,455 Oil and gas properties and equipment 820,435 18,923 483,085(e) -- 27,422 328,851 Other 2,018 92 1,735 -- 27 348 ---------- -------- ----------- --------- ---------- ---------- $829,028 $19,430 $ 489,066 $ -- $ 27,695(d) $331,697 ========= ======== ========= ======== ========= ========= Year ended December 31, 1991: Land $ 99 $ -- $ 83 $ 39 $ 2 $ 53 Equipment 11,009 867 5,364 10 -- 6,522 Oil and gas properties and equipment 818,137 42,512 41,279 1,126 61 820,435 Other 1,878 133 -- 22 15 2,018 ---------- -------- ----------- --------- ---------- ---------- $831,123 $43,512 $ 46,726 $ 1,197(a,b) $ 78(a) $829,028 ========= ======== ========= ======== ========= =========
- --------------- Notes: (a) Includes transfers between property classes. (b) Includes $1,120 resulting from foreign currency translation of foreign assets for the year ended December 31, 1991. (c) Accounting methods for oil and gas property, plant and equipment can be found under the captions "Oil and Gas Properties" and "Other Property, Plant and Equipment" in Part II, Item 8, Note A of the Consolidated Financial Statements. (d) Represents foreign currency translation of foreign assets for the year. (e) Majority related to disposal of U.S. assets; see Part II, Item 8, Note B of the Consolidated Financial Statements. 55 56 DEKALB ENERGY COMPANY SCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (E) YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 ($ IN THOUSANDS)
Column A Column B Column C Column D Column E Column F ----------------------------- ----------- ----------- ----------- -------------------------- ---------- Balance At Other Charges Balance At Beginning Additions -------------------------- End Of Classification Of Period At Cost Retirements Additions Deductions Period ----------------------------- ---------- --------- ----------- --------- ---------- ---------- Year ended December 31, 1993: Equipment $ 1,769 $ 390 $ 260 $ -- $ 97 $ 1,802 Oil and gas properties and equipment 147,564 13,894 21,788(f) -- 9,591 130,079 Other 235 79 -- -- 10 304 ---------- --------- ----------- --------- ---------- ---------- $149,568 $ 14,363 $ 22,048 $ -- $ 9,698(d) $132,185 ========= ========= ========= ======== ========= ========= Year ended December 31, 1992: Equipment $ 4,238 $ 689 $ 2,985 $ -- $ 173 $ 1,769 Oil and gas properties and equipment 440,026 73,254(c) 355,386(f) -- 10,330 147,564 Other 1,402 113 1,261 -- 19 235 ---------- --------- ----------- --------- ---------- ---------- $445,666 $ 74,056 $ 359,632 $ -- $ 10,522(d) $149,568 ========= ========= ========= ======== ========= ========= Year ended December 31, 1991: Equipment $ 5,203 $ 1,071 $ 2,025 $ 3 $ 14 $ 4,238 Oil and gas properties and equipment 323,817 122,100(c) 6,079 188 -- 440,026 Other 1,255 133 -- 14 -- 1,402 ---------- --------- ----------- --------- ---------- ---------- $330,275 $ 123,304 $ 8,104 $ 205(a,b) $ 14(a) $445,666 ========= ========= ========= ======== ========= =========
- --------------- Notes: (a) Includes transfers between property classes. (b) Includes $191 resulting from foreign currency translation of foreign assets for the year ended December 31, 1991. (c) Includes Canadian and U.S. writedowns of $53,320 in 1992, and U.S. writedown of $94,241 in 1991. (d) Represents foreign currency translation of foreign assets for the year. (e) Accounting methods for depreciation, depletion and amortization of property, plant and equipment can be found under the captions "Oil and Gas Properties" and "Other Property, Plant and Equipment" in Part II, Item 8, Note A of the Consolidated Financial Statements. (f) Majority related to the disposal of U.S. assets; see Part II, Item 8, Note B of the Consolidated Financial Statements. 56 57 DEKALB ENERGY COMPANY SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNT YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 ($ IN THOUSANDS)
Column A Column B Column C Column D Column E - --------------------------------------------- ---------- ----------------------- ---------- ---------- Additions ----------------------- Balance At Charged To Charged To Balance At Beginning Costs And Other End Of Description Of Period Expenses Accounts Deductions Period - --------------------------------------------- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1993: Deducted in the balance sheet from the assets to which they apply: Allowance for doubtful accounts and notes receivable $ 679 $ 30 $ -- $ -- $ 709 ======== ========= ========= ========= ======== Allowance for assets of discontinued businesses $3,637 $ -- $840 $ (98)(b) $4,379 ======== ========= ========= ========= ======== Year ended December 31, 1992: Deducted in the balance sheet from the assets to which they apply: Allowance for doubtful accounts and notes receivable $ 385 $630 $ -- $ (336)(a) $ 679 ======== ========= ========= ========= ======== Allowance for assets of discontinued businesses $3,507 $ -- $761 $ (631)(b) $3,637 ======== ========= ========= ========= ======== Year ended December 31, 1991: Deducted in the balance sheet from the assets to which they apply: Allowance for doubtful accounts and notes receivable $ 259 $265 $ -- $ (139)(a) $ 385 ======== ========= ========= ========= ======== Allowance for assets of discontinued businesses $4,184 $ -- $165 $ (842)(b) $3,507 ======== ========= ========= ========= ========
