-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VDwFfrmU6Yqn6CQiWFV3fA3yd/gH1qpZfTbAn9oE5ueKcGmlmdww0+9OhbkWNWd8 l4mKE7rUZETtqXbbLPvfaQ== 0000950130-98-002495.txt : 19980511 0000950130-98-002495.hdr.sgml : 19980511 ACCESSION NUMBER: 0000950130-98-002495 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980508 SROS: NYSE SROS: PCX SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: UNION TEXAS PETROLEUM HOLDINGS INC CENTRAL INDEX KEY: 0000774214 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760040040 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 SEC ACT: SEC FILE NUMBER: 005-39305 FILM NUMBER: 98614424 BUSINESS ADDRESS: STREET 1: 1330 POST OAK BLVD CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7136236544 MAIL ADDRESS: STREET 1: 1330 POST OAK BLVD CITY: HOUSTON STATE: TX ZIP: 77056 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: UNION TEXAS PETROLEUM HOLDINGS INC CENTRAL INDEX KEY: 0000774214 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760040040 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9 BUSINESS ADDRESS: STREET 1: 1330 POST OAK BLVD CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7136236544 MAIL ADDRESS: STREET 1: 1330 POST OAK BLVD CITY: HOUSTON STATE: TX ZIP: 77056 SC 14D9 1 SCHEDULE 14D9 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------- UNION TEXAS PETROLEUM HOLDINGS, INC. (NAME OF SUBJECT COMPANY) UNION TEXAS PETROLEUM HOLDINGS, INC. (NAME OF PERSON FILING STATEMENT) COMMON STOCK, PAR VALUE $.05 PER SHARE (TITLE OF CLASS OF SECURITIES) 908640105 (CUSIP NUMBER OF CLASS OF SECURITIES) ALAN R. CRAIN, JR., ESQ. VICE PRESIDENT AND GENERAL COUNSEL UNION TEXAS PETROLEUM HOLDINGS, INC. 1330 POST OAK BOULEVARD HOUSTON, TEXAS 77056 (713) 623-6544 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICE AND COMMUNICATIONS ON BEHALF OF THE PERSON FILING STATEMENT) COPY TO: CHRISTINE B. LAFOLLETTE, ESQ. KING & SPALDING 1100 LOUISIANA, SUITE 3300 HOUSTON, TEXAS 77002-5219 (713) 751-3200 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 1. SECURITY AND SUBJECT COMPANY The name of the subject company is Union Texas Petroleum Holdings, Inc., a Delaware corporation (the "Company"), and the address of its principal executive offices is 1330 Post Oak Boulevard, Houston, Texas 77056. The title of the equity securities to which this Statement relates is the Common Stock, par value $.05 per share, of the Company (the "Shares"). ITEM 2. TENDER OFFER OF THE BIDDER This Statement relates to a tender offer disclosed in the Tender Offer Statement on Schedule 14D-1, dated May 8, 1998 (the "Schedule 14D-1"), of VWK Acquisition Corp., a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Atlantic Richfield Company, a Delaware corporation ("Parent"), to purchase all the issued and outstanding Shares at $29.00 per Share (the "Offer Price"), net to the seller in cash (the "Offer"), upon the terms and subject to the conditions set forth in the Offer to Purchase dated May 8, 1998 and the related Letter of Transmittal (which together constitute the "Offer Documents"). The principal executive offices of the Purchaser and Parent are located at 515 South Flower Street, Los Angeles, California 90071-2201. The Offer is being made pursuant to an Agreement and Plan of Merger dated as of May 4, 1998 among the Purchaser, Parent and the Company (the "Merger Agreement"), which provides, among other things, for the making of the Offer by the Purchaser and, subject to the conditions and upon the terms of the Merger Agreement, for the subsequent Merger of the Company and the Purchaser (the "Merger"). ITEM 3. IDENTITY AND BACKGROUND (a) The name and address of the Company, which is the person filing this statement, are set forth above in Item 1. (b) (1) The following describes material contracts, agreements, arrangements or understandings and any actual or potential conflict of interest between the Company or its affiliates and the Company, its executive officers, directors or affiliates: Certain contracts, agreements, arrangements or understandings between the Company and certain of its directors, executive officers or affiliates are described in the sections entitled "Voting Securities and Certain Beneficial Owners," "Executive Compensation and Other Information" and "Compensation Committee Interlocks and Insider Participation" in the Company's proxy statement dated March 24, 1998 for its 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement"). A copy of such sections of the 1998 Proxy Statement along with Annex A to the 1998 Proxy Statement are filed as Exhibit (c)(1) hereto. Annex A to the 1998 Proxy Statement includes the Amended and Restated Union Texas Petroleum Holdings, Inc. 1994 Incentive Plan which was adopted by the stockholders at the 1998 Annual Meeting of Stockholders on May 7, 1998. Certain other contracts, agreements or understandings between the Company and certain of its directors and executive officers are described below: Pursuant to the Company stock ownership guidelines and in accordance with the Company's securities compliance procedure, in February 1998, four of the Company's independent directors purchased shares in the open market as follows: Ambassador Robert L. Barry 4,000 Shares, Glenn A. Cox 5,000 Shares, Wylie B. Pieper 3,000 Shares and Stanley P. Porter 2,000 Shares. Pursuant to an arrangement adopted by the Company Board, the Company is authorized, subject to applicable law, to repurchase Shares at the Offer Price from the directors following consummation of the Offer. Pursuant to the terms of the Merger Agreement, all vested and non-vested options will be fully vested and exercisable in full upon consummation of the Offer and subject to a cash payment equal to the excess of the Offer Price over the exercise price of such option. Pursuant to the authorization of the Company Board on May 3, 1998, John L. Whitmire, Chairman of the Board and Chief Executive Officer, will be paid on the date of consummation of the Offer an amount of $5 million plus an excise tax gross-up amount. Pursuant to the same authorization, if Mr. Whitmire is 1 terminated following consummation of the Offer, Mr. Whitmire will be provided office space and certain support services and benefits for three years and will be eligible for retiree medical coverage. At the same meeting, the Company Board authorized that all officers be offered financial planning and tax planning services for a two year period commencing on May 1, 1998. (2) The following describes material contracts, agreements, arrangements or understandings and any actual or potential conflict of interest between the Company or its affiliates and the Purchaser, its executive officers, directors or affiliates: The Company and Parent are both in the oil and gas business and from time to time enter into business transactions with one another in furtherance of their respective business. A subsidiary of the Company and ARCO Alaska, Inc., a wholly owned subsidiary of Parent ("ARCO Alaska"), are co-venturers with a third party in the development of the Alpine oil field on the North Slope in Alaska. ARCO Alaska is the operator of the Alpine field and the Company and ARCO Alaska have 22% and 56% working interests, respectively, in the field. In addition, a subsidiary of the Company, ARCO Trinidad Exploration and Production Co., a wholly owned subsidiary of Parent ("ARCO Trinidad"), and a third party signed a Production Sharing Contract dated February 18, 1998 with the government of Trinidad and Tobago covering deep water Block 27. The Company's subsidiary and ARCO Trinidad have 15% and 45% working interests, respectively, in the block. In connection with the Offer, (i) the Company has entered into the Merger Agreement with Parent and the Purchaser and (ii) Petroleum Associates L.P., a Delaware limited partnership, and KKR Partners II, L.P., a Delaware limited partnership (such partnerships together, the "Tendering Stockholder") and Parent have entered into a Stockholders Agreement, dated as of May 4, 1998 (the "Stockholder Agreement"). Summaries of the Merger Agreement and the Stockholder Agreement are set forth below. Copies of such agreements are filed herewith as Exhibits (c)(2) and (c)(3), respectively, and the following summaries are qualified in their entirety by reference to the text of such agreements. Merger Agreement The Merger Agreement provides that following the satisfaction or waiver of the conditions described below under "Conditions to the Merger", the Purchaser will be merged with and into the Company (or, at the option of Parent, the Company will be merged with and into the Purchaser), and each issued Share (other than Shares owned by Parent, the Purchaser or the Company or a wholly owned subsidiary of Parent, the Purchaser or the Company or by stockholders, if any, who are entitled to and who properly exercise appraisal rights under Delaware law) will be converted into an amount in cash equal to the Offer Price. Vote Required To Approve Merger. The Delaware General Corporation Law (the "DGCL") requires, among other things, that the adoption of any plan of merger or consolidation of the Company must be approved by the Board of Directors of the Company (the "Company Board") and, if the "short-form" merger procedure described below is not available, approved by the holders of a majority of the Company's outstanding voting securities. The Company Board has approved the Offer, the Merger and the Merger Agreement; consequently, the only additional action of the Company that may be necessary to effect the Merger is adoption of the Merger Agreement by the Company's stockholders if such "short-form" merger procedure is not available. Under the DGCL, if stockholder adoption of the Merger Agreement is required in order to consummate the Merger, the vote required is the affirmative vote of the holders of a majority of the outstanding Shares (including any Shares owned by the Purchaser). If the Purchaser acquires, through the Offer, the Merger Agreement, the Stockholder Agreement or otherwise, voting power with respect to at least majority of the outstanding Shares (which would be the case if the Minimum Tender Condition (as defined in "Certain Conditions to the Offer") were satisfied and the Purchaser were to accept for payment Shares tendered pursuant to the Offer), it would have sufficient voting power to effect the Merger without the affirmative vote of any other stockholder of the Company. The DGCL also provides that if a parent company owns at least 90% of the outstanding shares of each class of stock of a subsidiary, the parent company may merge that subsidiary into the parent company, or the parent company may merge itself into that subsidiary, pursuant to the "short-form" merger procedures without 2 prior notice to, or the approval of, the other stockholders of the subsidiary. In order to consummate the Merger pursuant to these provisions of the DGCL, the Purchaser would have to own at least 90% of the outstanding Shares and at least 90% of the outstanding shares of the Series A Preferred Stock of the Company. Conditions to the Merger. The Merger Agreement provides that the respective obligations of each party to effect the Merger are subject to the satisfaction or waiver of certain conditions, including the following: (a) if required by applicable law, the Merger Agreement having been approved and adopted by the affirmative vote of the holders of a majority of the Shares; (b) the waiting period (and any extension thereof) applicable to the Merger under the Hart- Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") having terminated or expired and any consents, approvals and filings under any foreign antitrust law (including, without limitation, the rules and regulations of the Council of the European Communities (the "European Council") and of the Commission of the European Communities (the "European Commission," and the rules and regulations of the European Council and European Commission, collectively, the "EC Regulations"), the absence of which would prohibit the consummation of the Merger, having been obtained or made; (c) no temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger being in effect; provided, however, that each of the Company, the Purchaser and Parent has used all reasonable efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any such injunction or other order that may have been entered; and (d) the Purchaser having previously accepted for payment and paid for Shares pursuant to the Offer. Termination of the Merger Agreement. The Merger Agreement may be terminated at any time prior to the effective time of the Merger, whether before or after adoption of the Merger Agreement by the stockholders of the Company: (1) by mutual written consent of Parent, the Purchaser and the Company; (2) by either Parent or the Company, (a) if the Merger is not consummated on or before January 31, 1999, unless the failure to consummate the Merger is the result of a wilful and material breach of the Merger Agreement or the Stockholder Agreement by the party seeking to terminate the Merger Agreement; provided, however, that the passage of such period will be tolled for any part thereof during which any party is subject to a nonfinal order, decree, ruling or action restraining, enjoining or otherwise prohibiting the consummation of the Merger; (b) if any federal, state, local or foreign government or any court of competent jurisdiction, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a "Governmental Entity") issues an order, decree or ruling or takes any other action permanently enjoining, restraining or otherwise prohibiting the Merger and such order, decree, ruling or other action has become final and nonappealable; or (c) if as the result of the failure of any of the conditions to the Offer described below under "Certain Conditions of the Offer", the Offer has terminated or expired in accordance with its terms without the Purchaser having purchased any Shares pursuant to the Offer; (3) by Parent if, prior to the consummation of the Offer (unless Parent has waived its right to the Company's performance of certain conditions of the Offer by exercising its right to extend the Offer for up to 10 days following the latest expiration date of the Offer that would otherwise be permitted under the terms of the Merger Agreement), the Company breaches any of its representations or warranties or fails to perform in any material respect any of its covenants and obligations contained in the Merger Agreement or the Stockholder Agreement, which breach or failure to perform would give rise to the failure of a condition described under "Certain Conditions of the Offer," provided that Parent is not then in wilful and material breach of any representation, warranty or covenant in the Merger Agreement or the Stockholder Agreement, and provided further, that such breach or failure to perform is not capable of being cured by the earlier of 15 days from the time it came to the knowledge of the Company and the then scheduled expiration date of the Offer; 3 (4) by the Company in accordance with the terms of the Merger Agreement described in the second paragraph below under "Takeover Proposals", provided it has complied with all provisions described in the second paragraph under "Takeover Proposals", including the notice provisions therein, and that it complies with the applicable requirements relating to the payment (including the timing of any payment) of the Termination Fee (as defined below under "Fees and Expenses"); (5) by the Company if, prior to the consummation of the Offer, Parent or the Purchaser shall be in breach of any of their representations and warranties or fail to perform in any material respect any of their covenants and obligations contained in the Merger Agreement (provided, that the Company is not then in wilful and material breach of any representation, warranty or covenant contained in the Merger Agreement and provided further, that such breach or failure to perform is not capable of being cured by the earlier of 15 days from the time it came to the knowledge of Parent and the then scheduled expiration date of the Offer); (6) by the Company if the Offer has not been made in accordance with the terms of the Merger Agreement; or (7) by the Company if any event occurs which would result in the condition set forth in paragraph (e) under "Certain Conditions of the Offer" not being satisfied, and five business days have elapsed since such occurrence, unless Parent has waived its right to terminate the Merger Agreement and its right not to consummate the Offer for the failure of such condition resulting from such event. Takeover Proposals. The Merger Agreement provides that the Company will not, nor will it permit any of its subsidiaries to, nor will it authorize any officer, director or employee of, or any investment banker, attorney or other advisor or representative of, the Company or any of its subsidiaries (collectively, "Company Representatives") to, and will use its reasonable best efforts to ensure that none of the Company Representatives will, (1) solicit, initiate or encourage the submission of any Takeover Proposal (as defined below), (2) enter into any agreement with respect to any Takeover Proposal or (3) participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes a Takeover Proposal; provided, however, that, at any time during the period following the date of the Merger Agreement and prior to the consummation of the Offer (the "Applicable Period"), the Company may, in response to a Superior Proposal (as defined below, including the determination by the Company Board set forth in such definition) that was not solicited by the Company or any Company Representative and that did not otherwise result from a breach or a deemed breach of the provisions described in this paragraph, and subject to providing prior written notice of its decision to take such action to Parent (the "Company Notice") and compliance with the notification provisions described in the second succeeding paragraph below, for a period of no more than ten business days following delivery of the Company Notice (which period shall be extended to the end of the 48-hour period following the receipt by Parent of notice from the Company that it is prepared to accept a Superior Proposal), (i) furnish information with respect to the Company to any person making a Superior Proposal pursuant to a customary confidentiality agreement as determined by the Company after consultation with its outside counsel and (ii) participate in discussions or negotiations regarding such Superior Proposal. The Merger Agreement provides that any action that is in violation of or inconsistent with the restrictions set forth in the preceding sentence by any executive officer of the Company or any of its subsidiaries or any Company Representative or affiliate of the Company, whether or not such person is purporting to act on behalf of the Company or any of its subsidiaries or otherwise, shall be deemed to be a breach of the provisions described in this paragraph by the Company. The Merger Agreement defines "Takeover Proposal" as any inquiry, proposal or offer from any person relating to any direct or indirect acquisition or purchase of a business that constitutes 15% or more of the net revenues, net income or the assets of the Company and its subsidiaries taken as a whole, or 15% or more of any class of equity securities of the Company or any of its significant subsidiaries, any tender offer or exchange offer that if consummated would result in any person beneficially owning 15% or more of any class of equity securities of the Company or any of its subsidiaries, or any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company or any of its subsidiaries, other than the transactions contemplated by 4 the Merger Agreement. The Company may deliver only one Company Notice with respect to each person making a Superior Proposal. The Merger Agreement provides further that, except as described below, neither the Company Board nor any committee thereof may (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Parent, the approval or recommendation by such Company Board or such committee of the Offer, the Merger Agreement or the Merger, (ii) approve or cause the Company to enter into any letter of intent, agreement in principle or any legally binding acquisition agreement or similar agreement (an "Acquisition Agreement") related to any Takeover Proposal or (iii) approve or recommend, or propose to publicly approve or recommend, any Takeover Proposal. Notwithstanding the foregoing, if the Company has received a Superior Proposal and if the Purchaser has not accepted for payment any Shares pursuant to the Offer, the Company Board may (subject to this and the following sentences) terminate the Merger Agreement, but only at a time that is during the Applicable Period and is more than 48 hours following Parent's receipt of written notice advising Parent that the Company Board is prepared to accept such Superior Proposal, specifying the material terms and conditions of such Superior Proposal and identifying the person making such Superior Proposal; provided, however, that (x) at the time of such termination, such proposal continues to be a Superior Proposal, taking into account any amendment of the terms of the Offer or the Merger by Parent or any proposal by Parent to amend the terms of the Merger Agreement, the Offer or the Merger or any other Takeover Proposal made by Parent (a "New Parent Proposal"), and (y) concurrently with or immediately after such termination, the Company Board shall cause the Company to enter into an Acquisition Agreement with respect to such Superior Proposal. The Merger Agreement defines "Superior Proposal" as any proposal made by a third party to acquire, directly or indirectly, including pursuant to a tender offer, exchange offer, merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction, for consideration consisting of cash and/or securities, more than 50% of the outstanding Shares or all or substantially all the assets of the Company and otherwise on terms which the Company Board determines in its good faith judgment (after consultation