- --------------- Notes: (a) Uncollectible items written off, less recoveries of items previously written off. (b) Realized losses charged to the reserve. 57 58 DEKALB ENERGY COMPANY SCHEDULE IX -- SHORT-TERM BORROWINGS YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 ($ IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ----------------------------------- -------- -------- ----------- ----------- ----------- AVERAGE MAXIMUM AVERAGE WEIGHTED INTEREST AMOUNT AMOUNT AVERAGE BALANCE RATE AT OUTSTANDING OUTSTANDING INTEREST CATEGORY OF AGGREGATE AT END END OF DURING DURING RATE DURING SHORT-TERM BORROWINGS OF YEAR YEAR(A) THE YEAR THE YEAR(B) THE YEAR(A) - ----------------------------------- -------- -------- ----------- ----------- ----------- Year ended December 31, 1993: Non-U.S. Debt $ 5,663 $ 5.50% $ 5,663 $ 472 5.50% Year ended December 31, 1992: Non-U.S. Debt $ -- $ N/A $ 3,323 $ 1,159 7.54% Year ended December 31, 1991: Non-U.S. Debt $ 1,731 $ 8.00% $ 1,939 $ 575 10.06%
- --------------- Notes: (a) Non-U.S. debt is an operating line with the Royal Bank of Canada accruing interest at the Royal Bank prime rate. (b) The average amount of borrowings outstanding was based on a simple average of month end balances outstanding. 58 59 DEKALB ENERGY COMPANY SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 ($ IN THOUSANDS)
COLUMN A COLUMN B - --------------------------------------------------------------- ------------------------------- DESCRIPTION CHARGED TO COSTS AND EXPENSES - --------------------------------------------------------------- ------------------------------- 1993 1992 1991 ------- ------- ------- 1. Maintenance and repairs $ 2,282 $ 3,326 $ 3,723 ====== ====== ====== 3. Taxes, other than payroll and income taxes: Real estate and personal property 520 1,073 1,826 Production tax -- 1,429 3,315 Franchise tax 49 73 214 Other 142 167 231 ------- ------- ------- $ 711 $ 2,742 $ 5,586 ====== ====== ======
- --------------- Note: Items 2, 4 & 5 have been omitted as the amount did not exceed one percent of total sales and revenues. 59 60 EXHIBIT 11 DEKALB ENERGY COMPANY STATEMENT RE COMPUTATION OF PER SHARE EARNINGS YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AVERAGE SHARES OUTSTANDING 1993 1992 1991 - ----------------------------------------------------------- ----------- ----------- ----------- 1. Average shares outstanding 9,605,900 9,629,754 9,618,209 2. Net additional shares outstanding assuming all stock options exercised and proceeds used to purchase treasury stock (a) 69,250 -- -- ----------- ----------- ----------- 3. Average number of shares outstanding 9,675,150 9,629,754 9,618,209 ========== ========== ========== 4. Fully diluted number of shares 9,678,131 9,671,130 9,711,937 ========== ========== ========== 5. Net earnings (loss) per share computation: Earnings (loss) from continuing operations $ 5,672 $ (69,253) $ (62,586) Loss from discontinued operations -- (1,050) -- Earnings on cumulative effect of change in accounting principle 5,334 -- -- ----------- ----------- ----------- Net earnings (loss) $ 11,006 $ (70,303) $ (62,586) ========== ========== ========== 6. Net earnings (loss) per average share outstanding as reported in summary of operations: Earnings (loss) from continuing operations $ 0.59 $ (7.19) $ (6.51) Loss from discontinued operations -- (0.11) -- Earnings on cumulative effect of change in accounting principle 0.55 -- -- ----------- ----------- ----------- Net earnings (loss) per share $ 1.14 $ (7.30) $ (6.51) ========== ========== ========== 7. Net earnings (loss) per fully diluted average share: Earnings (loss) from continuing operations $ 0.59 $ (7.16) $ (6.44) Loss from discontinued operations -- (0.11) -- Earnings on cumulative effect of change in accounting principle 0.55 -- -- ----------- ----------- ----------- Net earnings (loss) per share $ 1.14 $ (7.27) $ (6.44) ========== ========== ==========
- --------------- Notes: (a) the 1991 and 1992 computations of average number of shares outstanding exclude anti-dilutive shares. 60 61 EXHIBIT 21 SUBSIDIARIES OF DEKALB ENERGY COMPANY The following table sets forth principal subsidiaries of the registrant and indicates as to each such subsidiary the state or other jurisdiction under the laws of which it was organized and the percentage of voting securities thereof owned by the registrant.
PERCENTAGE OF JURISDICTION OF VOTING SECURITIES INCORPORATION OWNED BY THE REGISTRANT --------------- ----------------------- DEKALB Energy Canada Ltd. Alberta 100% DEKALB Energy Texas Inc. Delaware 100%
61 62 EXHIBIT 24.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of DEKALB Energy Company on Form S-8, File Nos. 2-63440 (Post-Effective Amendment No. 6), No. 2-58358 (Post-Effective Amendment No. 1), No. 2-71978 (Post-Effective Amendment No. 1), and No. 33-36642 and Registration Statement No. 33-12534 (Amendment No. 3) on Form S-3 of our report dated February 18, 1994, on our audits of the consolidated financial statements and financial statement schedules of DEKALB Energy Company as of December 31, 1993 and 1992 and for each of the three years in the period ended December 31, 1993, which report is included in this Annual Report on Form 10-K. Calgary, Alberta COOPERS & LYBRAND March 4, 1994 62 63 APPENDIX DOCUMENTS FILED IN PAPER FORMAT UNDER FORM SE: ITEM 8. REPORT OF INDEPENDENT ACCOUNTANTS ITEM 14.(A)(1) REPORT OF INDEPENDENT ACCOUNTANTS ITEM 14.(A)(3) Exhibit 24.1 Consent of Independent Accountants Exhibit 24.2 Consent of Independent Petroleum Engineers Exhibit 28 Report of Independent Petroleum Engineers
63 EX-13.2 3 QUARTERLY REPORT DEKALB -- 10-Q 1 Ex-13.2 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) __x__ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1994 _____ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ Commission file number: 0-2886 DEKALB Energy Company (Exact name of registrant as specified in its charter) Delaware 36-0987809 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700-9th Avenue S.W. T2P 3V4 Calgary, Alberta Canada (Postal Code) (Address of principal executive offices) (403) 261-1200 (Registrant's telephone number, including area code) Indicate whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__X__ No_____ Outstanding as of Title of Class September 30, 1994 Class A Stock, no par value 2,310,233 Class B (nonvoting) Stock, no par value 7,075,992 Exhibit index is located on page 16 Total number of pages is 20 1 2 DEKALB Energy Company INDEX
Page No. -------- Part I - Financial Information Consolidated Statements of Operations for the nine months ended September 30, 1994 and 1993 (Unaudited) 3 Consolidated Statements of Operations for the three months ended September 30, 1994 and 1993 (Unaudited) 4 Consolidated Balance Sheets at September 30, 1994 (Unaudited) and December 31, 1993 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1994 and 1993 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7-9 Report of Independent Accountants 10 Management's Discussion and Analysis of Results of Operations and Financial Position 11-15 Part II - Other Information 16 EXHIBIT 11 - Computation of Net Earnings per Share 17 EXHIBIT 15 - Letter Re Unaudited Interim Financial Information 18 Signatures 19 Appendix - Documents Filed in Paper Format Under Form SE 20
2 3 DEKALB Energy Company CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands) (Unaudited)
For the nine months ended September 30, 1994 1993 ------------- ------------- Operating revenues (Note 8) Oil and liquids sales $ 10,067 $ 10,971 Natural gas sales 24,289 22,020 Other 1,087 1,030 - -------------------------------------------------------------------------------------------------------------------------- Total operating revenues 35,443 34,021 Operating expenses Lease operations and other direct charges 8,150 9,296 Depreciation, depletion and amortization 10,503 11,395 General and administrative 2,308 2,681 (Gain) loss on disposal of U.S. assets - (513) - -------------------------------------------------------------------------------------------------------------------------- Operating Income 14,482 11,162 Interest expense, net of interest income and capitalized interest (Note 3) 3,027 3,159 Other (income) expense, net (66) 51 - -------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income and other taxes 11,521 7,952 Income and other taxes (Note 5) 5,465 4,129 - -------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 6,056 3,823 Cumulative effect of change in accounting principle (Note 5) - 5,334 - -------------------------------------------------------------------------------------------------------------------------- Net earnings $ 6,056 $ 9,157 ========================================================================================================================== Earnings per share (Note 4): Earnings from continuing operations $ 0.63 $ 0.40 Cumulative effect of change in accounting principle - 0.55 - -------------------------------------------------------------------------------------------------------------------------- Net earnings per share $ 0.63 $ 0.95 ========================================================================================================================== Weighted average shares outstanding (in thousands) 9,610 9,671 The accompanying notes are an integral part of the financial statements.
3 4 DEKALB Energy Company CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands) (Unaudited)
For the three months ended September 30, 1994 1993 ------------ ------------ Operating revenues (Note 8) Oil and liquids sales $ 3,786 $ 3,505 Natural gas sales 8,064 6,382 Other 356 358 - ------------------------------------------------------------------------------------------------------------------- Total operating revenues 12,206 10,245 Operating expenses Lease operations and other direct charges 3,124 3,362 Depreciation, depletion and amortization 3,941 3,419 General and administrative 746 634 (Gain) loss on disposal of U.S. assets - (513) - ------------------------------------------------------------------------------------------------------------------- Operating Income 4,395 3,343 Interest expense, net of interest income and capitalized interest (Note 3) 1,048 903 Other (income) expense, net (144) 38 - ------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income and other taxes 3,491 2,402 Income and other taxes (Note 5) 1,601 1,328 - ------------------------------------------------------------------------------------------------------------------- Net Earnings 1,890 1,074 =================================================================================================================== Earnings per share (Note 4): Net earnings per share $ 0.20 $ 0.11 =================================================================================================================== Weighted average shares outstanding (in thousands) 9,526 9,699 The accompanying notes are an integral part of the financial statements.
4 5 DEKALB Energy Company CONSOLIDATED BALANCE SHEETS ($ in thousands)
As of September 30, 1994 December 31, (Unaudited) 1993 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents (Note 6) $ 15,898 $ 22,664 Accounts receivable 9,407 7,874 Other current assets 647 781 - ----------------------------------------------------------------------------------------------------------------------- Total current assets 25,952 31,319 Other assets 806 855 Property, plant and equipment (Note 7): Oil and gas assets, full cost method Proved properties, being amortized 322,170 298,235 Unproved properties and properties under development, not being amortized 14,922 9,048 Other property and equipment 3,072 2,817 Less accumulated depreciation, depletion and amortization (142,523) (132,185) - ----------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 197,641 177,915 - ----------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 224,399 $ 210,089 ======================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank line of credit $ 18,286 $ 5,663 Accounts payable 11,334 13,868 Other current liabilities 4,119 5,177 - ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 33,739 24,708 Other liabilities 10,132 10,612 Deferred income taxes (Note 5) 27,668 22,845 Long-term debt (Note 6) 51,325 51,325 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 122,864 109,490 - ----------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note 2) Shareholders' equity: Capital stock: Class A; $.625 stated value; 6,000,000 shares authorized; 2,390,025 shares issued at September 30, 1994; 2,418,000 shares issued at December 31 ,1993; 1,494 1,511 Class B (nonvoting); $.625 stated value; 13,000,000 shares authorized; 11,288,458 shares issued at September 30, 1994; 11,260,483 shares issued at December 31 ,1993 7,055 7,038 Capital in excess of stated value 51,657 51,657 Retained earnings 148,610 142,554 Currency translation adjustments (13,876) (12,141) - ----------------------------------------------------------------------------------------------------------------------- 194,940 190,619 Treasury shares, at cost (4,292,258 shares at September 30, 1994 and 4,072,258 shares at December 31, 1993) (93,405) (90,020) - ----------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 101,535 100,599 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 224,399 $ 210,089 ======================================================================================================================= The accompanying notes are an integral part of the financial statements.