with a financial advisor of nationally recognized reputation) (x) is reasonably capable of being completed, taking into account all legal, financial, regulatory and other aspects of the proposal and the third party making such proposal, and (y) provides greater value to the holders of Shares (specifically taking into account the expected value of the consideration to be received by the holders of Shares on the date such consideration is expected to be received by such holders) than the cash consideration to be received by such stockholder pursuant to the Offer and the Merger, as the Offer and the Merger may be amended from time to time, or the value to the holders of Shares to be provided by any New Parent Proposal (specifically taking into account the expected value of the consideration expected to be received in the Offer, the Merger or any New Parent Proposal by the holders of Shares on the date such consideration is expected to be received by such holders). In addition to the obligations of the Company described in the preceding two paragraphs, the Merger Agreement provides that the Company will promptly advise Parent orally and in writing of any Takeover Proposal or any inquiry or request for information with respect to or that could reasonably be expected to lead to any Takeover Proposal, the identity of the person making any such Takeover Proposal or inquiry or request for information and the material terms of any such Takeover Proposal or inquiry or request for information. The Company is further required under the terms of the Merger Agreement to (i) keep Parent fully informed of the status including any change to the material terms of any such Takeover Proposal or inquiry or request for information and (ii) provide to Parent as soon as practicable after receipt or delivery thereof with copies of all correspondence and other written material sent or provided to the Company or any Company Representative or any affiliate of the Company from any third party in connection with any Takeover Proposal or inquiry or request for information or sent or provided by the Company or any Company Representative or any affiliate of the Company to any third party in connection with any Takeover Proposal or inquiry or request for information; provided, however, that the Company shall not be required to provide any nonpublic information specified in this clause (ii) regarding the business or financial condition or prospects of such third party if the Company is prohibited from disclosing such information pursuant to a legally binding confidentiality agreement. The Merger Agreement provides that nothing contained therein will prohibit the Company from taking and disclosing to its stockholders a position contemplated by Rule 14e-2(a) promulgated under the Securities 5 Exchange Act of 1934, as amended (the "Exchange Act"), or from making any disclosure to the Company's stockholders if, in the good faith judgment of the Company Board, after consultation with outside counsel, failure so to disclose would be inconsistent with applicable law; provided, however, that neither the Company nor the Company Board nor any committee thereof may withdraw or modify, or propose publicly to withdraw or modify, its position with respect to the Offer, the Merger or the Merger Agreement or approve or recommend, or propose publicly to approve or recommend, a Takeover Proposal so long as the Merger Agreement is in effect. Fees and Expenses. The Merger Agreement provides that, except as described below, all fees and expenses incurred in connection with the Offer, the Merger and the other transactions contemplated by the Merger Agreement and the Stockholder Agreement will be paid by the party incurring such fees or expenses, whether or not the Merger is consummated. The Merger Agreement further provides that the Company will pay in same-day funds to Parent a fee of $85,000,000 (the "Termination Fee") under the following circumstances: (a) if the Company terminates the Merger Agreement in accordance with the provisions described above in clause (4) under "Termination of the Merger Agreement"; (b) if (i) after the date of the Merger Agreement and prior to the termination of the Merger Agreement, any person makes a Takeover Proposal, (ii) the Offer shall have remained open until the scheduled expiration date immediately following the date such Takeover Proposal is made, (iii) the Minimum Tender Condition is not satisfied at the expiration of the Offer, (iv) the Merger Agreement is terminated by Parent or the Company in accordance with the provisions described above in clause (2)(c) under "Termination of the Merger Agreement" and (v) within 12 months of the date of termination of the Merger Agreement, the Company executes a legally binding agreement or an agreement in principle pursuant to which any person, entity or group (other than Parent, the Purchaser or any of their affiliates), in one transaction or a series of transactions, will acquire more than 50% of the outstanding Shares or assets of the Company through any open market purchases, merger, consolidation, tender or exchange offer, recapitalization, reorganization or other business combination (an "Acquisition Event"); or (c) if (i)after the date of the Merger Agreement and prior to the termination of the Merger Agreement, any person makes a Takeover Proposal, (ii)the Merger Agreement is terminated in accordance with the provisions described above in clause (2)(c) under "Termination of the Merger Agreement" as a result of the failure of any condition set forth in paragraphs (f) or (g) under "Certain Conditions to the Offer," and (iii) an Acquisition Event occurs within 12 months of the date of termination of the Merger Agreement. Any fee due pursuant to the provisions described in this paragraph will be paid on the date of termination of the Merger Agreement in the case of a fee due under clause (a) of the preceding sentence, or on the date such Acquisition Event is consummated in the case of a fee due under clause (b) or (c) of the preceding sentence. Conduct of Business. The Merger Agreement provides that, except as contemplated or permitted by the Merger Agreement or the Stockholder Agreement or to the extent that Parent otherwise agrees, from May 4, 1998 to the effective time of the Merger or earlier termination of the Merger Agreement: (a) the Company will, and will cause its subsidiaries to, conduct their respective business in the usual, regular and ordinary course consistent with past practice except as required to comply with changes in applicable law occurring after the date of the Merger Agreement (subject to the express restrictions set forth below, including, without limitation, the restrictions of clauses (e) and (f) below) and, to the extent consistent therewith, use all commercially reasonable efforts to preserve intact their current business organizations and keep available the services of their current officers and employees to maintain their respective goodwill and ongoing business; (b) the Company will not, and will not permit any of its subsidiaries to, (i) declare, set aside or pay any dividends on, or make other distributions in respect of, any of its capital stock (other than regular quarterly cash dividends not in excess of $0.05 per Share with usual record and payment dates and in accordance with the Company's present dividend policy and regular quarterly cash dividends with respect to the Series A Preferred Stock), other than dividends and distributions by a direct or indirect wholly owned subsidiary of the Company to its parent, (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 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; (c) the Company will not, and will not permit any of its subsidiaries to, issue, deliver, sell or grant (i) any shares of its capital stock, (ii) any bonds, debentures, notes or 6 other indebtedness of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matter on which stockholders of the Company may vote or other voting securities, (iii) any securities convertible into, or exchangeable for, or any options, warrants or rights to acquire, any such shares, voting securities or convertible or exchangeable securities or (iv) any "phantom" stock, "phantom" stock rights, stock appreciation rights or stock-based performance units, other than the issuance of Shares (and associated rights granted under the Rights Agreement (as defined below under "Rights Agreement")) upon the exercise of stock options outstanding on the date of the Merger Agreement or under the Company's Savings Plan for Salaried Employees, Deferred Compensation Plan or defined contribution retirement plan for employees of Virginia Indonesia Company and in accordance with the present terms of such stock options and plan; (d) the Company will not, and will not permit any of its subsidiaries to, amend its certificate of incorporation or by-laws (or comparable charter or organizational documents); (e) the Company will not, and will not permit any of its subsidiaries to, enter into or amend any material technical contract, long-term drilling rig contract, agreement to sell, purchase or share seismic and other geological or geophysical data, or any material contract for the purchase or sale of oil, gas, LPG, LNG, ethylene, propylene or other hydrocarbon or petrochemical products other than in the ordinary course of business consistent with past practice; (f) the Company will not, and will not permit any of its subsidiaries to (i) enter into, or amend, or negotiate to enter into or amend, any farm-out or farm-in arrangement, area of mutual interest agreement, exploration license, lease, concession agreement, production sharing contract, operating service agreement or similar agreement or arrangement evidencing an interest in hydrocarbons, or participate in any bidding group, bidding round or public hearing with respect thereto, (ii) acquire, or negotiate to acquire, any interest in a corporation, partnership or joint venture arrangement which holds an oil and gas interest of the type described in the foregoing clause, (iii) sell, transfer, assign, relinquish or terminate (other than relinquishments or terminations required by the terms of existing agreements) or negotiate to take any such action with respect to, the Company's interest (as of the date of the Merger Agreement) in any oil and gas exploration license, lease, area of mutual interest agreement, concession agreement, production sharing contract, operating service agreement or other agreement or arrangement evidencing an interest in hydrocarbons, or in the equity or debt securities of any corporation, partnership or joint venture arrangement which holds such an interest, including, without limitation, the imposition of any pledge, lien, charge, mortgage, encumbrance or security interest of any kind or nature whatsoever (collectively, "Liens"), other than Liens permitted by the Merger Agreement, on any of the foregoing, (iv) give, or negotiate to give, any approvals relating to development plans, work plans, budgets or capital expenditure commitments in connection with any oil and gas interests of the type described in the foregoing clause, other than expenditures in the Company's existing capital expenditure budget, or (v) make any change in the Company's petrochemical business, including, without limitation, the imposition of any Lien, other than Liens permitted by the Merger Agreement, thereon, or enter into any agreements or negotiations to acquire or build new petrochemicals capacity or expand existing petrochemicals capacity, or dispose of (including by way of a contribution of assets or otherwise), all or any portion of the Company's petrochemical business, or to alter or amend, in any material respect, any contracts relating to the Company's petrochemical business, other than in the ordinary course of business consistent with past practice; (g) the Company will not, and will not permit any of its subsidiaries to, acquire or agree to acquire (i) by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business organization or division thereof or (ii) any assets that are material, individually or in the aggregate, to the Company and its subsidiaries taken as a whole; (h) the Company will not, and will not permit any of its subsidiaries, to (i) grant to any officer or director of the Company or any of its subsidiaries any increase in compensation, except in the ordinary course of business consistent with prior practice or to the extent required under employment agreements in effect as of the date of the most recent audited financial statements included in the documents required to be filed by the Company under the Exchange Act which are filed and publicly available prior to the date of the Merger Agreement (the "Filed Company SEC Documents"), (ii) grant to any employee, officer or director of the Company or any of its subsidiaries any increase in severance or termination pay, except to the extent required under any agreement in effect as of December 31, 1997, (iii) enter into any employment, consulting, indemnification, severance or termination agreement with any such employee, officer or director, (iv) establish, adopt, enter into or amend in any material respect any collective bargaining agreement or benefit plan of the Company specified the Merger Agreement or 7 (v) take any action to accelerate any rights or benefits, or make any material determinations not in the ordinary course of business consistent with prior practice, under any collective bargaining agreement or benefit plan of the Company specified the Merger Agreement; (i) the Company will not, and will not permit any of its subsidiaries to, make any change in accounting methods, principles or practices materially affecting the reported consolidated assets, liabilities or results of operations of the Company, except insofar as may have been required by a change in generally accepted accounting principles or by operation of law; (j) the Company will not, and will not permit any of its subsidiaries to, sell, lease, license or otherwise dispose of, or subject to any Lien, any properties or assets, except sales of inventory and excess or obsolete assets in the ordinary course of business consistent with past practice; (k) the Company will not, and will not permit any of its subsidiaries to, (i) incur any indebtedness for borrowed money or guarantee any such indebtedness of another person or issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or any of its subsidiaries, guarantee any debt securities of another person, enter into any "keep-well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, except for short-term borrowings or trade obligations incurred in the ordinary course of business consistent with past practice, or (ii) make any loans, advances or capital contributions to, or investments in, any other person, other than to or in the Company or any direct or indirect wholly owned subsidiary of the Company; (l) the Company will not, and will not permit any of its subsidiaries to, make or agree to make any new capital expenditure or expenditures, other than expenditures in the Company's existing capital expenditure budget, that, individually, is in excess of $1,500,000 or, in the aggregate, are in excess of $5,000,000; (m) the Company will not, and will not permit any of its subsidiaries to, make any tax election or settle or compromise any material tax liability or refund, consent to any extension or waiver of the statute of limitations period applicable to any tax claim or action, if any such election, settlement, compromise, consent or other action would have the effect of increasing the tax liability or reducing any net operating loss, foreign tax credit, net capital loss or any other credit or tax attribute of the Company or any of its subsidiaries (including, without limitation, deductions and credits related to alternative minimum taxes); (n) the Company will not, and will not permit any of its subsidiaries to, enter into any hedging agreement or other financial agreement or arrangement designed to protect the Company against fluctuations in commodities prices or currency exchange rates, except agreements or arrangements entered into in the ordinary course of business consistent with past practice; (o) the Company will not, and will not permit any of its subsidiaries to, (i) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms or the terms of the Merger Agreement, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or notes thereto) of the Company included in the Filed Company SEC Documents or incurred in the ordinary course of business consistent with past practice, (ii) cancel any material indebtedness (individually or in the aggregate) or waive any claims or rights of substantial value or (iii) waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company or any of its subsidiaries is a party; (p) the Company will not, and will not permit any of its subsidiaries to, make any material change (including failing to renew) in the amount or nature of the insurance policies covering the Company and its subsidiaries, other than pursuant to the terms of such existing policies as of the date of the Merger Agreement; (q) the Company will not, and will not permit any of its subsidiaries to, enter into any agreements in connection with, or negotiate to give any approvals to, the amendment, extension, modification or waiver of any of the terms and conditions (as in effect on the date of the Merger Agreement) of the Indonesian Participating Units issued by Unimar Company, or any guarantee or "keep well" or other agreement to maintain any financial condition with respect thereto; and (r) the Company will not, and will not permit any of its subsidiaries to, authorize any of, or commit or agree to take any of, the foregoing actions. In addition to the foregoing, in the Merger Agreement the Company and Parent have agreed that they will not, and will not permit any of their respective subsidiaries to, take any action that would, or that would reasonably be expected to, result in (a) any of the representations and warranties of such party set forth in the Merger Agreement and the Stockholder Agreement, to the extent a party thereto, that is qualified as to materiality becoming untrue, (b) any of such representations and warranties that is not so qualified becoming untrue in any material respect or (c) any of the conditions described under "Certain Conditions of the Offer"or any condition 8 to the Merger described under "Conditions to the Merger" above, not being satisfied, subject to the Company's right to take actions specifically permitted by the Merger Agreement described above in "Takeover Proposals". In the Merger Agreement, the Company has also agreed to promptly advise Parent orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen, would have, a material adverse effect on the Company. Board of Directors. The Merger Agreement provides that promptly upon the acceptance for payment of, and payment for, Shares by the Purchaser pursuant to the Offer, the Purchaser will be entitled to designate such number of directors on the Company Board as will give the Purchaser, subject to compliance with Section 14(f) of the Exchange Act, representation on the Company Board equal to at least that number of directors, rounded up to the next whole number, which is the product of (a) the total number of directors on the Company Board (giving effect to the directors elected pursuant to this sentence) multiplied by (b) the percentage that (i) such number of Shares so accepted for payment and paid for by the Purchaser plus the number of Shares otherwise owned by the Purchaser or any other subsidiary of Parent bears to (ii) the number of such Shares outstanding, and the Company will, at such time, cause the Purchaser's designees to be so elected; provided, however, that in the event that the Purchaser's designees are appointed or elected to the Company Board, until the effective time of the Merger, the Company Board will include at least three directors who were directors of the Company as of the date of the Merger Agreement and who are not officers of the Company. Subject to applicable law, the Company has agreed to take all action requested by Parent necessary to effect any such election, including mailing to its stockholders the Information Statement containing the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, which Information Statement is attached as Appendix A to this Schedule 14D-9. Stock Options. The Merger Agreement provides that prior to the consummation of the Offer, the Company Board (or, if appropriate, any committee administering the Company Stock Plans (as defined below)) shall have adopted such resolutions or taken such other actions as are required to ensure that all Company Stock Options (as defined below) and all Company SARs (as defined below) heretofore granted under any Company Stock Plan that are outstanding at the effective time of the Merger shall not give the holder thereof the right to receive any capital stock of Parent, the Company or the Surviving Corporation (as defined below) after the effective time of the Merger or to receive from Parent, the Company or the Surviving Corporation any consideration other than an amount of cash equal to (i) (x) the excess, if any, of the consideration payable pursuant to the Merger over the exercise price per share of Common Stock subject to such Company Stock Option or Company SAR, multiplied by (y) the number of shares of Common Stock for which such Company Stock Option or Company SAR shall not theretofore have been exercised, less (ii) such amounts as may be required to be deducted or withheld with respect thereto under the Code or under any provision of state, local or foreign tax law. The Merger Agreement defines (a) "Company Stock Option" as any option to purchase Shares granted under any Company Stock Plan, (b) "Company SAR" as any stock appreciation right linked to the price of the Shares and granted under any Company Stock Plan, and (c) "Company Stock Plans" as the plans providing for the grant of Company Stock Options or any other issuance of capital stock of the Company as specified in the Merger