5 6 DEKALB Energy Company CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) (Unaudited)
For the nine months ended September 30, 1994 1993 ------------- ------------- Cash Flows from Operating Activities - ------------------------------------ Net earnings $ 6,056 $ 9,157 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation, depletion and amortization 10,503 11,395 Provision for deferred income taxes (Note 5) 5,011 3,600 Cumulative effect of change in accounting principle (Note 5) - (5,334) (Gain) loss on disposal of U.S. assets - (513) Other 99 (35) - ---------------------------------------------------------------------------------------------------------------------- 21,669 18,270 Changes in assets and liabilities: Accounts receivable and other current assets (1,494) 3,509 Accounts payable and other current liabilities (3,042) (8,178) Other assets 49 - Other liabilities (445) (1,252) - ---------------------------------------------------------------------------------------------------------------------- Cash flows from continuing operations 16,737 12,349 - ---------------------------------------------------------------------------------------------------------------------- Cash flows from discontinued operations - 840 - ---------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities 16,737 13,189 - ---------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities - ------------------------------------ Purchases of property, plant and equipment (36,436) (12,665) Proceeds from sale of property, plant and equipment (Note 7) 4,494 620 Proceeds from sale of U.S. assets - 6,175 Increase (decrease) in short-term payables for purchases of property, plant and equipment (446) 803 - ---------------------------------------------------------------------------------------------------------------------- Net cash flows from investing activities (32,388) (5,067) - ---------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities - ------------------------------------ Purchases of stock (3,385) (79) Proceeds from exercise of stock options - 1 Net short-term borrowings 12,515 (360) Payments made on long-term debt - (17,400) - ---------------------------------------------------------------------------------------------------------------------- Net cash flows from financing activities 9,130 (17,838) - ---------------------------------------------------------------------------------------------------------------------- Net effect of exchange rates on cash (245) 117 - ---------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (6,766) (9,599) Cash and cash equivalents, at December 31 22,664 18,872 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, at September 30 $ 15,898 $ 9,273 ====================================================================================================================== Note: Cash paid during the period for: Income taxes 386 597 Interest 4,390 4,138 Capitalized interest (Note 3) 845 1,173 The accompanying notes are an integral part of the financial statements.
6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General The consolidated financial statements included herein are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally made in the registrant's annual Form 10-K filing. These financial statements should be read in conjunction with the financial statements and notes thereto included in DEKALB Energy Company's (the "Company") latest annual report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments of a normal recurring nature necessary to fairly represent the financial position, results of operations, and cash flows for the respective interim periods. 2. Commitments and Contingencies The Company and its subsidiaries are defendants in various legal actions arising in the course of their current and discontinued business activities. Management is of the opinion there are no pending legal proceedings that would have a material effect on the consolidated financial position or results of operations of the Company. 3. Interest Expense, Capitalized Interest and Interest Income ($ in thousands)
Interest Capitalized Interest Net Interest 1994 Expense Interest Income Expense ---- ----------- ----------- ----------- ----------- 1st Qtr. $ 1,333 $ (238) $ (126) $ 969 2nd Qtr. 1,436 (275) (151) 1,010 3rd Qtr. 1,542 (332) (162) 1,048 ----------- ----------- ----------- ----------- $ 4,311 $ (845) $ (439) $ 3,027 =========== =========== =========== =========== 1993 ---- 1st Qtr. $ 1,681 $ (391) $ (128) $ 1,162 2nd Qtr. 1,600 (383) (123) 1,094 3rd Qtr. 1,451 (399) (149) 903 ----------- ----------- ----------- ----------- $ 4,732 $ (1,173) $ (400) $ 3,159 =========== =========== =========== ===========
4. Earnings Per Share Calculation Earnings per share is calculated by dividing the earnings by the weighted average number of shares outstanding during the period. The computation of weighted average shares outstanding excludes anti-dilutive shares. 7 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) 5. Income and Other Taxes Income and other taxes is comprised of the following ($ in thousands):
Deferred Total Income Capital Income Income and 1994 Taxes Taxes Taxes Other Taxes ---- -------- -------- -------- ----------- 1st Qtr. $ 97 $ 87 $ 1,738 $ 1,922 2nd Qtr. 65 45 1,832 1,942 3rd Qtr. 80 80 1,441 1,601 -------- -------- -------- -------- $ 242 $ 212 $ 5,011 $ 5,465 ======== ======== ======== ======== 1993 ---- 1st Qtr. $ 0 $ 38 $ 1,713 $ 1,751 2nd Qtr. 160 155 735 1,050 3rd Qtr. 59 117 1,152 1,328 -------- -------- -------- --------- $ 219 $ 310 $ 3,600 $ 4,129 ======== ======== ======== =========