Agreement. The Merger Agreement further provides that, prior to the expiration of the Offer, the Company will, subject to compliance with applicable law, make an offer to pay each holder of a Company Stock Option that is not automatically subject to a cash payment upon consummation of the Offer, promptly after the consummation of the Offer and in exchange for the cancellation of such Company Stock Option, an amount in cash equal to (x)(1) the excess, if any, of the Offer Price over the exercise price per share of Common Stock subject to such Company Stock Option multiplied by (2) the number of shares of Common Stock for which such Company Stock Option shall not theretofore have been exercised, less (y) such amounts as may be required to be deducted or withheld with respect thereto under the Internal Revenue Code of 1986 and the regulations promulgated thereunder or under any provision of state, local or foreign tax law. In addition, the Merger Agreement provides that, subject to compliance with applicable law, the Company may take any actions necessary to purchase Shares from those officers of the Company and members of the Company Board as are designated by the Company Board, and 9 such purchase shall take place after the consummation of the Offer at a price per share equal to the Offer Price. See Item 3(b)(1) above. Benefit Plans. The Merger Agreement provides that Parent will cause the corporation surviving the Merger (the "Surviving Corporation") to (a) maintain for a period of one year after the effective time of the Merger the benefit plans of the Company, as specified in the Merger Agreement (other than plans providing for the issuance of capital stock of the Company or based on the value of capital stock of the Company) in effect on the date of the Merger Agreement or (b) make available to employees of the Company and its subsidiaries (including employees transferred to employment with Parent or other subsidiaries of Parent) the employee benefit plans of Parent and its subsidiaries that are provided to similarly situated employees of Parent and its subsidiaries. The Merger Agreement also provides that (i) following the effective time of the Merger, Parent will cause the Company and its subsidiaries to honor (subject to the provisions described in this paragraph and under "Indemnification") all obligations under any contracts, agreements and commitments of the Company and its subsidiaries prior to the date of the Merger Agreement (or as established or amended in accordance with or permitted by the Merger Agreement) the existence of which does not constitute a violation of the terms of the Merger Agreement, which apply to any current or former employee, or current or former director of the parties to the Merger Agreement or any of their subsidiaries; provided, however, that this undertaking is not intended to prevent the Company or any subsidiary of the Company from enforcing such contracts, agreements and commitments in accordance with their terms, including, any reserved right to amend, modify, suspend, revoke or terminate any such contract, agreement or commitment; (ii) for purposes of any of the Company's benefit plans conferring rights on a current or former employee, officer or director as a result of a change of control of the Company, the consummation of the Merger shall be deemed to constitute a "Change of Control" (as that term is defined in such benefit plans of the Company); (iii) if any employee or officer of the Company or any of its subsidiaries becomes a participant in any employee benefit plan, program, practice or policy of Parent or any subsidiary of Parent or the Surviving Corporation, such employee or officer shall be given credit thereunder for all service prior to the effective time of the Merger with the Company and its subsidiaries or any predecessor employer (to the extent such credit was given by the Company) for purposes of eligibility and vesting (but not for benefit accrual purposes), except to the extent that crediting such service would result in duplication of benefits; (iv) for a period of two years from the consummation of the Offer, if any segment or business of the Company or its subsidiaries (a "Segment") is sold or otherwise disposed of, Parent agrees, and shall cause the Surviving Corporation to agree, to provide, or cause the buyer of or other successor to such Segment to provide, each employee whose employment is involuntarily terminated after such sale or other disposition with severance benefits which are no less favorable than the severance benefits to which such employee would have been entitled had such employee's employment instead then been involuntarily terminated by the Company or its subsidiaries, pursuant to the Company's benefit plans existing as of the date of the Merger Agreement, but only to the extent that the obligations of the Company and its subsidiaries under the Company's benefit plans have not been discharged prior to such involuntary termination of employment (for the purposes of this clause, the term "involuntarily terminated" shall be used as such term is used in the relevant benefit plans of the Company); (v) on or before 90 days after the consummation of the Merger, Parent will (x) notify each management employee who is a participant in the Company's Executive Severance Plan as to whether Parent intends to continue the employment of such participant or to terminate the employment of such participant, (y) with respect to each participant whose employment Parent intends to terminate, notify such participant of the effective date of such termination and the details of the terms and conditions of such participant's employment intended by Parent to be applicable prior to the date of such termination, and (z) with respect to each participant to whom Parent intends to offer continued employment, notify such participant of any desired changes Parent would make in the terms and conditions of such participant's employment; (vi) Parent shall maintain, or shall cause the Surviving Corporation or its successors to maintain, with respect to employees and former employees (and their eligible dependents) of the Company and its subsidiaries who are participating in the Company's retiree medical plan as of the effective time of the Merger or who should be eligible to participate in the Company's retiree medical plan if they retired as of the later of (x) the effective time of the Merger or (y) in the case of an employee who is involuntarily terminated for purposes of any Company severance plan (as currently in effect), as of the end of the salary continuation period under such severance plan, retiree medical coverage that is consistent with the 10 retiree medical coverage provided to similarly situated employees and former employees of Parent and its subsidiaries at such time; (vii) without regard to whether the Company's Salaried Employees' Pension Plan (the "CSEPP") or the Company's Supplemental Retirement Plan II (the "SERP") are continued following the effective time of the Merger, Parent shall cause certain benefits provided by the CSEPP and the SERP (pertaining to additional service credit under such plans for certain participants who are involuntarily terminated), with respect to employees of the Company as of the effective time of the Merger who are involuntarily terminated from employment with Parent or any subsidiary of Parent within two years after the effective time of the Merger, to be continued for a period of not less than two years following the effective time of the Merger; (viii) at Parent's election, the Company shall amend the CSEPP and Savings Plan for Salaried Employees to cause all employees of the Company and its subsidiaries to become 100% vested in their accrued benefits under such plans as of the effective time of the Merger, provided that in all cases, any employee of the Company or any of its subsidiaries who is a participant in the CSEPP or the Savings Plan for Salaried Employees as of the effective time of the Merger shall become 100% vested in his or her accrued benefits under such plans if and when such employee is involuntarily terminated within two years of the effective time of the Merger. The Merger Agreement further provides that nothing therein shall be construed as giving any employee of the Company or any subsidiary of the Company any right to continued employment following the effective time of the Merger. Indemnification. In the Merger Agreement, Parent has agreed, to the fullest extent permitted by law, (a) to cause the Surviving Corporation to honor all the Company's obligations to indemnify (including any obligations to advance funds for expenses) the current or former directors or officers of the Company and its subsidiaries for acts or omissions by such directors and officers occurring at or prior to the effective time of the Merger to the extent that such obligations of the Company exist on the date of the Merger Agreement, whether pursuant to the Restated Certificate of Incorporation, as amended, or By-laws, as amended, of the Company, individual indemnity agreements or otherwise; (b) that such obligations will survive the Merger and will continue in full force and effect in accordance with the terms of the Restated Certificate of Incorporation, as amended, and By-laws, as amended, of the Company and such individual indemnity agreements from the effective time of the Merger until the expiration of the applicable statute of limitations with respect to any claims against such directors or officers arising out of such acts or omissions; and (c) for a period of six years after the effective time of the Merger, to cause to be maintained in effect the current policies of directors' and officers' liability insurance maintained by the Company (provided that Parent may substitute therefor policies with reputable and financially sound carriers of at least the same coverage and amounts containing terms and conditions which are no less advantageous) with respect to claims arising from or related to facts or events which occurred at or before the effective time of the Merger; provided, however, that Parent will not be obligated to make annual premium payments for such insurance to the extent such premiums exceed 300% of the annual premiums paid as of the date hereof by the Company for such insurance (such 300% amount, the "Maximum Amount"). If such insurance coverage cannot be obtained at all, or can only be obtained at an annual premium in excess of the Maximum Amount, Parent will maintain the most advantageous policies of directors' and officers' insurance obtainable for an annual premium equal to such amount; provided, however, that if such insurance coverage cannot be obtained at all, Parent shall purchase all available extended reporting periods with respect to pre-existing insurance in an amount which, together with all other insurance purchased pursuant to clause (c) above, does not exceed the Maximum Premium. The Merger Agreement further provides that Parent will not, and will cause the Company not to, take any action that would have the effect of limiting the aggregate amount of insurance coverage required to be maintained for the individuals referred to in clause (c) above. In the Merger Agreement, Parent has also agreed that (a) from and after the consummation of the Offer, to the full extent permitted by law, Parent will, and will cause the Company (or any successor to the Company), to indemnify, defend and hold harmless the present officers and directors of the Company and its subsidiaries (each an "Indemnified Party") against all losses, claims, damages, liabilities, fees and expenses (including attorneys' fees and disbursements), judgments, fines and amounts paid in settlement (collectively, "Losses") arising out of actions or omissions occurring at or prior to the effective time of the Merger in connection with the Merger Agreement, the Stockholder Agreement, the Offer, the Merger and the other transactions contemplated by the Merger Agreement and the Stockholder Agreement; provided, however, that an Indemnified Party shall not be 11 entitled to indemnification under this clause (a) for Losses arising out of actions or omissions by the Indemnified Party constituting (i) a breach of the Merger Agreement or the Stockholder Agreement, (ii) criminal conduct or (iii) any violation of federal, state or foreign securities laws; and provided further, however, that in order to be entitled to indemnification under this clause (a), an Indemnified Party must give Parent and the Company prompt written notice of any third party claim which may give rise to any indemnity obligation under this clause (a), and Parent and the Company shall have the right to assume the defense of any such claim through counsel of their own choosing (subject to such counsel's reasonable judgment that separate defenses that would create a conflict of interest on the part of such counsel are not available), provided that if Parent and the Company do not assume any such defense, they shall be liable for all reasonable costs and expenses of defending such claim incurred by the Indemnified Party, including reasonable fees and disbursements of counsel and shall advance such reasonable costs and expenses to the Indemnified Party; provided, however, that such advance shall be made only after receiving an undertaking from the Indemnified Party that such advance shall be repaid if it is determined that such Indemnified Party is not entitled to indemnification therefor and that neither Parent nor the Company shall be liable under this clause (a) for any Losses resulting from any settlement, compromise or offer to settle or compromise any such claim or litigation or other action, without the prior written consent of Parent and the Company; (b) the Company shall not, and Parent shall not permit the Company to, amend or repeal any provision of the Restated Certificate of Incorporation, as amended, or By-laws, as amended, of the Company after the consummation of the Offer if such action would adversely affect the rights of individuals who on or prior to the consummation of the Offer were entitled to advances, indemnification or exculpation thereunder, for actions or omissions by such individuals prior to the effective time of the Merger; and (c) in the event the Surviving Corporation or any successor to the Surviving Corporation (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all its properties and assets to any person, then, and in each case, proper provision shall be made so that the successors of the Surviving Corporation honor the obligations of the Company set forth in the provisions of the Merger Agreement described in this and the immediately preceding paragraph. Reasonable Efforts; Notification. The Merger Agreement provides that upon the terms and subject to the conditions set forth in the Merger Agreement, each of the Company, Parent and the Purchaser will 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 Offer, the Merger and the other transactions contemplated by the Merger Agreement and the Stockholder Agreement, including (i) the obtaining of all necessary actions or nonactions, waivers, consents and approvals from Governmental Entities and the making of all necessary registrations and filings (including filings with Governmental Entities, if any) 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, (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging the Merger Agreement or the Stockholder Agreement or the consummation of the transactions contemplated thereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed and (iv) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by the Merger Agreement and the Stockholder Agreement and to fully carry out the purposes of the Merger Agreement and the Stockholder Agreement. In connection with the foregoing sentence, the Company and the Company Board will (i) take all action necessary to ensure that no state takeover statute or similar statute or regulation is or becomes applicable to the Merger Agreement or the Stockholder Agreement or any transaction contemplated thereby and (ii) if any state takeover statute or similar statute or regulation becomes applicable to the Merger Agreement or the Stockholder Agreement, take all action necessary to ensure that the transactions contemplated thereby may be consummated as promptly as practicable on the terms contemplated by the Merger Agreement and the Stockholder Agreement and otherwise to minimize the effect of such statute or regulation on the transactions contemplated thereby; provided, however, that nothing in the Merger Agreement will require any party to waive any substantial rights or agree to any substantial limitation on its operations or to take any action that would result in any of the consequences referred to in paragraph (a) under "Certain Conditions of the Offer." The Merger Agreement further provides that the 12 Company shall give prompt notice to Parent and Parent or the Purchaser shall give prompt notice to the Company, of (i) any representation or warranty made by it contained in the Merger Agreement or the Stockholder Agreement that is qualified as to materiality becoming untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becoming untrue or inaccurate in any material respect or (ii) the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under the Merger Agreement or the Stockholder Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under the Merger Agreement or the Stockholder Agreement. Representations and Warranties. The Merger Agreement contains various customary representations and warranties. Procedure for Termination, Amendment, Extension or Waiver. The Merger Agreement provides that following the election or appointment of the Purchaser's designees to the Company Board as described above under "Board of Directors", prior to the effective time of the Merger, any amendment or termination of the Merger Agreement, extension for the performance or waiver of the obligations of Parent or the Purchaser or waiver of the Company's rights thereunder will require the concurrence of a majority of the directors of the Company who were directors on the date of the Merger Agreement and who are not officers of the Company. Certain Conditions of the Offer. Notwithstanding any other term of the Offer or the Merger Agreement, the Purchaser will not be required to accept for payment or, subject to any applicable rules and regulations of the Commission, including Rule14e-1(c) under the Exchange Act (relating to the Purchaser's obligation to pay for or return tendered Shares promptly after the termination or withdrawal of the Offer), to pay for any Shares tendered pursuant to the Offer unless (i) there have been validly tendered and not withdrawn prior to the expiration of the Offer the number of Shares which would represent at least a majority of the Fully Diluted Shares, as defined below (the "Minimum Tender Condition"), (ii) any waiting period under the HSR Act applicable to the purchase of Shares pursuant to the Offer has expired or been terminated and (iii) any waiting period or other period under the EC Regulations applicable to the Offer or the Merger, or the exercise by Parent or the Purchaser of full ownership and voting rights with respect to such Shares acquired pursuant to the Offer and the Merger, shall have expired or been terminated, and European Council and the European Commission shall have taken all such action as shall be required so that Parent and the Purchaser may consummate the Offer and the Merger and exercise full ownership and voting rights with respect to the Shares to be acquired pursuant to the Offer and the Merger. For purposes of the Minimum Tender Condition, the Merger Agreement defines "Fully Diluted Shares" as all outstanding securities entitled generally to vote in the election of directors of the Company on a fully diluted basis, after giving effect to the exercise or conversion of all options, rights and securities exercisable or convertible into such voting securities, other than potential dilution attributable to the Rights. Furthermore, notwithstanding any other term of the Offer or the Merger Agreement, the Purchaser will not be required to commence the Offer, accept for payment or, subject as aforesaid, to pay for any Shares not theretofore accepted for payment or paid for, and may terminate or amend the Offer, with the consent of the Company or if, at any time on or after the date of the Merger Agreement and before the acceptance of Shares for payment or the payment therefor, any of the following conditions exists: (a) there shall be threatened or pending any suit, action or proceeding by any Governmental Entity in any of the significant geographical regions in which the Company or any of its subsidiaries operates or before the European Commission (i) challenging the acquisition by Parent or the Purchaser of any Shares, seeking to restrain or prohibit the making or consummation of the Offer or the Merger or any other transaction contemplated by the Merger Agreement or the Stockholder Agreement, or seeking to obtain from the Company, Parent or the Purchaser any damages in connection with the Offer, the Merger or the Merger Agreement that are material in relation to the Company and its subsidiaries taken as a whole, (ii) seeking to prohibit or limit the ownership or operation by the Company, Parent or any of their respective subsidiaries of any material portion of the business or assets of the Company, Parent or any of their respective subsidiaries, or to compel the Company, Parent or any of their respective subsidiaries, to dispose of or hold separate any material portion of the business or assets of the Company, Parent or any of their respective 13 subsidiaries, as a result of the Offer, the Merger or any other transaction contemplated by the Merger Agreement or the Stockholder Agreement, (iii) seeking to impose limitations on the ability of Parent or the Purchaser to acquire or hold, or exercise full rights of ownership of, any Shares, including the right to vote the Shares purchased by it on all matters properly presented to the stockholders of the Company, (iv) seeking to prohibit Parent or