Capital taxes relate to the Canadian Large Corporations Tax and franchise taxes. The year-to-date and third quarter tax provisions for 1994 and 1993 resulted in effective tax rates differing from that of the statutory Canadian income tax rate of 44.34%, principally due to the lack of tax benefits associated with interest and other costs incurred in the U.S. Effective January 1, 1993, the Company adopted the liability method of accounting for income taxes under Statement of Financial Accounting Standards (SFAS) No. 109. The adoption of SFAS 109 resulted in a one-time benefit adjustment of $5.3 million in the first quarter of 1993. 6. Disclosures About Fair Value of Financial Instruments The carrying amount of cash and cash equivalents approximates the fair value due to the short term maturities of these instruments. The fair value of the Company's long-term debt is approximately $52.2 million, or $.9 million over stated book value, based upon estimates provided to the Company by independent sources. 7. Disposition of Assets During the third quarter of 1994, the Company sold its interest in leasehold and tangible property in the Buick Creek area of the Province of British Columbia, Canada for proceeds of $.4 million. In March 1994, the Company reflected the sale of its interest in leasehold and tangible property in the Rigel area of the Province of British Columbia, Canada for proceeds of $3.6 million. In accordance with the full cost method of accounting, the proceeds received for the 1994 dispositions were credited to the full cost pool; therefore, no gains or losses were recorded on the sales. On August 5, 1993, the Company announced the sale of all its California gas wells to Samedan Oil Corporation for $5.1 million, effective July 1, 1993. Consistent with the full cost method of accounting on a cost center basis, the Company recorded a $0.5 million pre-tax and after-tax gain on the disposition of the California gas wells in the third quarter of 1993. The Company also closed down its exploration office in Bakersfield. The only U.S. assets retained by the Company after this sale are a working interest in a single non- operated oil well in California and acreage adjacent thereto. Sales revenues and volumes, lease operating expenses, and depreciation, depletion and amortization (DD&A) recorded for the 1993 divested California properties to the effective date of the sale were as follows: 8 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) 7. Disposition of Assets (continued)
Six Months Ended ($ in thousands) June 30, 1993 ---------------- Revenues $ 1,551 Lease Operating Expenses $ 270 DD&A $ 964 Sales Volumes ------------- Natural Gas (MMCF) 850
8. Hedge Contracts The Company enters into contracts to hedge a portion of its oil and gas production against fluctuating prices. Approximately 25% of the Company's average annual production is hedged through various contracts with terms ranging to October 1995. The results of these contracts are included in revenues as the oil or gas is produced. The fair value of the hedges exceed contract values based on terms currently available to the Company. 9. Postemployment Benefits In November 1992, the Financial Accounting Standards Board Introduced Statement No. 112, "Employers' Accounting for Postemployment Benefits" effective for fiscal years beginning after December 15, 1993. No provision for any current or future obligation has been made by the Company as the estimated amounts are not material. 10. Financial Statement Presentation Certain prior year figures have been reclassified to conform to the current year financial statement presentation. 9 10 Report of Independent Accountants To the Shareholders and Board of Directors of DEKALB Energy Company: We have reviewed the accompanying consolidated balance sheet of DEKALB Energy Company as of September 30, 1994, and the related consolidated statements of operations for the three month and nine month periods ended September 30, 1994 and 1993, and the consolidated statements of cash flows for the nine month periods ended September 30, 1994 and 1993. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with United States generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1993, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993 (not represented herein); and in our report dated February 18, 1994, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1993, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Coopers & Lybrand Calgary, Alberta November 7, 1994 10 11 Management's Discussion and Analysis of Results of Operations and Financial Position SELECTED OPERATING STATISTICS (1)
For the Nine Months Ended For the Three Months Ended ------------------------- -------------------------- 9/30/94 9/30/93 9/30/94 9/30/93 ------- ------- ------- ------- Average Prices - -------------- Oil and condensate ($ per Bbl) $ 15.47 $ 16.54 $ 17.68 $ 14.88 Natural gas liquids ($ per Bbl) 8.51 9.96 9.25 9.12 Natural gas ($ per Mcf) 1.61 1.40 1.45 1.30 Sales Volumes - ------------- Oil and condensate (Mbbls) 553 554 185 201 Natural gas liquids (Mbbls) 177 181 56 56 Natural gas (Mmcf) 15,041 15,721 5,544 4,906 Oil and condensate, natural gas liquids and natural gas equivalents (Mbbls) (2) 3,237 3,355 1,165 1,074 (1) U.S. operating data has been combined with Canada due to the immateriality of the U.S. data in relation to the operating results as a whole. 1993 includes six months of U.S. operating data on the divested California properties. (2) Gas converted to oil at 6,000 cubic feet per barrel.