any of its subsidiaries from effectively controlling in any material respect the business or operations of the Company and its subsidiaries in connection with the Offer, the Merger or the Merger Agreement or (v) which otherwise is reasonably likely to have a Material Adverse Effect. The Merger Agreement defines "Material Adverse Effect" as (a) any materially adverse effect on the business, assets, properties, financial condition or results of operations of the Company and its subsidiaries taken as a whole, or (b) any prevention or material delay in the ability of the Company to consummate the Offer, the Merger and the other transactions contemplated by the Merger Agreement and the Stockholder Agreement, which has occurred or would reasonably be expected to occur as a result of any change, effect, event, occurrence or state of facts; provided, however, with respect to clauses (a) and (b), other than any change, effect, event, occurrence or state of facts, to the extent such change, effect, event, occurrence or state of facts is the result of adverse changes in economic conditions, or of conditions or adverse changes in or affecting the worldwide energy industry generally, including, but not limited to, changes in markets and prices for oil, gas and other hydrocarbons or hydrocarbon products. (b) any statute, rule, regulation, legislation, interpretation, judgment, order or injunction shall be enacted, entered, enforced, promulgated, amended or issued in any of the significant geographical regions in which the Company or any of its subsidiaries operates or by the European Council or the European Commission with respect to, or shall be deemed applicable to, or any consent or approval shall be withheld with respect to, (i) Parent, the Company or any of their respective subsidiaries or (ii) the Offer, the Merger or any of the other transactions contemplated by the Merger Agreement or the Stockholder Agreement, by any Governmental Entity that is reasonably likely to result, directly or indirectly, in any of the consequences referred to in paragraph (a) above; (c) since the date of the Merger Agreement, there shall have occurred any event, change, effect or development that, individually or in the aggregate, has had or would be reasonably expected to have a Material Adverse Effect, and if a Material Adverse Effect has occurred, it shall be continuing; (d) there shall be any temporary, preliminary or permanent restraining order or injunction or other legal restraint or prohibition by any Governmental Entity that prevents or makes illegal the consummation of the Offer, the Merger or any of the other transactions contemplated by the Merger Agreement or the Stockholder Agreement; (e) there shall have occurred and continued for at least three calendar days: (i) a general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange, any national securities exchange or the Nasdaq National Market System (excluding suspensions or limitations resulting from physical damage or interference with such exchanges not related to market conditions); (ii) a decline of at least 30% in the Dow Jones Industrial Index; (iii) a declaration of a banking moratorium or suspension of payments in respect of banks in the United States; (iv) a mandatory limitation by the United States Government or a change in the general financial, banking or capital markets which materially and adversely affects the ability of major financial institutions in the United States to extend credit; (v) a commencement of a war, armed hostilities or other major national or international crisis directly involving the United States (other than an action involving personnel of the United Nations) or (vi) in the case of any of the foregoing existing on the date of the Merger Agreement, a material acceleration or worsening thereof; (f) any representation and warranty of the Company or any other party (other than Parent and the Purchaser) in the Merger Agreement or the Stockholder Agreement shall not be true and correct in all material respects (provided that any representation or warranty of the Company or any other party (other than Parent and the Purchaser) contained in the Merger Agreement or the Stockholder Agreement that is qualified by a materiality standard or a material adverse effect qualification shall not be further qualified by this condition) as of the date of the Merger Agreement and (except with respect to the representation and warranty relating to title to properties and to the extent such representations or warranties expressly relate to an earlier date) as of the scheduled or extended expiration of the Offer; 14 (g) the Company shall have failed to comply with the terms of the Merger Agreement described in clause (f) under "Conduct of Business" or the Company or any other party (other than Parent and the Purchaser) shall have failed to comply with any agreement or covenant in any material respect of the Company or any other party (other than Parent and the Purchaser) to be performed or complied with by any of them under the Merger Agreement or the Stockholder Agreement; (h) there shall have been issued, delivered, sold or granted any Common Stock pursuant to the Rights Agreement; or (i) the Merger Agreement shall have been terminated in accordance with its terms; which in the sole judgment of the Purchaser or Parent, in the case of any such condition, and regardless of the circumstances giving rise to any such condition (including any action or inaction by Parent or any of its affiliates), makes it inadvisable to proceed with such acceptance for payment or payment. The foregoing conditions are for the sole benefit of the Purchaser and Parent and may be asserted by the Purchaser or Parent regardless of the circumstances giving rise to such condition or may be waived by the Purchaser and Parent in whole or in part at any time and from time to time in their sole discretion. The failure by Parent, the Purchaser or any other affiliate of Parent at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and circumstances shall not be deemed a waiver with respect to any other facts and circumstances and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. The foregoing summary of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit (c)(2) hereto. The Merger Agreement should be read in its entirety for a more complete description of the matters summarized above. Rights Agreement The Rights Agreement, dated September12, 1997, between the Company and First Chicago Trust Company of New York as Rights Agent (the "Rights Agreement") has been amended as of May 3, 1998 (the "Amendment") to exempt the Merger Agreement, the Stockholder Agreement, the acquisition of Shares by Parent or the Purchaser pursuant to the Offer or the Stockholder Agreement and the other transactions contemplated by the Merger Agreement and the Stockholder Agreement from the provisions of the Rights Agreement. The Company has agreed that neither it nor the Company Board will, without the prior consent of Parent, (i) further amend the Rights Agreement, (ii) redeem the rights issued pursuant to the Rights Agreement or (iii) take any action with respect to, or make any determination under, the Rights Agreement. The foregoing summary of the Amendment is qualified in its entirety by reference to the Amendment, a copy of which is filed as Exhibit (c)(5) hereto. The Amendment should be read in its entirety for a more complete description of the matters summarized above. The Stockholder Agreement Pursuant to the Stockholder Agreement, Petroleum Associates, L.P. and KKR Partners II, L.P., each a Delaware limited partnership, who collectively own 25.6% of the outstanding Shares (the "Principal Stockholders"), have unconditionally agreed to tender into the Offer, and not to withdraw therefrom, all the Shares over which the Principal Stockholders had voting and dispositive control on May 4, 1998 (comprising 21,833,334 Shares), as well as any Shares acquired by the Principal Stockholders after such time. The Principal Stockholders have further agreed in the Stockholder Agreement that they will not (a) transfer (which term for purposes of the Stockholder Agreement includes any sale, gift, pledge or other disposition), or consent to any transfer of, any or all of the Shares subject to the Stockholder Agreement or any interest therein, (b) enter into any contract, option or other agreement or understanding with respect to any transfer of any or all of the Shares subject to the Stockholder Agreement or any interest therein, (c) grant any proxy, power-of-attorney or other authorization in or with respect to the Shares subject to the Stockholder Agreement, (d) deposit the 15 Shares subject to the Stockholder Agreement into a voting trust or enter into a voting agreement or arrangement with respect to such Shares or (e) take any other action that would in any way restrict, limit or interfere with the performance of the Principal Stockholders' obligations under the Stockholder Agreement or the transactions contemplated by the Stockholder Agreement or the Merger Agreement. The Principal Stockholders have also agreed in the Stockholder Agreement that they will not, nor will they authorize or permit any officer, director, partner, affiliate or employee of, or any investment banker, attorney or other advisor or representative of, the Principal Stockholders to, solicit, initiate or encourage the submission of, enter into any agreement with respect to, or participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Takeover Proposal, in each case subject to certain exceptions applicable in the event the Company is entitled to take such action with regard to any Takeover Proposal. In addition, the Principal Stockholders have granted Parent an irrevocable option to purchase the Shares subject to the Stockholder Agreement at a price per Share of $29.00 in cash (the "Option"). The Option becomes exercisable, in whole but not in part, by Parent if, and only if, the Principal Stockholders breach or otherwise fail to comply with their obligations to tender into the Offer, and not to withdraw therefrom, the Shares subject to the Stockholder Agreement and the Purchaser has otherwise accepted the Shares for purchase pursuant to the Offer. Under the Stockholder Agreement, the Principal Stockholders have also granted to Parent and certain individuals designated by Parent a proxy which is irrevocable during the term of the Stockholder Agreement with respect to the Shares subject to the Stockholder Agreement to vote such Shares in favor of the Merger, the adoption of the Merger Agreement and the approval of the other transactions contemplated by the Merger Agreement and against (i) any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, combination, sale of substantial assets, reorganization, recapitalization, dissolution, liquidation or winding up of or by the Company, (ii) any Takeover Proposal and (iii) any amendment of the Company's Restated Certificate of Incorporation, as amended, or its By-laws, as amended, or other proposal or transaction involving the Company or any subsidiary of the Company, which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify any provision of the Merger Agreement, the Stockholder Agreement, the Merger or any other transaction contemplated by the Merger Agreement or change in any manner the voting rights of any class of capital stock of the Company. The Principal Stockholders have agreed not to commit or agree to take any action inconsistent with the foregoing. The Stockholder Agreement (including the Option) will terminate upon the earlier of (i) the effective time of the Merger and (ii) the termination of the Merger Agreement in accordance with its terms. Upon any termination of the Stockholder Agreement, the Stockholder Agreement (including the Option) will thereupon become void and of no further force and effect, and there shall be no liability in respect of the Stockholder Agreement or of any transactions contemplated thereby or by the Merger Agreement on the part of any party thereto or any of its directors, officers, partners, stockholders, employees, agents, advisors, representatives, or affiliates; provided, however, that nothing in the Stockholder Agreement shall relieve any party thereto from any liability for such party's wilful breach of the Stockholder Agreement. The foregoing summary of the Stockholder Agreement is qualified in its entirety by reference to the Stockholder Agreement, a copy of which is filed as Exhibit (c)(3) hereto. The Stockholder Agreement should be read in its entirety for a more complete description of the matters summarized above. Appraisal Rights The holders of Shares do not have appraisal rights as a result of the Offer. However, if the Merger is consummated, holders of Shares and holders of Series A Preferred Stock at the effective time of the Merger will have certain rights pursuant to the provisions of Section 262 of the DGCL ("Section 262") to dissent and demand appraisal of their Shares or Series A Preferred Stock, as the case may be. Under Section 262, dissenting stockholders who comply with the applicable statutory procedures will be entitled to receive a judicial 16 determination of the fair value of their Shares or Series A Preferred Stock (exclusive of any element of value arising from the accomplishment or expectation of the Merger) and to receive payment of such fair value in cash, together with a fair rate of interest, if any. Any such judicial determination of the fair value of Shares or Series A Preferred Stock could be based upon factors other than, or in addition to, the price per Share to be paid in the Merger or the market value of the Shares or Series A Preferred Stock. The value so determined could be more or less than the price per Share to be paid in the Merger. The foregoing summary of Section 262 does not purport to be complete and is qualified in its entirety by reference to Section 262. FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. ITEM 4. THE SOLICITATION OR RECOMMENDATION. (a) The Company Board met to consider the proposed structure for a possible business combination with the Purchaser and to consider the terms of the Offer at meetings held on April 17, 24 and 27, 1998 and on May 3, 1998. At its meeting held on May 3, 1998, the Company Board unanimously determined that the Merger Agreement, the Stockholder Agreement, the Offer, the Merger and the other transactions contemplated by the Merger Agreement and the Stockholder Agreement are fair to and in the best interests of the Company and its stockholders, authorized the Company to enter into the Merger Agreement with Parent and the Purchaser, approved the Offer and the Merger and agreed to recommend the acceptance of the Offer to the Company's stockholders. A copy of the letter to the stockholders of the Company dated May 8, 1998 from John L. Whitmire, Chairman of the Board, containing the recommendation of the Company Board, is filed as Exhibit (a)(1) hereto and is incorporated herein by reference. As set forth in the Purchaser's Offer to Purchase, the Purchaser will purchase Shares tendered prior to the close of the Offer if at least a majority of the outstanding Shares have been tendered by that time and all conditions to the Offer have been satisfied. Stockholders considering not tendering their Shares in order to wait for the Merger should note that the Purchaser is not obligated to purchase any Shares, and can terminate the Offer and the Merger Agreement and not proceed with the Merger, if fewer than a majority of the outstanding Shares are tendered prior to the expiration of the Offer or if any of the other Offer conditions are not satisfied. The Offer is scheduled to expire at 12:00 Midnight, New York City time, on Friday, June 5, 1998, unless the Purchaser, in its sole discretion, elects to extend the period of time for which the Offer is open. The Purchaser may (i) extend the Offer if at the scheduled expiration date of the Offer any of the conditions to the Purchaser's obligation to purchase Shares are not satisfied until such time as such conditions are satisfied or waived or (ii) extend the Offer for any period required by any rule, regulation, interpretation or position of the SEC or the staff thereof applicable to the Offer, (iii) extend the Offer for any reason for a period of not more than 10 business days beyond the latest expiration date that would otherwise be permitted under clause (i) or (ii) of this sentence, provided, in the case of clause (iii), that the Purchaser shall waive certain conditions to the Offer during such extension. In addition, the Purchaser has agreed that it shall, at the request of the Company, extend the Offer one or more times for up to 30 days in the aggregate if any of the conditions to the Offer are not satisfied on the expiration date of the Offer provided that such conditions are reasonably capable of being satisfied and provided that the Company has not received a Company Takeover Proposal. A copy of the press release issued by Parent and the Company announcing the Merger and the Offer is filed as Exhibit (a)(2) hereto and is incorporated herein by reference. (b) On Thursday, April 16, 1998, William E. Wade, Jr., President of Parent, visited John Whitmire, Chairman and Chief Executive Officer of the Company, at Mr. Whitmire's office in Houston. During that visit Mr. Wade asked Mr. Whitmire to consider an all cash purchase of the Company by Parent in a negotiated transaction at $28.50 per share. At a telephonic board meeting the next day, Mr. Whitmire informed the Company Board of Mr. Wade's proposal. The Company Board authorized Mr. Whitmire to retain Salomon Brothers Inc, now doing business as Salomon Smith Barney (collectively, with all other entities doing business as Salomon Smith Barney, "Salomon Smith Barney") and Petrie Parkman & Co., Inc. ("'Petrie Parkman"), as its financial advisors (the "Advisors"), to review Parent's proposal, to study alternative transactions that might be available with other companies and to make a recommendation to the Company Board as to whether a sale of the Company 17 at the offered price should be considered. Following such meeting and during the week of April 20, 1998, Mr. Whitmire had discussions with several other oil and gas companies regarding a possible transaction. Management of the Company and the Advisors met with two additional companies and had ongoing discussions. On Monday, April 20, 1998, Mr. Whitmire called Mr. Wade and informed him that the Company had retained financial and legal advisors and that the Company's Board would meet on Friday, April 24th to consider the proposal. On Friday, April 24, 1998, the Company Board met in Houston and received a presentation from Salomon Smith Barney and a presentation from Petrie Parkman. Mr. Whitmire and the Advisors reported to the Company Board that several other companies had expressed an interest in the Company and that there had been discussions with such companies as to whether any of them would be willing to make a proposal. Mr. Whitmire and the Advisors reported that one of these companies was considering a potential transaction in the form of an all stock merger and a second company was considering a cash offer. At this meeting, the Company Board authorized Mr. Whitmire and the Advisors to continue discussions regarding both cash and stock transactions, and to make a recommendation to the Company Board on the following Monday. Following the April 24, 1998 Company Board meeting, Mr. Whitmire telephoned Mr. Wade and advised him that, while Parent's proposal was attractive, he was not authorized by the Company Board to enter into exclusive negotiations with Parent. On Sunday, April 26, 1998, representatives of the Company and Parent met in Houston to review certain information provided by the Company, which included data regarding the Company's exploration and operating activities outside the United States and its petrochemical business. During that weekend, representatives of the Company also met with representatives of the independent oil and gas company with which the Company was discussing an all stock merger. On Monday, April 27, 1998, the Company Board met telephonically and received a report from Mr. Whitmire and the Advisors concerning Parent's cash proposal, the terms of the potential transaction with the independent oil and gas company in the form of an all stock merger and the results of discussions with other companies. Mr. Whitmire reported to the Company Board that Parent had increased its offer to $29.00 per Share in cash and that Mr. Wade had informed Mr. Whitmire that $29.00 per Share was Parent's best offer. After discussion, the Company Board authorized Mr. Whitmire and the Company's management to enter into negotiations with Parent for an all cash merger at $29.00 per Share. Later that evening, Parent's legal advisors sent to the Company and its legal advisors drafts of the Merger Agreement and related documents. On Tuesday, April 28, 1998, Mr. Whitmire and Mr. Wade met in New York to discuss the proposed transaction. After such meeting, the Company immediately commenced negotiations with Parent. On Sunday, May 3, 1998, the Company Board met to review the Merger Agreement. At the May 3, 1998 meeting, at which all of the directors other than Mr. Kravis were present, the Company Board received opinions of the Advisors, dated May 3, 1998 that, based upon and subject to various considerations and assumptions (and the analyses presented to the Company Board underlying such opinions) set forth in such opinions, as of the date of such opinions, the $29.00 per Share consideration to be received by the holders of the Shares in the Offer and the Merger is fair from a financial point of view to such holders. After review of the Merger Agreement and receipt of such opinions, the Company Board unanimously approved the Offer, the Merger, the Merger Agreement and other transactions contemplated by the Merger Agreement. The Merger Agreement was executed and delivered by the parties, and the Company and Parent publicly announced the transaction before the opening of trading on the New York Stock Exchange ("NYSE") on Monday, May 4, 1998. In reaching its conclusions described in Item 4(a) above, the Company Board considered a number of factors, including, without limitation, the following: (i) that the $29.00 per Share Offer Price represented a premium of approximately 40% over the last reported sales price of the Shares on the NYSE Composite Transactions Tape on May 1, 1998 of $20.50 per Share (the last trading day prior to announcement of the Merger Agreement); (ii) the terms of the Merger Agreement, including the Company's ability to terminate the Merger Agreement and accept a Superior Proposal and the absence of any financing contingency on the part of Parent; (iii) the opinions of Salomon Smith Barney and Petrie Parkman, dated May 3, 1998, that, based upon and subject to various considerations and assumptions, as of such date the $29.00 per Share in cash to be received by the holders of the Shares in the Offer and the Merger is fair from a financial point of view to such holders; (iv) the results of management's discussions with other potential purchasers of the Company; (v) information with 18 respect to the financial condition, results of operations and business of the Company, on both a historical and a prospective basis, current industry, economic and market conditions and historical and various projected ranges of prices for oil and gas; (vi) the historical market prices and recent trading patterns of the Shares and the market prices and financial data relating to other companies engaged in the same business as the Company; (vii) the prices paid in other recent acquisition transactions, including acquisitions in the industry in which the Company does business; and (viii) alternatives to the Offer and the Merger that might be available to the Company and its stockholders, particularly the Company remaining independent and continuing to pursue its long-term growth strategy. The Company Board did not assign relative weights to the foregoing factors or determine that any factor was of more importance than other factors. Rather, the Company Board viewed its position and recommendation as being based on the totality of the information presented to it and considered by it. In analyzing the Offer and the Merger, the Company Board was assisted and advised at its meetings on April 24 and 27, 1998 and May 3, 1998 by representatives of Salomon Smith Barney and Petrie Parkman, who reviewed various financial considerations, and representatives of the Company's legal counsel, who reviewed various legal and other considerations, as well as the terms of the Merger Agreement and related agreements, with the Company Board. Salomon Smith Barney and Petrie Parkman are investment banking firms engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, negotiated primary and secondary underwritings, private placements and valuations for corporate and other purposes. The Company selected Salomon Smith Barney and Petrie Parkman as its financial advisors based upon Salomon Smith Barney and Petrie Parkman's familiarity with the Company and the industry in which the Company operates and their experience, ability and reputation with respect to mergers and acquisitions. Copies of the written opinions of Salomon Smith Barney and Petrie Parkman, each dated May 3, 1998, describing the assumptions made, matters considered and the scope of the review undertaken and procedures followed by each firm, are filed as Exhibits(a)(3) and (a)(4) hereto, respectively, and are incorporated herein by reference. STOCKHOLDERS ARE ENCOURAGED TO READ SUCH OPINIONS IN THEIR ENTIRETY. Based upon the foregoing, at its May 3, 1998 meeting, the Company Board unanimously determined that the terms of the Offer and the Merger are fair to and in the best interests of the Company and its stockholders, approved the Offer and the Merger and recommended that stockholders of the Company accept the Offer as set forth above. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. Salomon Smith Barney and Petrie Parkman are acting as the Company's financial advisors in connection with the Offer and the Merger. Pursuant to their respective agreements with the Company, Salomon Smith Barney and Petrie Parkman are entitled to transaction fees of $7.7 million and $2.75 million, respectively, each of which shall become payable upon consummation of the transactions contemplated by the Merger Agreement. The Advisors are also entitled to receive an additional fee in the event the holders of the Shares ultimately receive in excess of $29.00 per Share. In addition, whether or not the Offer or the Merger is completed, the Company has agreed to reimburse each of Salomon Smith Barney and Petrie Parkman periodically for reasonable out-of- pocket expenses, including the fees and disbursements of its counsel, and to indemnify each of Salomon Smith Barney and Petrie Parkman against certain expenses and liabilities incurred in connection with its engagement, including liabilities under Federal securities laws. The Advisors have each previously rendered certain investment banking and financial advisory services to the Company and Parent and certain of its affiliates, for which each Advisor received customary compensation. The Advisors each may have other business relationships with the Company or Parent. In the ordinary course of its business, Salomon Smith Barney may actively trade the debt and equity securities of the Company for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. In the ordinary course of business, Petrie Parkman may actively trade the debt and equity securities of the Company for the accounts of customers. 19 Except as set forth above, neither the Company nor any person acting on its behalf has employed, retained or compensated, or currently intends to employ, retain or compensate, any person to make solicitations or recommendations to the stockholders of the Company on its behalf with respect to the Offer. 19--1 ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES. (a) No transactions in the Common Stock of the Company have been effected in the past 60 days by the Company or any affiliate or subsidiary of the Company, or, to the best knowledge of the Company, by any executive officer or director of the Company, with the exception of (x) purchases by the administrator of the Company's 401(k) plan of approximately: (i) 311 Shares for the account of John L. Whitmire, Chairman of the Board and Chief Executive Officer; (ii) 247 Shares for the account of William M. Krips, Senior Vice President; (iii) 284 Shares for the account of Arthur W. Peabody, Jr., Senior Vice President; (iv) 424 Shares for the account of Larry D. Kalmbach, Vice President and Chief Financial Officer; (v) 171 Shares for the account of Alan R. Crain, Jr., Vice President and General Counsel; (vi) 147 Shares for the account of Richard A. Cunningham, Regional Vice President; (vii) 237 Shares for the account of James E. Knight, Regional Vice President; (viii) 119 Shares for the account of Michael N. Markowitz, Vice President and Treasurer; (ix) 123 Shares for the account of Donald M. McMullan, Vice President and Controller; (x) 273 Shares for the account of Roger W. Pierce, Vice President Exploration; (xi) 228 Shares for the account of Newton W. Wilson, III, Regional Vice President; and (xii) 230 Shares for the account of John M. Zimmerman, Vice President, all pursuant to previous elections made by such officers under the 401(k) plan and (y) the exercise by Alan R. Crain, Jr., Vice President and General Counsel of the Company on April 7, 1998, of an outstanding stock option, which would have expired April 14, 1998, for 4,500 Shares under a stock option plan of the Company. (b) To the best knowledge of the Company, each principal executive officer and director of the Company currently intends to tender, pursuant to the Offer, all unrestricted Shares which are held of record or beneficially owned by such person (other than the Shares of the four directors described in Item 3 above). ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY. (a) Except as described under Item 3(b), the Company is not engaged in any negotiations in response to the Offer which relate to or would result in: (i) an extraordinary transaction, such as a merger or reorganization, involving the Company or any subsidiary of the Company; (ii) a purchase, sale or transfer of a material amount of assets by the Company or any subsidiary of the Company; (iii) a tender offer for or other acquisition of securities by or of the Company; or (iv) any material change in the present capitalization or dividend policy of the Company. (b) Except as described under Item 4, there are no transactions, board resolutions, agreements in principle, or signed contracts in response to the Offer, other than those described under Item 3(b), which relate to or would result in one or more of the matters referred to in this Item 7. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED. The information statement attached as Annex I hereto is being furnished in connection with the possible designation by the Purchaser, pursuant to the Merger Agreement, of certain persons to be appointed to the Company Board other than at a meeting of the Company's stockholders. The Company, the Company Board and Parent are defendants in two purported class actions filed on May 6, 1998, each filed in the Chancery Court of the State of Delaware in and for New Castle County. The actions are styled Dorthy M. McMullen v. Union Texas Petroleum Holdings, Inc.; John L. Whitmire; Sellers Stough; Richard R. Shinn; George R. Roberts; Stanley P. Porter; Wylie B. Pieper; Michael W. Michelson; Henry R. Kravis; James H. Greene, Jr.; Edward A. Gilhuly; Glenn A Cox; Robert L. Barry; and Atlantic Richfield Company and Byron S. Squyres and Mary Falcon Squyres v. Robert L. Barry; Wylie Bernard Pieper, John L. Whitmire, Glenn A. Cox, James H. Greene, Jr., Edward A. Gilhuly, Richard R. Shinn, Sellers Stough, Henry R. Kravis, George S. Roberts, Michael W. Michelson, Stanley P. Porter, Union Texas Petroleum Holdings, Inc., Kohlberg Kravis Roberts & Co. L.P. and Atlantic Richfield Company. These actions, both of which are filed by alleged owners of Shares, both claim, among other things, that certain individual directors of the Company have 20 breached their fiduciary duties to stockholders by failing to consider strategic alternatives to the Merger that would maximize value to the stockholders. In addition, the Squyres action claims that Parent aided and abetted in the breaches of fiduciary duty committed by these individual directors and that the Principal Stockholders breached their duty of loyalty to the stockholders by arranging a transaction that unfairly benefits them to the detriment of the other stockholders. Both complaints seek declaratory and injunctive relief and attorneys' fees and experts' fees. The Company believes that the suits are without merit. The Company will take all appropriate action to respond to such litigation. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. The following Exhibits are filed herewith: (a)(1) Recommendation Letter to the Stockholders of the Company, dated May 8, 1998, from John L. Whitmire, Chairman of the Board of the Company.* (a)(2) Press Release issued jointly by the Company and Atlantic Richfield Company announcing the Merger and the Offer. (a)(3) Opinion of Salomon Smith Barney, dated May 3, 1998.* (a)(4) Opinion of Petrie Parkman & Co., dated May 3, 1998.* (b) None. (c)(1) "Voting Securities and Certain Beneficial Owners," "Executive Compensation and Other Information," "Compensation Committee Interlocks and Insider Participation" and "Annex A: Amended and Restated Union Texas Petroleum Holdings, Inc. 1994 Incentive Plan" sections of the Proxy Statement of the Company filed with the Commission on March 24, 1998. (c)(2) Agreement and Plan of Merger, dated May 4, 1998, between the Company, Atlantic Richfield Company and VWK Acquisition Corp. (c)(3) Stockholders Agreement, dated May 4, 1998, between the Atlantic Richfield Company, Petroleum Associates, L.P. and KKR Partners II, L.P. (c)(4) Rights Agreement dated as of September 12, 1997 between the Company and First Chicago Trust Company of New York, as Rights Agent, which includes as Exhibit A the Form of Rights Certificate and as Exhibit B the Summary of Rights to Purchase Common Stock (filed as Exhibit 1 to the Company's Form 8-A Registration Statement filed September 15, 1997 (Commission File No. 1-9019) and as Exhibit 4.1 to the Company's 10-Q for the quarter ended September 30, 1997 (Commission File No. 1- 9019) and incorporated herein by reference). (c)(5) Amendment to Rights Agreement, dated May 3, 1998, between the Company and First Chicago Trust Company of New York, as Rights Agent.
- -------- * Included in copies mailed to stockholders. 21 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and accurate. UNION TEXAS PETROLEUM HOLDINGS, INC. By: /s/ John L. Whitmire ------------------------------------- Name: John L. Whitmire Title: Chairman of the Board and Chief Executive Officer Dated: May 8, 1998 ANNEX I UNION TEXAS PETROLEUM HOLDINGS, INC. 1330 POST OAK BOULEVARD HOUSTON, TEXAS 77056 ---------------- INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER ---------------- NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT. NO PROXIES ARE BEING SOLICITED AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY ---------------- This Information Statement, which is being mailed on or about May 8, 1998 to the holders of shares of the Common Stock, par value $.05 per share (the "Company Common Stock"), of Union Texas Petroleum Holdings, Inc., a Delaware corporation (the "Company"), is being furnished in connection with the designation by Atlantic Richfield Company, a Delaware corporation ("Parent"), and VWK Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Parent ("Sub"), of persons to the Board of Directors of the Company (the "Board"). Such designation is to be made pursuant to an Agreement and Plan of Merger dated as of May 4, 1998 (the "Merger Agreement") among the Company, Parent and Sub. Pursuant to the Merger Agreement, among other things, Parent is to commence a cash tender offer no later than May 8, 1998 to purchase all of the issued and outstanding shares of Company Common Stock at $29.00 per share, net to the seller in cash, as described in Parent's Offer to Purchase dated May 8, 1998 (the "Offer to Purchase") and the related Letter of Transmittal (which Offer to Purchase and related Letter of Transmittal together constitute the "Offer"). The Offer is scheduled to expire at 12:00 midnight, New York City time, on Friday, June 5, 1998, unless extended. The Offer is conditioned on, among other things, a majority of the outstanding shares of Company Common Stock on a fully diluted basis being validly tendered prior to the expiration of the Offer and not withdrawn (the "Minimum Condition"). The Merger Agreement also provides for the merger (the "Merger") of Sub with and into the Company as soon as practicable after consummation of the Offer. Following the consummation of the Merger (the "Effective Time"), the Company will be the surviving corporation (the "Surviving Corporation") and a wholly owned subsidiary of Parent. In the Merger, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than shares of Company Common Stock held in the treasury of the Company or by Parent, Sub or any direct or indirect wholly owned subsidiary of Parent or the Company, all of which will be canceled, and other than shares of Company Common Stock, if any, held by stockholders who have perfected rights as dissenting stockholders under Delaware law) will be converted into the right to receive cash in the amount of $29.00. The Merger Agreement provides that promptly upon the purchase by Sub of any of the outstanding shares of Company Common Stock pursuant to the Offer, Sub shall be entitled to designate the number of directors on the Board equal to at least the number of directors, rounded up to the next whole number, which is the product of (a) the total number of directors on the Board (giving effect to the directors elected pursuant to this sentence) multiplied by (b) the percentage that (i) such number of shares of Company Common Stock so purchased by Sub plus the number of such shares otherwise owned by Sub or any other subsidiary of Parent bears to (ii) the A-1 number of such shares of Company Common Stock outstanding. The Company's obligations to cause such designees (the "Sub Designees") to be elected to the Board shall be subject to Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 promulgated thereunder. Notwithstanding the above, until the Effective Time the Company shall have at least three directors who were directors as of the date of the Merger Agreement and who are not officers of the Company (the "Independent Directors"). If the number of Independent Directors falls below three, the remaining Independent Directors (or if no Independent Directors remain the other directors) shall be entitled to designate persons who are not officers, stockholders or affiliates of the Company, Parent or Sub to fill the vacancies. Following the election of the Sub Designees and prior to the Effective Time, the approval of a majority of the Independent Directors or their successors will be required to authorize any termination of the Merger Agreement by the Company, any amendment of the Merger Agreement requiring action by the Board, any extension of time for the performance or waiver of any of the obligations of Sub or Parent, or any waiver of the Company's rights under the Merger Agreement. The terms of the Merger Agreement, a summary of the events leading up to the Offer and the execution of the Merger Agreement and other information concerning the Offer and the Merger are contained in the Offer to Purchase and in the Solicitation/Recommendation Statement on Schedule 14D-9 of the Company (the "Schedule 14D-9") with respect to the Offer, copies of which are being delivered to stockholders of the Company contemporaneously herewith. Certain other documents (including the Merger Agreement) were filed with the Securities and Exchange Commission (the "SEC") as exhibits to the Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") of Sub and as exhibits to the Schedule 14D-9. The exhibits to the Schedule 14D-1 and the Schedule 14D-9 may be examined at and copies thereof may be obtained from the SEC in the manner set forth in Section 8 of the Offer to Purchase. Parent intends to finance the purchase of Company Common Stock in the Offer and the Merger from the proceeds of the sale of commercial paper and other short-term borrowings backed by an existing and an additional bank facility. No action is required by the stockholders of the Company in connection with the election of the Sub Designees to the Board. However, Section 14(f) of the Exchange Act requires the mailing to the Company's stockholders of the information set forth in this Information Statement prior to a change in a majority of the Company's directors otherwise than at a meeting of the Company's stockholders. The information contained in this Information Statement concerning Parent, Sub and the Sub Designees has been furnished to the Company by such persons, and the Company assumes no responsibility for the accuracy or completeness of such information. The principal executive offices of Parent and Sub are located at 515 South Flower Street, Los Angeles, California 90071-2201. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT At the close of business on May 1, 1998, there were issued and outstanding 85,285,286 shares of Company Common Stock, excluding Company Common Stock held by the Company, each share being entitled to one vote upon matters to be voted upon at a stockholders meeting. There are no other voting securities outstanding. The table below sets forth certain information as of May 1, 1998 regarding the beneficial ownership of Company Common Stock, excluding Common Stock held by the Company, by (i) each person known by the Company to own beneficially more than 5% of its outstanding shares of Company Common Stock, (ii) each director of the Company, (iii) the five executive officers of the Company named in the Summary Compensation Table and (iv) all executive officers and directors of the Company as a group. A-2
AMOUNT AND NATURE OF PERCENTAGE OF BENEFICIAL SHARES OF COMMON NAME OWNERSHIP(1) STOCK OUTSTANDING ---- ------------ ----------------- Petroleum Associates, L.P.(2)................... 21,833,334 25.6% KKR Partners II, L.P.(2)........................ 9 West 57th Street New York, New York 10019 GSB Investment Management, Inc.(3).............. 4,424,912 5.2% 301 Commerce Street Fort Worth, Texas 76102 Robert L. Barry, Director(4).................... 9,000 * Glenn A. Cox, Director(4)(5).................... 24,000 * Edward A. Gilhuly, Director(2).................. 0 -- James H. Greene, Jr., Director(2)............... 0 -- Henry R. Kravis, Director(2).................... 0 -- Michael W. Michelson, Director(2)............... 0 -- Wylie B. Pieper, Director(4).................... 10,000 * Stanley P. Porter, Director(4).................. 17,000 * George R. Roberts, Director(2).................. 0 -- Richard R. Shinn, Director(4)................... 19,000 * Sellers Stough, Director(4)..................... 18,000 * John L. Whitmire(4)(6)(7)....................... 228,172 * Chairman of the Board and Chief Executive Offi- cer William M. Krips, Senior Vice President(4)(6)... 205,687 * Arthur W. Peabody, Jr., Senior Vice Presi- dent(4)(6)..................................... 269,858 * Newton W. Wilson, III, Regional Vice Presi- dent(4)(6)..................................... 140,109 * Larry D. Kalmbach(4)(6)......................... 92,333 * Vice President and Chief Financial Officer All executive officers and directors as a group, including the above (group equals 23 percent)(4)(6)(8)............. 1,404,107 1.7%