11 12 Management's Discussion and Analysis of Results of Operations and Financial Position (continued) EARNINGS FROM CONTINUING OPERATIONS Year-to-date earnings from continuing operations are 58.4% higher compared with 1993. Earnings per share from continuing operations for the first nine months of 1994 have risen to 63 cents per share in 1994 versus 40 cents per share in 1993. For the third quarter, earnings and earnings per share from continuing operations in 1994 increased by 76.0% and 81.8%, respectively, compared to 1993. These higher year-to-date and third quarter results are reflective of continuing higher gas prices, improved oil prices in the third quarter, and the Company's ongoing emphasis on its cost structure. Current year results also reflect the impact of the lower Canadian dollar exchange rate, resulting in lower U.S. dollar equivalent expenses. DRILLING ACTIVITY Consistent with its focus on long-term growth through exploration and development, the Company participated in the drilling of 61 exploration and development wells (45.96 net wells) during the first nine months of 1994, with a success rate of 75% (80% on a net well basis). Fifty gas targets and eleven oil targets were drilled, primarily in the Nevis, Kaybob and Claresholm areas of Alberta and in northeast British Columbia. Of particular significance was a successful 100% Company-owned and operated well drilled in the first quarter on the Hunter prospect in northeast British Columbia, where 24 feet of gas pay in the Halfway zone was encountered, with an established drill stem test rate of 4.5 MMCFD before royalties. The well is expected to be tied in during the first half of 1995. The Company participated in the drilling of 22 wells (13 net wells) in the 1993 comparative period. During the third quarter of 1994, the Company participated in the drilling of 14 exploration and development wells (9.34 net wells) with 79% (79% on a net well basis) of the wells being successful. OPERATING REVENUES Year-to-date operating revenues of $35.4 million increased from prior year revenues of $34.0 million, primarily due to higher gas prices, partially offset by lower oil and natural gas liquids prices and lower gas production during the first half of 1994. Higher gas volumes and increased prices for all products contributed to a 19.1% increase in operating revenues in the 1994 third quarter. The Company's year-to-date oil and condensate prices were 6.5% lower compared to 1993. During the first six months of 1994, the Company received an average of $14.36 per barrel versus $17.49 in 1993. These prices followed changes in the WTI oil price, which averaged $16.28 per barrel during the first half of 1994 compared with $19.83 per barrel in the 1993 comparative period. A significant recovery was seen in the third quarter of 1994, however, with the Company's oil and condensate prices and the WTI oil price averaging $17.68 and $18.48 per barrel, respectively. Natural gas prices similarly followed those of oil and condensate with the Company receiving an average price of $2.18 per barrel less in the first half of 1994 versus 1993, but a 13 cent higher price in the third quarter of 1994 versus 1993. Combined year-to-date oil, condensate and natural gas liquids volumes decreased slightly from the prior year. 12 13 Management's Discussion and Analysis of Results of Operations and Financial Position (continued) Gas revenues for the first nine months of 1994 increased to $24.3 million from $22.0 million in 1993. This was due to improved gas prices which rose to an average of $1.61 per thousand cubic feet (MCF) from $1.40 during the same period last year. System gas prices were 17.8% higher and sales volumes were 23.9% lower compared to the first nine months of 1993. Direct sales (short- term and spot) prices and volumes were up by 8.5% and 26.4%, respectively, compared to 1993. System and direct gas sales accounted for approximately 42% and 58%, respectively, of total Company year-to-date gas sales volumes. Overall Company gas prices received were 11.5% higher in the 1994 third quarter compared to 1993. Gas sales volumes were down 4.3% during the first nine months of 1994. This decline was principally due to the disposition of the Company's California properties in the third quarter of 1993 (see Note 7, "Disposition of Assets," in the Notes to the Financial Statements). In addition, a unitization adjustment was recorded in the second quarter of 1993, resulting in additional gas volumes relating to prior periods of approximately 220 MMCF. General field declines, compressor installations and repairs, and several plant turnarounds also resulted in some curtailment of production during the first halfhalf of 1994. Gas volumes for the third quarter were 13.0% higher in 1994 versus 1993. Year-to-date, the Company tied in approximately 12.2 MMCFD of gas production. Thirty-four gas wells in the Province of Alberta and seven oil wells in the Province of British Columbia were brought onto production during the first nine months of 1994. To protect against oil and natural gas price fluctuations, the Company has entered into various hedge contracts for a portion of its oil and gas (See Note 8, "Hedge Contracts," in the Notes to the Financial Statements). A net gain of $1.0 million was recognized as a component of operating revenues in the first nine months of 1994 as a result of these hedge contracts. The effect of the gain on average prices was 31 cents per BOE based on total Company volumes. OPERATING EXPENSES Year-to-date lease operating expenses and other direct charges were down 12.3% compared to the prior year, primarily as a result of the disposition of the Company's California properties in the third quarter of 1993 (see Note 7, "Disposition of Assets" in the Notes to the Consolidated Financial Statements), processing rate adjustments relating to current and prior years' production from two of the Company's non-operated fields, and a lower Canadian dollar exchange rate. In addition, a third party gas processing fee adjustment for 1991 and 1992 of $.6 million was recorded in the second quarter of 1993. For the third quarter, lease operating expenses and other direct charges fell from $3.12/BOE in 1993 to $2.68/BOE in 1994. This decline was again mainly due to the processing rate adjustments recorded in 1994 and the lower Canadian dollar. Year-to-date depreciation, depletion and amortization (DD&A) expense fell $0.9 million compared to 1993, primarily due to the lower Canadian dollar exchange rate in 1994 and the disposal of the Company's higher cost California properties in 1993. DD&A expense in the third quarter of 1994 was up by $0.5 million due to a higher DD&A rate and increased production, partially offset by the impact of the lower Canadian dollar exchange rate. Year-to-date general and administrative expenses were 13.9% below the same period last year. The decline reflects a decrease in professional fees and other general office costs as well as increased overhead chargeouts. Third quarter general and administrative expenses were up by 17.7% in 1994 compared to 1993, reflecting increased staff levels. 