- -------- *Less than 1%. (1) Beneficial ownership of Common Stock, except as noted. (2) KKR Associates is the sole general partner of Petroleum Associates, L.P. ("Petroleum Associates") and KKR Partners II, L.P. (collectively, the "KKR Partnerships") and possesses sole voting power and investment power with respect to the 21,833,334 shares owned by such stockholders. KKR Associates is a limited partnership of which Henry R. Kravis, George R. Roberts, Michael W. Michelson, James H. Greene, Jr., Edward A. Gilhuly (all directors of the Company), Robert I. MacDonnell, Paul E. Raether, Michael T. Tokarz, Perry Golkin, Clifton S. Robbins and Scott Stuart are the general partners, and Messrs. Kravis and Roberts are also members of the Executive Committee of KKR Associates. None of the aforementioned individuals beneficially owns any other shares of Company Common Stock. Petroleum Associates made its investment in the Company in 1985. The limited partnership agreement pursuant to which Petroleum Associates was organized expired on December 31, 1997 in accordance with the terms of the limited partnership agreement. The terminated Petroleum Associates partnership continues to be in existence for a winding-up period after such date. The limited partnership agreement provides that, in connection with the dissolution and winding up of Petroleum Associates, KKR Associates has the sole discretion regarding the timing (which may be one or more years after the expiration of the limited partnership agreement) and the manner of disposition of the Company Common Stock owned by Petroleum Associates, including public or private sales of such Company Common Stock, the distribution of such Company Common Stock to the limited partners of Petroleum Associates or a combination of the foregoing. If shares of Company Common Stock are distributed to the limited partners of Petroleum Associates, each limited partner will thereafter have sole discretion with respect to its Company Common Stock. In addition, pursuant to the limited A-3 partnership agreement, Petroleum Associates will distribute to KKR Associates for its own account, concurrently with any sales of shares owned by Petroleum Associates, cash and/or shares of Company Common Stock that together have a fair market value equal to approximately 20% of the profits realized with respect to the shares sold and distributed. The Company has agreed that, upon the request of KKR Partnerships, the Company will register under the Securities Act and applicable state securities laws the sale of the Company Common Stock owned by the KKR Partnerships as to which registration has been requested. The Company's obligation is subject to certain limitations relating to a minimum amount required for registration, the timing of a registration and other similar matters. The Company is obligated to pay any registration expenses incidental to such registrations, excluding underwriters' commissions and discounts. The KKR Partnerships currently own approximately 25.6% of the issued and outstanding shares of Company Common Stock, excluding shares held by the Company. As a result, the KKR Partnerships and their general partners may be able to exercise substantial influence over the Company, through their representation on the Board and by reason of their significant voting power with respect to the election of directors and actions submitted to a vote of stockholders. See also "Compensation Committee Interlocks and Insider Participation." (3) GSB Investment Management, Inc. is a registered investment advisor that pursuant to a Schedule 13G dated February 10, 1998 reported such shares. (4) Includes the following shares issuable upon the exercise of outstanding or issuable stock options that are exercisable within 60 days after May 1, 1998: (i) 14,000 for each of Messrs. Cox, Porter, Shinn and Stough; (ii) 5,000 for Messrs. Pieper and Barry; (iii) 142,500 for Mr. Whitmire; 172,894 for Mr. Krips; 168,694 for Mr. Peabody; 129,293 for Mr. Wilson; 75,026 for Mr. Kalmbach; and (iv) 1,031,931 for all executive officers and directors as a group. Excludes shares issuable upon the exercise of options that became exercisable upon a change in control. (5) Voting and investment power are shared with Veronica Cox with respect to 10,000 shares, all of which are held in the Glenn A. Cox Trust, UTA. (6) Shares held by executive officers in the Company's Savings Plan for Salaried Employees are included in the table. (7) Voting and investment power are shared with Virginia Whitmire with respect to 9,700 shares, all of which are held in the Virginia Kempton Whitmire Revocable Trust dated September 7, 1995. (8) As of May 1, 1998, the executive officers of the Company include the five executive officers named in the Summary Compensation Table and the other officers listed as Executive Officers. See "Executive Officers." DIRECTORS AND EXECUTIVE OFFICERS The Sub Designees. Sub has selected William E. Wade, Jr., Marie L. Knowles, Michael E. Wiley and Donald R. Voelte, Jr. as the Sub Designees. All of the Sub Designees are officers of Parent, and all except Mr. Wiley are executive officers and/or directors of Sub. Certain information regarding the Sub Designees is contained in Schedule I annexed hereto. To the best knowledge of the Company, none of the Sub Designees or their associates beneficially owns any equity securities, or rights to acquire any equity securities, of the Company or has been involved in any transactions with the Company or any directors or executive officers thereof that are required to be disclosed pursuant to the rules and regulations of the SEC. Current and Continuing Directors. The following table sets forth certain information with respect to the current directors of the Company: Robert L. Barry--Age 63, Director since December 1997. Ambassador Barry retired from the United States (U.S.) Foreign Service in 1995 after 34 years of service. Ambassador Barry held numerous positions of increasing responsibility during his Foreign Service career, including U.S. Ambassador to Indonesia from 1992 to 1995. He is a principal in Phoenix International, an electric power development company focused on projects A-4 in Indonesia, and his own international consulting firm, Robert Barry and Associates, which specializes in Indonesia, Eastern Europe and the independent states of the former Soviet Union. Ambassador Barry currently heads the mission of the Organization for Security and Cooperation in Europe, where he is responsible for elections, human rights, arms control and democracy initiatives in Bosnia-Hercegovinia. Glenn A. Cox--Age 68, Director since January 1993. Mr. Cox is a retired President and Chief Operating Officer of Phillips Petroleum Company ("Phillips"), a position he held from 1985 until December 1991. Phillips is a corporation involved in petroleum exploration, production and refining and also in the manufacturing and distribution of a variety of chemicals. Mr. Cox is also a director of BOK Financial Corp., Bank of Oklahoma, The Williams Companies and Helmerich & Payne, Inc. Member of the Audit Committee and the Section 16 Committee. Edward A. Gilhuly--Age 38, Director since December 1992. Mr. Gilhuly was an associate of Kohlberg Kravis Roberts & Co. ("KKR") from 1986 until 1995, when he became a partner. He is also a director of Layne Christensen Company, Owens-Illinois Group, Inc. and Owens-Illinois, Inc. Member of the Organization and Compensation Committee. James H. Greene, Jr.--Age 47, Director since December 1992. Mr. Greene was an associate of KKR from 1986 until 1993, when he became a partner. He is also a director of Bruno's, Inc., Owens-Illinois Group, Inc., Owens-Illinois, Inc., Randall's Food Markets, Inc. and Safeway, Inc. Henry R. Kravis--Age 54, Director since July 1985. Mr. Kravis has been a partner in KKR since its organization in 1976. He is also a director of Amphenol Corporation, Borden, Inc., Bruno's, Inc., Evenflo & Spalding Holdings Corporation, The Gillette Company, IDEX Corporation, Inc., Kinder Care Learning Centers, Inc., KSL Recreation Group, Inc., Newsquest Capital plc., Owens-Illinois, Inc., Owens-Illinois Group, Inc., PRIMEDIA Inc., Randall's Food Markets, Inc., Reltec Corporation, Safeway, Inc., Sotheby's Holdings, Inc. and World Color Press, Inc. Mr. Kravis is a first cousin of Mr. Roberts. Michael W. Michelson--Age 46, Director since July 1985. Mr. Michelson has been a partner of KKR since January 1987, and prior to that he had been an associate of KKR. Mr. Michelson is also a director of Amphenol Corporation, AutoZone, Inc., Owens-Illinois, Inc., Owens-Illinois Group, Inc. and Promus Hotel Corporation. Member of the Organization and Compensation Committee. Wylie B. Pieper--Age 65, Director since May 1997. Mr. Pieper is a retired Vice Chairman and Chief Operating Officer of Halliburton Company ("Halliburton"). Mr. Pieper served in a number of executive capacities throughout his 38 year career with Halliburton and its subsidiary, Brown & Root, Inc. Mr. Pieper serves on the Board of Governors, the George R. Brown School of Engineering Advisory Board and the Jones Graduate School of Administration Council of Overseers at Rice University. Mr. Pieper is also a director at Highlands Insurance Group, Inc. Stanley P. Porter--Age 79, Director since July 1985. Mr. Porter is a retired Vice Chairman of Arthur Young & Company. Mr. Porter was a director of AlliedSignal Inc. (collectively with its predecessor, Allied Corporation, "Allied") from 1980 until April 1989. Allied is an advanced technology company. Mr. Porter is a former director of Fiber Industries, Inc. and Engraph, Inc. Member of the Audit Committee. George R. Roberts--Age 54, Director since July 1985. Mr. Roberts has been a partner in KKR since its organization in 1976. He is also a director of Amphenol Corporation, Borden, Inc., Bruno's Inc., Evenflo & Spalding Holdings Corporation, IDEX Corporation, KinderCare Learning Centers, Inc., KSL Recreation Group, Inc., Owens-Illinois Group, Inc. Owens-Illinois, Inc., PRIMEDIA INC., Randall's Food Markets, Inc., Safeway Inc. and World Color Press, Inc. Mr. Roberts is a first cousin of Mr. Kravis. Richard R. Shinn--Age 80, Director since May 1988. Mr. Shinn was Executive Vice Chairman of the New York Stock Exchange from May 1985 through December 1990. Mr. Shinn retired as Chairman and Chief A-5 Executive Officer of Metropolitan Life Insurance Company in 1983. Mr. Shinn was a director of Allied from 1973 until April 1988. Mr. Shinn is also a director of Grey Advertising, Inc. Member of the Audit Committee, the Organization and Compensation Committee and the Section 16 Committee. Sellers Stough--Age 75, Director since March 1988. Mr. Stough is a retired Vice President, Finance of Chevron Corporation. Mr. Stough also served on the Executive Committee of Chevron Corporation from August 1986 until his retirement in December 1987. Mr. Stough was a consultant to the law firm of Pillsbury Madison & Sutro from February 1988 until December 1990 and served as Executive Director of the firm from November 1989 through December 1990. Mr. Stough was a director of Amax, Inc. from 1982 until 1987. Member of the Audit Committee. John L. Whitmire--Age 57, Chairman of the Board and Chief Executive Officer since January 1996. Mr. Whitmire has responsibility for the overall management of the Company. Mr. Whitmire served as Executive Vice President--Exploration and Production and as a director of Phillips from January 1994 to January 1996, when he retired. Prior thereto, Mr. Whitmire served in a number of executive capacities throughout his 30 year career with Phillips. If a majority of the outstanding Shares are purchased by the Purchaser pursuant to the Offer, Parent currently intends to request the Company to reduce the number of its directors to not more than seven and to designate the four Sub Designees as a majority of the Board. The current directors of the Company who would be removed pursuant to this reduction in the size of the Board have not yet been identified. If a greater number of Shares are purchased by Sub pursuant to the Offer, Sub may, pursuant to the terms of the Merger Agreement, designate additional directors to the Board. The Board has standing audit, organization and compensation and Section 16 committees that are composed of directors of the Company. The functions of the Audit Committee (the "Audit Committee") include reviewing external financial reporting, both annual and quarterly reports, and other financial portions of external reporting of the Company, recommending engagement of the Company's independent accountants, reviewing and approving the terms of engagement of the independent accountants, reviewing the independence of such accountants, reviewing with the independent accountants the plan, scope and results of the auditing engagement, and reviewing the scope and results of the Company's procedures for internal auditing and the adequacy of the Company's internal accounting controls. The functions of the Organization and Compensation Committee (the "Compensation Committee") include establishing compensation for executive officers, monitoring compensation arrangements of certain management employees for consistency with corporate objectives and to enhance shareholder value, recommending remuneration arrangements for senior management, serving as the Stock Option Committee under the Company's 1985, 1987 and 1992 Stock Option Plans and the Company's 1994 Incentive Plan, administering the Incentive Compensation Plan and Deferred Plan, and making recommendations with respect to employee benefit plans. The functions of the Section 16 Committee, established to comply with amendments to the rules promulgated under Section 16 of the Exchange Act, as well as Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), include approving grants of options, stock, stock appreciation rights and other types of awards to and certain deferrals by officers of the Company that are subject to or intended for compliance with the Exchange Act or the Code (the "Section 16 Officers"). In addition, although the Board does not have a standing nominating committee, the Compensation Committee considers and makes recommendations to the Board regarding persons to be nominated for election as directors by the Board to fill vacancies that arise between annual meetings of stockholders. Stockholders wishing to recommend a person for consideration as a nominee for election to the Board can do so in accordance with the Company's Bylaws by providing timely written notice to the Secretary of the Company at 1330 Post Oak Blvd., Houston, Texas 77056, providing such nominee's name, appropriate biographical information and A-6 any other information that would be required in a proxy statement. Any such recommendation should be accompanied by a written statement from the person recommended, giving his or her consent to be named as a nominee and, if nominated and elected, to serve as a director. A notice must be delivered to the Secretary not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the close of business on the 10th day following the day on which public announcement of the date of such meeting is first made by the Company. Such notice to the Secretary must set forth the name and address of the stockholder that is giving the notice and the beneficial owner, if any, on whose behalf the nomination is made and the number of shares that are owned beneficially by such stockholder and, if any, such beneficial owner. During the year ended December 31, 1997, the Board held a total of fourteen meetings, the Audit Committee held three meetings, the Compensation Committee held four meetings and the Section 16 Committee held one meeting and acted once by written consent. Messrs. Gilhuly, Greene, Kravis and Roberts attended less than 75% of the Board meetings. Compensation Committee Interlocks and Insider Participation. Two of the current members of the Compensation Committee, Mr. Michelson and Mr. Gilhuly, are affiliates of KKR and the KKR Partnerships. The KKR Partnerships collectively own approximately 25.6% of the outstanding Company Stock. In connection with the 1985 Stock Acquisition, the Company agreed to pay each of KKR and Allied a fee for financial advisory services of $250,000 per year, increasing at a compound rate of 10% per annum. The Company is obligated to continue to pay this annual advisory service fee to KKR until KKR or its affiliates own less than 20% of the number of shares of Company Common Stock outstanding. During 1997, KKR was paid $748,943 for such financial advisory services pursuant to this agreement. DIRECTOR COMPENSATION All directors who are not officers of the Company receive $40,000 per annum for serving on the Board. In addition, all directors are reimbursed for out- of-pocket costs of attending Board and committee meetings. Messrs. Gilhuly, Greene, Kravis, Michelson and Roberts are directors affiliated with KKR. Under the 1994 Incentive Plan, as in effect and amended in accordance with Proposal 3 of the Company's Proxy Statement dated March 24, 1998, each person who becomes a director who is not then an employee of the Company or any subsidiary or is not affiliated with KKR (an "Eligible Director") for the first time is granted an option to purchase 5,000 shares of Common Stock effective as of the date the individual becomes an Eligible Director. Each incumbent Eligible Director also receives an option to purchase 3,000 shares of Common Stock effective as of the date of each annual meeting of stockholders. During 1997, each Eligible Director, other than Mr. Pieper and Ambassador Barry, who were not directors as of such date, received an annual grant of an option to purchase 3,000 shares of Common Stock at $19.75 per share under the 1994 Incentive Plan. Effective May 9, 1997 and December 19, 1997, Mr. Pieper and Ambassador Barry each received an option to purchase 5,000 shares of Common Stock at $19.75 and $20.6875 per share, respectively, under the 1994 Incentive Plan. Each such option is fully vested and exercisable and has a term of ten years, but must be exercised within six months of termination of service on the Board for any reason other than death or disability or retirement after at least five years of continuous Board service, in which event such option must be exercised within two years of death or disability and within three years of retirement. The price per share to be paid by the holder of such an option is equal to the fair market value per share of Common Stock on the date the option is granted. Except transfers to family members, family entities or private foundations, no transfer, sale or other disposition of Common Stock acquired upon option exercise is permitted, except in an amount necessary to satisfy tax withholding liability, until the Eligible Director terminates service as an Eligible Director of the Company, unless a prior extraordinary corporate transaction occurs. A-7 In May 1997, the Board approved the establishment of stock ownership guidelines for Eligible Directors and executives to further strengthen the tie between executive officers, directors and the stockholders of the Company. The ownership level for Eligible Directors was set at three times the annual retainer fee, with the recommendation that the Eligible Directors meet this ownership guideline within a five year period based on beneficial ownership of Common Stock. Such guideline and suggested ownership levels are subject to annual review by the Compensation Committee. As of December 31, 1997, two of the six Eligible Directors had met the guideline. To encourage stock ownership opportunities, the Board also approved at its May 1997 meeting the Union Texas Petroleum Holdings, Inc. Deferred Compensation Plan, as amended and restated at its February 1998 meeting (the "Deferred Plan") to give key employees and directors the ability to defer compensation on an elective basis in the form of restricted shares of Common Stock or in phantom shares of Common Stock. Other options available for interest accrual on deferred amounts include a mutual fund program account and an interest account. Directors may defer up to 100% of their annual retainer fees, in increments of 25%. Ambassador Barry and Messrs. Gilhuly, Greene, Kravis, Michelson and Whitmire have elected to participate in the Deferred Plan for 1998. Executive Officers. Set forth below is the age at May 1, 1998 and certain other information concerning each person, including their principal occupations and positions for the past five years, currently serving as an executive officer of the Company. John L. Whitmire--Age 57, Chairman of the Board and Chief Executive Officer since January 1996. Mr. Whitmire has responsibility for the overall management of the Company. Mr. Whitmire served as Executive Vice President--Exploration and Production and as a director of Phillips Petroleum Company ("Phillips") from January 1994 to January 1996 when he retired. Prior thereto, Mr. Whitmire served in a number of executive capacities throughout his 30 year career with Phillips. William M. Krips--Age 58, Senior Vice President since May 1994, after having served as Senior Vice President Exploration and Production, Senior Vice President and General Manager--U.S. Exploration and Production, Senior Vice President and General Manager--Hydrocarbon Products Group and Vice President and General Manager--International Operations. Mr. Krips has responsibility for the Regional Business Units and Technical Services. Mr. Krips joined Allied in 1964, and served in a number of management positions in planning, financing, marketing and operations. Mr. Krips is also a member of the Management Board of Unimar Company, a partnership that is half owned by the Company, and a director of ENSTAR Corporation ("ENSTAR"), a corporation owned by Unimar Company, and of VICO 7.5, Inc., ENSTAR Indonesia, Inc., Virginia International Company and Virginia Indonesia Company, which entities are subsidiaries of ENSTAR. Arthur W. Peabody, Jr.--Age 55, Senior Vice President since May 1994, after having served as Senior Vice President--Exploration and Production, Senior Vice President and General Manager--Hydrocarbon Products Group, Vice President--Planning and Administration and Vice President--Acquisitions and Planning. Mr. Peabody has responsibility for Exploration, Acquisitions, Enhanced Production Ventures, Information Technology and Portfolio Management. Mr. Peabody is also a member of the Unimar Company Management Board, and a director of ENSTAR, ENSTAR Indonesia, Inc., VICO 7.5, Inc. and Virginia International Company, which entities are subsidiaries of ENSTAR. Mr. Peabody joined Allied in 1981 and, prior to assuming his current position, held various positions in management and in planning and development with Allied and thereafter with the Company. Larry D. Kalmbach--Age 46, Vice President and Chief Financial Officer since February 1995, after having served as Vice President--Finance and Vice President and Controller of the Company. Mr. Kalmbach has responsibility for Accounting, Tax, Treasury, Audit, Risk Management, Corporate Planning, Purchasing, Administration and Investor Relations. He joined the Company in 1974 and has held various financial management positions with the Company. He is also a member of the Unimar Company Management Board, and a director of ENSTAR and of VICO 7.5, Inc., Virginia International Company and Virginia Indonesia Company, which entities are subsidiaries of ENSTAR. A-8 Alan R. Crain, Jr.--Age 46, Vice President and General Counsel since May 1996, after having served as Assistant General Counsel from September 1988 until he assumed his current position. Mr. Crain has responsibility for Law, Commercial Negotiations, Government Affairs and Security. Mr. Crain joined the Company in March 1988. Richard A. Cunningham--Age 46, Regional Vice President since May 1996, after having served as General Manager Worldwide Business Development from September 1991 until he assumed his current position. Mr. Cunningham has responsibility for the Asia Pacific regional business unit. Mr. Cunningham joined the Company in 1981 and, prior to assuming his current position, held various positions in negotiations and business development as well as serving as President of VICO Indonesia. James E. Knight--Age 52, Regional Vice President since May 1996, after having served as Vice President, Technical Services from December 1991 until he assumed his current position. Mr. Knight has responsibility for the Europe, Middle East, Africa and Central Asia regional business unit. Mr. Knight joined the Company in 1980 and, prior to assuming his current position, held various positions in management in gas processing, engineering and international operations. Michael N. Markowitz--Age 51, Vice President and Treasurer since July 1985, after having served as Treasurer from August 1983 until he assumed his current position. Mr. Markowitz has responsibility for Treasury and Tax. Mr. Markowitz joined the Company in 1972 and, prior to assuming his current position, held various positions of increasing responsibility in tax and treasury. Donald M. McMullan--Age 49, Vice President and Controller since June 1993, after having served as Assistant Treasurer and Director Finance from July 1988 until he assumed his current position. Mr. McMullan has responsibility for Accounting and Corporate Planning. Mr. McMullan joined the Company in 1980 and, prior to assuming his current position, held various management positions in finance, treasury and acquisitions. Roger W. Pierce--Age 48, Vice President Exploration since May 1996, after having served as General Manager Exploration Operations from December 1994 until he assumed his current position. Mr. Pierce has responsibility for worldwide Exploration. Mr. Pierce joined the Company in 1976 and, prior to assuming his current position, held various positions in domestic and international exploration operations. Newton W. Wilson, III--Age 47, Regional Vice President since May 1996, after having served as General Counsel, Vice President--Administration and Secretary from January 1993 until he assumed his current position. Mr. Wilson has responsibility for the Americas regional business unit. Mr. Wilson joined the Company in 1985 as Vice President, General Counsel and Secretary. John M. Zimmerman--Age 51, Vice President--Investor Relations since May 1996, and Vice President--Planning and Investor Relations from April 1990 until he assumed his current position. Mr. Zimmerman joined the Company in April 1983. Certain of the executive officers also serve as directors of certain of the Company's subsidiaries and affiliates in addition to those named above. The Company's Bylaws provide that each officer shall hold office until the officer's successor is elected or appointed or until the officer's death, resignation or removal by the Board. A-9 EXECUTIVE COMPENSATION The following table sets forth information regarding aggregate cash compensation, stock option awards and other compensation earned by the Company's Chief Executive Officer and the four other most highly compensated executive officers for services rendered in all capacities to the Company and its subsidiaries in the years 1995 to 1997. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS -------------------------------------- ----------------------- NUMBER OF SECURITIES NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING OPTIONS/SARS ALL OTHER POSITION YEAR SALARY BONUS(1) COMPENSATION(2) GRANTED(3) COMPENSATION(4) ------------------ ---- -------- -------- --------------- ----------------------- --------------- John L. Whitmire........ 1997 $600,000 $600,000 -- 175,000 $48,000 Chairman of the Board 1996 $586,957 $565,500 $577,873(5) 345,000 $28,000 and Chief Executive Officer William M. Krips........ 1997 $324,000 $198,500 -- 61,000 $25,920 Senior Vice President 1996 $314,667 $205,300 -- 39,100 $25,173 1995 $305,000 $193,000 -- 39,100 $24,400 Arthur W. Peabody, Jr... 1997 $320,500 $198,500 -- 61,000 $25,640 Senior Vice President 1996 $310,000 $205,300 -- 39,100 $24,800 1995 $296,250 $193,000 -- 39,100 $23,700 Newton W. Wilson, III... 1997 $304,000 $197,100 -- 41,000 $24,320 Regional Vice President 1996 $294,667 $170,000 -- 31,600 $23,574 1995 $285,000 $170,000 -- 31,600 $22,800 Larry D. Kalmbach....... 1997 $272,000 $169,300 -- 37,000 $21,760 Vice President and 1996 $267,000 $154,900 -- 31,600 $21,360 Chief Financial Officer 1995 $255,833 $150,000 -- 31,600 $20,467
- -------- (1) Includes compensation under the Company's Incentive Compensation Plan (the "Incentive Compensation Plan"), which program is under the 1994 Incentive Plan and provides cash awards for executive officers and employees of the Company. Awards are paid currently in a lump sum or may be deferred pursuant to the Deferred Plan. No incentive compensation accrued in 1997, 1996 or 1995 was deferred by any of the executive officers to later years, except for the Chief Executive Officer who deferred 100% of his 1997 award into restricted shares of Common Stock under the Deferred Plan. (2) During each of the three years ended December 31, 1995, 1996 and 1997, perquisites for each individual named in the Summary Compensation Table, other than Mr. Whitmire in 1996, aggregated less than 10% of the total annual salary and bonus reported for such individual in the Summary Compensation Table, or $50,000, if lower. Accordingly, no such amounts are included in the Summary Compensation Table. (3) Each option granted included an equal number of stock appreciation rights ("SARs"). (4) Information in this column includes amounts contributed by the Company under the Company's Savings Plan for Salaried Employees (the "Savings Plan") and Supplemental Non-Qualified Savings Plan for Executive Employees (the "Supplemental Savings Plan"). The Company's matching contributions to the Savings Plan for 1997 were in the respective amounts of: $9,500.00 for Mr. Whitmire, $9,500.00 for Mr. Krips, $9,500.00 for Mr. Peabody, $8,486.64 for Mr. Wilson, and $9,500.00 for Mr. Kalmbach. The Company's matching contributions to the Supplemental Saving Plan for 1997 were in the respective amounts of: $38,500.00 for Mr. Whitmire; $16,420.00 for Mr. Krips; $16,140.01 for Mr. Peabody, $15,833.36 for Mr. Wilson, and $12,259.97 for Mr. Kalmbach. (5) Includes certain amounts in connection with Mr. Whitmire's employment in January 1996, including the purchase of Mr. Whitmire's home in Bartlesville, Oklahoma at its appraised value of $388,000 and special payment of $170,000 related to relocation to Houston, Texas by the Company. Pursuant to the authorization of the Company Board on May 3, 1998, John L. Whitmire, Chairman of the Board and Chief Executive Officer, will be paid on the date of consummation of the Offer in an amount of $5 million plus an excise tax gross-up amount. Pursuant to the same authorization, if Mr. Whitmire is terminated following consummation of the Offer, Mr. Whitmire will be provided office space and certain support services and benefits for three years and will be eligible for retiree medical coverage. At the same meeting, the Company Board authorized that all officers be offered financial planning and tax planning services for a two year period commencing on May 1, 1998. A-10 OPTION/SAR EXERCISES AND HOLDINGS The following table sets forth information with respect to the executive officers named in the Summary Compensation Table concerning the exercise of options and SARs during 1997 and unexercised options and SARs held as of the end of 1997, which includes grants made under the Company's 1985 and 1992 Stock Option Plans and the 1994 Incentive Plan. AGGREGATED OPTION/SAR EXERCISES IN 1997 AND OPTION/SAR VALUES AT DECEMBER 31, 1997
NUMBER OF SECURITIES VALUE OF UNEXERCISED NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS SECURITIES OPTIONS/SARS HELD AT 1997 HELD AT 1997 FISCAL UNDERLYING FISCAL YEAR-END YEAR-END(2) OPTIONS/SARS VALUE ------------------------- ------------------------- NAME EXERCISED REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ -------------- ----------- ------------- ----------- ------------- John L. Whitmire........ 0 $ 0 142,500 377,500 $158,203 $158,203 William M. Krips........ 31,330 $262,388.75 172,894 126,450 $502,257 $ 71,174 Arthur W. Peabody, Jr... 23,800 $299,075.00 192,494 126,450 $684,519 $ 71,174 Newton W. Wilson, III... 19,330 $166,117.21 138,958 93,900 $426,438 $ 57,522 Larry D. Kalmbach....... 0 $ 0 75,026 85,275 $163,409 $ 52,157
- -------- (1) Market value of the Company's Common Stock at the time of exercise, minus the exercise price, multiplied by the number of shares underlying the options or SARs exercised. (2) Value calculated by subtracting the exercise price from the market value of the Company's Common Stock on December 31 1997, which was $20.71875 based on the average of the high and low sales price on December 31, 1997 on the New York Stock Exchange, multiplied by the number of shares underlying the unexercised options or SARs. PENSION PLANS Certain employees of the Company, including each of its executive officers, are participants in the Company's Salaried Employees' Pension Plan (the "Pension Plan"). The table below illustrates the annual straight-life annuity benefits payable to an employee under the Pension Plan as if the employee were age 65 in 1997.
ESTIMATED ANNUAL PENSION BENEFIT FOR YEARS OF CREDITED SERVICE INDICATED --------------------------------------------------------------- AVERAGE 5 10 15 20 25 30 35 40 ANNUAL PAY YEARS YEARS YEARS YEARS YEARS YEARS YEARS YEARS ---------- ------- ------- ------- ------- ------- ------- ------- ------- $ 300,000..... 24,600 49,200 73,800 98,400 123,000 147,600 172,200 196,800 400,000..... 32,800 65,600 98,400 131,200 164,000 196,800 229,600 262,400 500,000..... 41,000 82,000 123,000 164,000 205,000 246,000 287,000 328,000 600,000..... 49,200 98,400 147,600 196,800 246,000 295,200 344,400 393,600 700,000..... 57,400 114,800 172,200 229,600 287,000 244,400 401,800 459,200 800,000..... 65,600 131,200 196,800 262,400 328,000 393,600 459,200 524,800 900,000..... 73,800 147,600 221,400 295,200 369,000 442,800 516,600 590,400 1,000,000..... 82,000 164,000 246,000 328,000 410,000 492,000 574,000 656,000 1,100,000..... 90,200 180,400 270,600 360,800 451,000 541,200 631,400 721,600 1,200,000..... 98,400 196,800 295,200 393,600 492,000 590,400 688,800 787,200 1,300,000..... 106,600 213,200 319,800 426,400 533,000 639,600 746,200 852,800 1,400,000..... 114,800 229,600 344,400 459,200 574,000 688,800 803,600 918,400 1,500,000..... 123,000 246,000 369,000 492,000 615,000 738,000 861,000 984,000
The Pension Plan is a noncontributory, tax-qualified plan and provides that the normal retirement age is 65. The benefits listed in the table above are not subject to any reduction for Social Security benefits or, with respect to the executive officers named in the Summary Compensation Table, for other offset amounts. The amount of pension payable at normal or later retirement under the Pension Plan is based on an employee's years of credited A-11 service and the employee's average pay (including salary, Incentive Compensation Plan payments that are not deferred, elective deferrals made under the Company's Savings Plan or Section 125 cafeteria plans, and severance pay (excluding officers), but excluding amounts deferred under a deferred compensation plan, income from an exercise of a stock option or SAR and certain other fringe benefits as specified in the Pension Plan) during the most highly paid five consecutive years of the employee's last ten years of employment. An employee who was employed by the Company on or after April 29, 1990, may elect to receive a lump sum payment at retirement in lieu of a pension. The Code places certain maximum limitations on the amount of benefits that may be payable under tax-qualified plans, such as the Pension Plan. Any excess over such maximum limitation calculated in accordance with the provisions of the Pension Plan will be paid separately by the Company through one or more unfunded excess benefit plans. Such excess benefit plans also provide benefits to certain employees in excess of those provided under the Pension Plan, based upon deferred compensation, severance pay and certain additional service that is not taken into account under the Pension Plan and to the extent the formula in effect for the Pension Plan prior to 1989 would produce a larger benefit than the current formula. Such additional benefits are calculated and included in the table above, with the exception of benefits related to the formula in effect prior to 1989 and a special supplemental benefit to Mr. Whitmire. In 1988, the Company adopted a trust pursuant to which the Company may, at its discretion, including in the event of a change of control, contribute amounts to the trust to provide for all or part of the benefits the Company is obligated to pay pursuant to the excess benefit plans. Any assets placed in the trust will remain subject to the general unsecured creditors of the Company. At December 31, 1997, the following individuals had the number of years of credited service indicated: Mr. Whitmire, 1; Mr. Krips, 33; Mr. Peabody, 16; Mr. Wilson, 12; and Mr. Kalmbach, 23. Mr. Whitmire is also entitled to receive a special supplemental benefit to ensure that he receives compensation for any loss of total pension benefit as a result of his retirement from his previous employer. A-12 STOCK PRICE PERFORMANCE GRAPH Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return (change in year-end stock price plus reinvested dividends) on the Company's Common Stock against the cumulative total return of the Standard & Poor's 500 Stock Index and the Dow Jones Secondary Oil Industry Index for the period of five years ended December 31, 1997. 1992 1993 1994 1995 1996 1997 - ----------------------------------------------------------------------------- United Texas 100.0 109.6 112.8 106.4 124.2 116.6 S&P 500 100.0 110.1 111.5 153.5 188.7 251.6 Dow Jones Secondary Oil 100.0 113.0 112.2 128.8 158.7 170.1 - ----------------------------------------------------------------------------- Assumes $100 invested December 31, 1992, in the Company's Common Stock, S&P 500 Stock Index and Dow Jones Secondary Oil Industry Index (dividends reinvested). There can be no assurance that the Company's stock performance will continue into the future with the same or similar trends depicted in the graph above. The Company will not make or endorse any predictions as to future stock performance. A-13 REPORT OF THE ORGANIZATION AND COMPENSATION COMMITTEE AND THE SECTION 16 COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION COMPENSATION PROGRAM The Company's compensation program for all executives, including the executive officers named in the Summary Compensation Table, is administered by the Compensation Committee and the Section 16 Committee of the Company's Board. The Compensation Committee currently consists of three members, all of who are non-employee directors and two of whom are affiliated with the KKR Partnerships, which collectively own approximately 25.6% of the Company's Common Stock. The Section 16 Committee currently consists of two members, both of whom are non-employee directors as defined under the Exchange Act, and approves grants of options, stock, stock appreciation rights and other types of awards to Section 16 Officers. Set forth below is a report collectively submitted by the Compensation Committee and the Section 16 Committee (collectively, the "Committees" and individually a "Committee") addressing the Company's executive compensation program for 1997. The Company's executive compensation program is designed to attract, motivate and retain executives critical to the long-term success of the Company. An important consideration in this philosophy is to relate the interests of the executive officers with those of the stockholders. In connection with this philosophy, the Compensation Committee approved a new compensation program for 1997, which places more emphasis on variable performance-based pay that is tied directly to the results of the Company. The new program strengthens, and the Company's proposed amendment to the 1994 Incentive Plan is intended to continue, the alignment between compensation and stockholder wealth creation. The program is composed of four elements: a base salary, an annual bonus, long-term incentives in the form of stock options, and a comprehensive benefits program. The goal of the new program for all employees, including executive officers, is to establish base salaries at the market median, target bonus opportunities at the 65th percentile and grant stock options to all employees. All employees participate in the Company's annual incentive compensation program, which is based entirely on the Company meeting predetermined financial and strategic goals as approved by the Compensation Committee. Individual personal objections for executive officers and other key employees have been eliminated. Specific award opportunities vary depending on the Company's performance level and the employee's salary grade. If the Company meets or exceeds its goals, then the expectation is that each employee's total direct compensation (i.e., salary, bonus and annualized long- term incentives) will be well above the market median (50th percentile). The Committees annually review the Company's executive compensation program on the basis of information provided by the Company, as well as studies, data and reports provided by independent consultants. Each component of the executive compensation program is described below. BASE SALARIES The objective of the Company's base salary program for key management positions is to provide its executives with base salary opportunities that are competitive with similar positions in companies similar in size to the Company, based on annual revenues (referred to in this report as "comparable companies"). In order to motivate and retain key executives critical to the long-term success of the Company, the Company has established certain practices in regard both to base salary and to the relationship of incentive bonus to predetermined performance-oriented goals for the Company. The base salaries established for 1997 for the executive officers of the Company were reviewed at the January meeting of the Compensation Committee. In setting such base salaries, the Compensation Committee reviewed compensation data for comparable companies, including a comparison of market compensation data from a December 1996 comprehensive study that included detailed market data regarding base salaries, annual incentives and long-term incentives, prepared by Towers Perrin, an independent consultant (the "Consultant Study"), and analyzed the Company's executive compensation program. The Consultant Study included data collected from nationally recognized private and A-14 published compensation surveys of energy and other industry companies of comparable size to the Company for fiscal year 1996, but did not necessarily include data from proxy statements published in 1996 for fiscal year 1995 for the companies included in the Dow Jones Secondary Oil Industry published index. The data obtained from the foregoing surveys is more reflective of competitive compensation among companies of similar size, based on annual revenues, than the data pertaining to companies included in the Dow Jones Secondary Oil Industry published index for purposes of the Company's Stock Price Performance Graph, which index includes several companies that are much larger and other companies that are smaller than the Company in terms of annual revenues. The energy and other industry survey data provide more detail about actual current compensation practices and levels to the Compensation Committee than information from proxy statements published in prior years. With the data collected, the Compensation Committee's objective for 1997 was to establish the executives' salary at the market median (50th percentile) and bonus opportunities at the 65th percentile in an effort to be competitive with compensation provided to executives at comparable companies. The Company believes it is crucial to provide strongly competitive salaries in order to attract and retain managers who are highly talented. The specific competitive markets considered depend on the nature and level of the particular positions and the labor markets from which qualified individuals would be recruited for such positions. Base salary levels also reflect the performance of each individual employee over time. Thus, employees with higher