13 14 Management's Discussion and Analysis of Results of Operations and Financial Position (continued) NON-OPERATING ITEMS Year-to-date interest expense, net of interest income and capitalized interest, decreased by $0.1 million, mainly due to lower interest costs as a result of the repurchase of a portion of the Company's public notes during the 1993 comparative period. These lower interest costs were partially offset by interest charges on the Company's operating line of credit during 1994 and a decrease in the amount of interest capitalized. For the third quarter of 1994, interest charges on the Canadian operating line and lower capitalized interest were partially offset by the impact of the lower exchange rate. The weighted average long-term debt outstanding was $51.3 million versus $63.4 million for the first nine months of 1994 and 1993, respectively. INCOME TAXES The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" as of January 1, 1993. A one-time benefit adjustment of $5.3 million was recognized in the first quarter of 1993. The year-to-date and second quarter tax provisions reflect a different effective tax rate from the statutory Canadian income tax rate of 44.34%, principally due to the lack of tax benefits associated with interest costs incurred in the U.S. CASH FLOWS FROM OPERATING ACTIVITIES Cash flows from operating activities before changes in assets and liabilities were $21.7 million in the first nine months of 1994, up 18.6% compared with 1993. The increase is mainly due to higher operating revenues and lower operating expenses. Cash flows from continuing operations increased to $16.7 million in 1994 from $12.3 million in 1993. Taxes paid in 1994 and 1993 related to the Canadian Large Corporations Tax, withholding taxes and franchise taxes. CASH FLOWS FROM INVESTING ACTIVITIES Year-to-date cash outflows from investing activities were $32.4 million compared to $5.1 million for the same period last year, reflecting a $23.8 million increase in capital spending related to exploration and development in 1994. During the first nine months of 1994, the Company reflected the disposals of its interest in leasehold and tangible property in the Rigel and Buick Creek areas of the Province of British Columbia, Canada for total proceeds of $4.0 million. In accordance with the full cost method of accounting, the proceeds were credited to the full cost pool, therefore, no gains or losses were recorded on the sales. In 1993 proceeds were received from the sale of the Company's California assets (see Note 7, "Disposition of Assets," in the Notes to the Financial Statements). Additional proceeds of $1.1 million from the 1992 disposition of U.S. assets were received in the first quarter of 1993. 14 15 Management's Discussion and Analysis of Results of Operations and Financial Position (continued) CASH FLOWS FROM FINANCING ACTIVITIES The Company repaid $1.8 million on its line of credit during the first quarter of 1994 and drew down $14.3 million in the second and third quarters to fund increased capital spending and repurchases of stock. On July 27, 1994, the Board passed a resolution to authorize the repurchase from time to time, of up to one million shares of Class A and/or Class B (nonvoting) Stock. This resolution will replace and is in lieu of any authority to repurchase stock previously granted in any prior resolution. A total of 220,000 shares were purchased during the second and third quarters of 1994 at an average price of $15.39. In the first nine months of 1993, the Company repurchased $17.4 million of its public notes ($1.9 million of its 9 7/8% notes and $15.5 million of its 10% notes) and 7,191 shares of its common stock. LIQUIDITY The Company plans to fund its capital expenditures, working capital needs and interest payments through its operating cash flow, and a combination of long-term debt and the revolving line of credit. At September 30, 1994, the Company had $15.9 million in cash and short-term investments, and $4.0 million available under its Canadian line of credit. The current term of the credit facility expires on June 30, 1995, at which time the Company expects a twelve month extension. PROSPECTIVE AND OTHER INFORMATION Given its current successful drilling program and projected capital spending for 1994, the Company expects to more than replace this year's expected production of about 4,500 MBOE's. Approximately 11 MMCFD of gas is expected to be tied in during the last quarter of 1994. Deliverability is forecasted to approach 70 million cubic feet per day net working interest after royalty by year end compared to 57 million cubic feet per day at December 31, 1993. As a result of increased opportunities, 1994 capital expenditures net of divestitures will be higher than prior estimates of $28 million. The Company also announced in November 1994 its intention to repurchase $22.1 million of its 10% public notes in the second quarter of 1995, at which time they will be callable at par. The repurchase will be funded through the Company's operating cash flow and cash reserves. On April 12, 1994 the Company's Class B (nonvoting) Stock began trading on The Toronto Stock Exchange in addition to the NASDAQ/NMS. The additional listing is in recognition of the Company's focus on its Canadian asset base, and is intended to increase the Company's profile among Canadian analysts and attract additional Canadian investors. 15 16 PART II OTHER INFORMATION Item 1. Legal Proceedings Management is of the opinion there are no pending legal proceedings that would have a material effect on the consolidated financial position of the Company. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11 - Computation of Net Earnings per Share. Exhibit 15 - Letter Re Unaudited Interim Financial Information. (b) Reports on Form 8-K: On September 21, 1994, the Company filed a Form 8-K to announce the death of Michael E. Finnegan, Executive Vice President and Chief Financial Officer of the Company. 16 17 EXHIBIT 11 DEKALB Energy Company COMPUTATION OF NET EARNINGS PER SHARE (Unaudited) For the nine months
For the nine months ended September 30, 1994 1993 -------------- --------------- 1. Average Shares Outstanding 9,538,725 9,605,803 2. Net additional shares outstanding assuming all stock options exercised and proceeds used to purchase treasury stock 71,339 65,185 -------------- --------------- 3. Average number of shares outstanding for primary earnings per share 9,610,064 9,670,988 ============== =============== 4. Average number of shares outstanding for fully diluted earnings per share 9,615,610 9,674,863 ============== =============== 5. Net earnings for per share computation: Earnings from continuing operations $ 6,056,000 $ 3,823,000 Cumulative effect of change in accounting principle - 5,334,000 -------------- --------------- Net earnings $ 6,056,000 $ 9,157,000 ============== =============== 6. Net earnings per average share outstanding as reported in the financial statements: Earnings from continuing operations $ 0.63 $ 0.40 Cumulative effect of change in accounting principle - 0.55 -------------- --------------- Net earnings per share $ 0.63 $ 0.95 ============== =============== 7. Net earnings per fully diluted share: Earnings from continuing operations $ 0.63 $ 0.40 Cumulative effect of change in accounting principle - 0.55 -------------- --------------- Net earnings per share $ 0.63 $ 0.95 ============== ===============
17 18 EXHIBIT 15 Securities & Exchange Commission Washington, D.C. 20549 We are aware that our report dated November 7, 1994 on our review of the interim financial information of DEKALB Energy Company for the periods ended September 30, 1994 and 1993 included in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1994 is incorporated by reference into Registration Statement No. 2-63440 (Post Effective Amendment No. 6), No. 2-58358 (Post Effective Amendment No. 1), No. 2-71978 (Post Effective Amendment No. 1), and No. 33-36642 on Form S-8 and Registration Statement No. 33-12534 (Amendment No. 3) on Form S-3. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. Coopers & Lybrand Calgary, Alberta November 7, 1994 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DEKALB Energy Company DONALD MCMORLAND -------------------------------- Donald McMorland Vice Chairman of the Board and President EDDY Y. TSE -------------------------------- Eddy Y. Tse Chief Accounting Officer November 9, 1994 19 20 APPENDIX Documents Filed in Paper Format Under Form SE: Part I Report of Independent Accountants Part II, Item 6, Exhibit 15 Letter Re Unaudited Interim Financial Information 20 EX-23.1 4 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the incorporation by reference in this registration statement on Form S-4 of our report dated February 8, 1994 included in Apache Corporation's Form 10-K/A for the year ended December 31, 1993, and to all references to our firm included in this registration statement. ARTHUR ANDERSEN LLP Houston, Texas January 16, 1995 EX-23.2 5 CONSENT OF COOPERS & LYBRAND 1 EXHIBIT 23.2 CONSENT OF COOPERS & LYBRAND The Board of Directors of DEKALB Energy Company: We consent to the incorporation by reference in this registration statement of Apache Corporation on Form S-4 of our report dated February 18, 1994 on our audits of the consolidated financial statements of DEKALB Energy Company as of December 31, 1993 and 1992 and for the years ended December 31, 1993, 1992 and 1991 and our report dated February 18, 1994 on our audits of the associated financial statement schedules of DEKALB Energy Company, which reports are incorporated by reference herein. We also consent to all references to our firm included in this registration statement of Apache Corporation on Form S-4. Calgary, Alberta, Canada January 16, 1995 COOPERS & LYBRAND EX-99.1 6 FORM OF PROXY CARD 1 EXHIBIT 99.1 - -------------------------------------------------------------------------------- PROXY DEKALB ENERGY COMPANY PROXY FOR SPECIAL MEETING OF DEKALB CLASS A STOCKHOLDERS TO BE HELD ON , 1995 The undersigned hereby appoints Bruce P. Bickner, Charles C. Roberts and Thomas H. Roberts, Jr., and each of them proxies (to act by majority decision if more than one shall act), with full power of substitution, to vote all shares of stock of DEKALB Energy Company which the undersigned would be entitled to vote if personally present at the Special Meeting of the holders of DEKALB Class A Stock to be held at the offices of DEKALB on the 10th floor, 700-9th Avenue S.W., Calgary, Alberta Canada T2P 3V4, on , , 1995, at 9:00 a.m., local time, and at any adjournments thereof, upon the matters described in the accompanying Proxy Statement/Prospectus and upon such other business that may be properly come before the meeting or any adjournments thereof. Said proxies are directed to vote as instructed on the matters set forth below and otherwise at their discretion. Receipt of a copy of the Notice of said meeting and Proxy Statement/Prospectus is hereby acknowledged. The Board of Directors recommends a vote "FOR" the proposal to approve and adopt the Merger Agreement. CONTINUED AND TO BE SIGNED ON REVERSE SIDE. SEE REVERSE SIDE. - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- (REVERSE SIDE) THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED. IN THE ABSENCE OF DIRECTION, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND IN THE DISCRETION OF THE WITHIN NAMED PROXIES WITH RESPECT TO OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS THEREOF. 1. Proposal to approve and adopt the agreement and Plan of Merger dated as of December 21, 1994, among Apache Corporation, XPX Acquisitions, Inc. and DEKALB Energy Company. / / FOR / / AGAINST / / ABSTAIN Please sign exactly as name appears on this Proxy. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title of such. If a corporation, please sign a full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person. - --------------------------- ------------ --------------------------- ------------ Signature: Date: Signature: Date:
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW / / PLEASE SIGN, DATE AND RETURN PROMPTLY USING THE ENCLOSED ENVELOPE - -------------------------------------------------------------------------------- EX-99.3 7 LETTER -- COOPERS & LYBRAND 1 EXHIBIT 99.3 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Apache Corporation Registration on Form S-4 We are aware that our reports dated May 6, 1994, July 26, 1994 and November 7, 1994 on our review of interim financial information of DEKALB Energy Company for the periods ended March 31, 1994, June 30, 1994 and September 30, 1994 respectively and included in DEKALB Energy Company's quarterly report on Form 10-Q for the quarters then ended are incorporated by reference in this registration statement of Apache Corporation on Form S-4. Pursuant to Rule 436(c) under the Securities Act of 1933, these reports should not be considered a part of the registration statement of Apache Corporation. Calgary, Alberta, Canada January 16, 1995 COOPERS & LYBRAND -----END PRIVACY-ENHANCED MESSAGE-----