levels of performance sustained over time will be paid correspondingly higher salaries. The Chief Executive Officer and the senior human resources executive of the Company reviewed with the Compensation Committee a proposed 1997 salary plan for the Company's executive officers, following with the Compensation Committee approved the proposed plan at the January 1997 meeting. Three executive officers, including one of the executive officers named in the Summary Compensation Table, received salary increases at levels considered appropriate in view of the duties and scope of responsibilities of each such officer's position and were in a range generally consistent with the market median (50th percentile) of comparable companies. ANNUAL INCENTIVES The objective of the Company's annual incentive bonus, a pay-for-performance program under the 1994 Incentive Plan, is to motivate and reward individuals based on contributions to business results. The Compensation Committee administers the Company's incentive program, recommends to the Board the aggregate amount of incentive compensation and approves individual officer awards. The Board approves the aggregate amount of the incentive compensation awards to all participants. The annual bonus in 1997 was tied directly to the results of the Company and was based upon achievement of performance-oriented goals, 65% of which were financial measures and 35% of which were strategic objectives. These goals and their weightings were approved by the Compensation Committee at its January 1997 meeting. In addition, a target bonus was approved for each employee based on salary grade. The target is adjusted based on the Company's achievement of these goals. Annual bonus target as a percentage of salary ranged from 40% to 50% for each of the executive officers named in the Summary Compensation Table, except for the Chief Executive Officer. See "Chief Executive Officer Compensation" below. If the Company exceeds its goals, such executive officers may receive a maximum of up to 80% to 100% of their salary as their bonus and, conversely, such officers may receive a reduced bonus or no bonus payment if the Company does not attain the goals. Each employee's award, including for executive officers, can be adjusted up or down by as much as 25% depending on individual performance to allow the Company discretion in rewarding individual performance. For 1997, the financial measures considered in the incentive compensation program included net income, net cash flow, reserve replacement, total shareholder return and economic value added from reserves. The total shareholder return measure compared the Company's return relative to the return of the companies in the Dow Jones Secondary Oil Industry published index. Financial results were measured against predetermined target performance levels approved by the Compensation Committee. The remaining portion of the awards was based on the achievement of certain strategic objectives, which were performance-oriented goals that directly supported the Company's overall business objectives, which included the development of a risk balanced exploration A-15 portfolio, the initiation of a significant industry project, the development of enhanced production ventures, the acquisition of producing or developing reserves and the control of cash operating costs and expenses. The accomplishment of such measures and objectives, as well as other significant growth initiatives achieved during the year, was evaluated by the Chief Executive Officer. The results of this evaluation were reflected in a recommended award for each employee, including executive officers. All employees, including the executive officers, received a bonus on the basis of percentage award levels previously approved by the Compensation Committee at its January 1997 meeting. In certain cases, an award to an employee, including an officer, was adjusted upward or downward by senior management, as much as 25% in either direction, to allow senior management discretion in rewarding performance. These adjustments were subject to approval by the Chief Executive Officer, and with respect to adjustments to awards for officers, approval by the Compensation Committee. The Chief Executive Officer reviewed all of the calculated awards for certain key salaried employees, including officers, adjusted such awards as he deemed appropriate and reviewed with the Compensation Committee at the February 1998 meeting a list of recommended awards for all officers of the Company. Bonuses as a percentage of salary ranged from 61% to 65% for each of the officers named in the Summary compensation Table, excluding the Chief Executive Officer. See "Chief Executive Officer Compensation" below. Such awards were above target because the Company on a weighted completion basis exceeded its financial measures and strategic objectives in 1997. The awards resulted in total cash compensation (base salary plus bonus) for executive officers generally reflective of the 65th percentile of comparable companies. LONG-TERM INCENTIVES Another important consideration in the compensation philosophy of the Company is to align the interests of the directors, key executive officers and employees with the long-term interests of the stockholders of the Company. The 1994 Incentive Plan provides authority for the Committees to use a range of long-term incentive awards in various forms as part of the company's overall compensation program. In connection with this philosophy, the Company historically has attempted to periodically award its employees with the stock options whose value depends upon an increase in the value of the Common Stock of the Company. The use of stock options is an integral part of the entire compensation package of the employees of the Company, which also serves as a pay-for-performance plan. Through providing the executives an opportunity for stock ownership, stock options reward executives, on the basis of the Company's future performance reflected in increased stock price, for long-term service to the Company and for enhancing shareholder value. Accordingly, the long-term stock options are granted to vest over time without regard to the number of options held currently by each executive officer on the date of grant. By working to increase the Company's stock value, one of the Company's performance goals is met, and the executives and employees are likewise compensated through increased option value. See "Director Compensation." On October 23, 1997, the Committees granted a total of 1,613,200 stock options pursuant to the 1994 Incentive Plan, which plan was previously approved by the stockholders. Options were received by all U.S.-based employees, including the named executive officers as described in the Summary Compensation Table and the Option/SAR Grants in 1997 Table. The option exercise price is equal to the fair market value of the stock on October 23, 1997, the date of the grants. The 1997 option grants vest at a rate of 25% per year beginning one year after the grant date. Consistent with the Company's objective that each employee's total direct compensation be well above the market median, the Committees' overall stock option grant guidelines for employees, including officers were generally to position grants at the 75th percentile of the competitors. At its October 1997 meeting, the Committees reviewed a September 1997 update of the Consultant Study and analyzed the executive compensation program. The results of the updated study indicated that the officers total direct compensation levels were generally competitive with the 65th percentile of the market. A history of stock options granted to officers from 1985 to such October 1997 meeting was also provided. The number of shares subject to option A-16 grants varied based on job grade classification. In recognition of the success of the Company in implementing the Company's growth strategies, the 1997 stock option grants were at the market 75th percentile, except for the Chief Executive Officer. See "Chief Executive Officer Compensation" below. Consistent with the Company's philosophy that compensation should be significantly aligned to stockholder value, the Committees have proposed the Amended 1994 Plan for stockholder approval. A copy of the plan document is provided as Appendix A to this Proxy Statement. The proposed amendment increases the number of shares of Common Stock available for award from four million to a total of eight million. If the Amended 1994 Plan is approved by the stockholders, grants of stock options or other awards will allow the Committees to continue to use stock options under such plan as a long-term incentive to motivate, attract and retain high-quality executive talent. STOCK OWNERSHIP PHILOSOPHY To further strengthen the tie between directors, key executive officers and the long-term interests of stockholders, the Compensation committee at its May 1997 meeting approved a program designed to build stock ownership among the directors and key executive officers. The various aspects of the program are discussed below. First, stock ownership guidelines were established for officers and Eligible Directors. Guidelines for the Chief Executive Officer were set at three times his annual salary, and for other officers at two or one times their annual salary, depending on position, with the expectation that the executives would attain their respective ownership levels within a five year period. The guidelines and each officer's individual ownership level in relationship with the guidelines are reviewed with the Compensation Committee annually. As of December 31, 1997, each of the executive officers in the Summary Compensation Table, except the Chief Executive Officer and Chief Financial Officer, have met the applicable guidelines; however, as of the date of this report, the Chief Executive Officer has met the guidelines with the deferral of his 1997 incentive bonus into restricted shares of the Company's Common Stock pursuant to the Deferred Plan. See "Chief Executive Officer Compensation" below. Second, the Committees approved the adoption of a non-qualified deferred compensation plan (the "Deferred Plan") to provide the opportunity for directors to defer up to 100% of their annual retainer fee in increments of 25%, officers and certain key employees to defer up to 50% of their base salaries in increments of 10% and key employees, including officers, to defer up to 100% of their annual incentive awards in increments of 25%. In addition, to provide more opportunities to build personal stock ownership, officers, key employees and directors are eligible to defer a portion or all of their annual incentive award and annual retainer fee, respectively, into restricted shares of the Company's Common Stock. Restrictions on the shares of stock received lapse at a rate no more quickly than 25% per year from the award date. In addition to the restricted share option election, participants in the Deferred Plan are allowed to select one of the following interest accrual options: Company phantom stock account, mutual funds program account or an interest account. A trust was established to secure these deferred compensation amounts. Any assets placed in the trust will remain subject to the general unsecured creditors of the Company. Currently, Mr. Whitmire has elected to participate in the Deferred Plan for 1998. OTHER COMPENSATION PROGRAMS AND POLICIES Another aspect of the Company's compensation package is to encourage employees to save for the future through the Savings Plan. The Savings Plan permits most regular salaried employees of the Company to contribute a percentage of their annual base salary to the Savings Plan on a before-tax basis. A participant's contributions to the Savings Plan are matched by the Company. Generally, the Company's basic matching contribution is an amount equal to 100% of the first 8% of the participant's base salary contributed to the Savings Plan, which 8% is referred to as the participant's basic contribution. To encourage alignment of the employees' and stockholders' long- term financial interests, all of the Company's contributions to the Savings Plan are A-17 invested in the Company's Common Stock, and participants may elect to invest their contributions in ten investment funds, including the one invested in the Company's Common Stock. The Code places certain maximum limitations on the amount of contributions which otherwise could be contributed to the Savings Plan. Highly compensated participants limited by such provisions, which include all of the executive officers, may contribute to the Supplemental Savings Plan and have their contributions matched by the Company in cash in accordance with the terms of the Supplemental Savings Plan. The Supplemental Savings Plan is unfunded, and benefits are paid from the general assets of the Company. Company contributions to the Supplemental Savings Plan in 1997 were $214,985.07, and 1997 contributions of $214,985.07 were made by the participants. See the Summary Compensation Table for information with respect to each named executive officer. The Company has certain broad-based employee benefit plans in which all employees, including the executives, participate, such as life and health insurance plans and the company's Matching Gifts Program, under which program the Company currently will match a maximum of $10,000 of gifts by employees and directors to eligible institutions per participant per year. Also, the executives of the Company are provided director and officer insurance coverage. The incremental cost to the Company of the executives' benefits provided under these plans is not material to the Company. For employee participants (which include all of the executive officers) whose benefits under the Savings Plan or Pension Plan are reduced or restricted due to tax law limits, the Company has applicable excess supplemental benefit plans. Benefits under these plans are not directly or indirectly tied to Company performance. Section 162(m) of the Code limits the tax deduction that the Company may take with respect to the compensation of certain executive officers, unless the compensation is "performance based" as defined in the Code. The Company's 1997 executive compensation, other than with respect to the Chief Executive Officer, was within the provisions for the $1 million deductibility cap set forth in Section 162(m) of the Code. Stock options granted under the 1992 Stock Option Plan and the 1994 Incentive Plan are intended to qualify for exemption from the cap. To the extent a committee has discretion in its decision making that is not permissible under the Code, certain awards such as annual incentive bonuses will not meet the requirement of deductibility under the Code. The Committees intend to continue to monitor developments under the tax law and consider actions that may be taken in the future that would enable any compensation in excess of $1 million paid to its executives who are "covered persons" under the provisions of Section 162(m) will be paid without regard to the limitation on deductibility thereunder. CHIEF EXECUTIVE OFFICER COMPENSATION Mr. Whitmire participates in the same compensation program as do the other executives of the Company. In accordance with the discussion above of the Company's philosophy for executive compensation, a significant portion of the compensation for the Chief Executive Officer is based upon the Company's performance. Mr. Whitmire's annual base salary remained at $600,000 for 1997 and his annual cash bonus target under the Company's incentive compensation program was 70% of his base salary. On October 23, 1997, Mr. Whitmire was granted options to purchase 175,000 shares of Common Stock at $23.03125 per share under the 1994 Incentive Plan. Such grant was above the 75th percentile of the market to reflect his significant contribution to the Company over the past year in advancing the various growth strategies of the Company. Mr. Whitmire currently owns 85,388 shares of Company Common Stock and has been granted a total of 520,000 stock options. Mr. Whitmire also will receive a special supplemental benefit to ensure that he receives compensation for any loss of total pension benefit as a result of his early retirement from his former employer to become the Chief Executive Officer of the Company. Mr. Whitmire's discretionary annual incentive bonus for 1997 was $600,000, which was 100% of his base salary and approximated 50% of his combined bonus and salary compensation for 1997. His annual incentive compensation was based on the achievement of financial and strategic objectives by the Company, as described above. The Compensation Committee evaluated the attainment of the Company's financial and strategic objectives and approved Mr. Whitmire's 1997 bonus. His award was above target because the Company A-18 exceeded on a weighted completion basis its financial measures and strategic objectives in 1997. The Committee also approved an upward adjustment to his award to reward Mr. Whitmire's performance over the past year. Mr. Whitmire elected to defer all of his 1997 incentive bonus into restricted shares of Common Stock pursuant to the Deferred Plan. Also, Mr. Whitmire participated in the Supplemental Savings Plan as reflected in the Summary Compensation Table. Mr. Whitmire's compensation in excess of $1 million for 1997 did not qualify for deductibility under the provisions of Section 162(m) of the Code. Since the Compensation Committee applied discretion to its decision making for 1997 awards that is not permissible under the Code, its annual incentive bonus to Mr. Whitmire did not and was not intended to meet the requirements for deductibility under the Code. The Compensation Committee believes the payment of the annual incentive bonus was in the best interests of the Company. Although the excess amount was not deductible, it was not material. The report of the Committees shall not be deemed incorporated by reference by any general statement incorporating by reference the 1998 Proxy Statement into any filing under the Securities Act or under the Exchange Act, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts. Organization and Compensation Committee: Edward A. Gilhuly Michael W. Michelson Richard R. Shinn Section 16 Committee: Glenn A. Cox Richard R. Shinn February 26, 1998 SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file initial reports of ownership and reports of changes in ownership (Forms 3, 4 and 5) of Common Stock and other equity securities of the Company with the SEC and the New York Stock Exchange. Officers, directors and greater-than-10% beneficial holders are required by SEC regulation to furnish the Company with copies of all such forms that they file. To the Company's knowledge, based solely on the Company's review of the copies of such reports received by the Company and, if applicable, written representations from certain reporting persons, that no reports on Form 5 were required. The Company believes that during the fiscal year ended December 31, 1997, its officers, directors and greater-than-10% beneficial owners complied with all applicable Section 16(a) filing requirements. A-19 SCHEDULE I SUB DESIGNEES The name, business address, present principal occupation or employment and employment history of each of the Sub Designees designated by Sub to serve on the Company's Board are set forth below. All such Sub Designees are citizens of the United States. Unless otherwise indicated, the principal business address of each Sub Designee is Atlantic Richfield Company, 515 South Flower Street, Los Angeles 90071.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; NAME, AGE AND BUSINESS ADDRESSMATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS --------------------------------------------------------------------------------
William E. Wade, Jr. (55).... President of ARCO since January 1998. Mr. Wade was a director of ARCO from June 1993 to May 1998. Mr. Wade served as an Executive Vice President from June 1993 to January 1998 and a Senior Vice President of ARCO from May 1987 to May 1993, President of ARCO Oil and Gas Company from October 1990 to May 1993, President of ARCO Alaska, Inc. from July 1987 to July 1990, a Vice President of ARCO from 1985 to 1987 and a Vice President of ARCO Exploration Company from 1981 to 1985. Mr. Wade has been an officer of ARCO since 1985. Mr. Wade also serves as a Director of Vastar Resources, Inc. Marie L. Knowles (51)........ Executive Vice President and Chief Financial Officer of ARCO since July 1996. Mrs. Knowles was a director of ARCO from July 1996 to May 1998. Mrs. Knowles served as a Senior Vice President of ARCO and President of ARCO Transportation Company from June 1993 to July 1996, Vice President and Controller of ARCO from July 1990 to May 1993, Vice President of Finance, Control and Planning of ARCO International Oil and Gas Company from July 1988 to July 1990, and Assistant Treasurer of Banking of ARCO from October 1986 to July 1988. Mrs. Knowles has been an officer of ARCO since 1990. Mrs. Knowles also serves as a Director of ARCO Chemical Company and Vastar Resources, Inc. Michael E. Wiley (47)........ Executive Vice President of ARCO since March 1997. Mr. Wiley was a director of ARCO from June 1997 to May 1998. Mr. Wiley served as Chief Executive Officer of Vastar Resources, Inc. from January 1994 to March 1997 and President from September 1993 to March 1997. Prior to the formation of Vastar Resources, Inc., Mr. Wiley was Senior Vice President of ARCO from June 1993 to June 1994, President of ARCO Oil and Gas Company from June 1993 to October 1993 and Vice President of ARCO and Manager of ARCO Exploration and Production Technology from 1991 to 1993. Mr. Wiley has been an officer of ARCO since 1997. Mr. Wiley also serves as Chairman of the Board of Vastar Resources, Inc. Donald R. Voelte, Jr. (45)... Senior Vice President of ARCO since April 1997. Mr. Voelte previously worked for the Mobil Corporation for 22 years. Mr. Voelte's most recent position was President of Mobil Oil Company's New Exploration and Producing Ventures from 1994 to April 1997. Mr. Voelte has been an officer of ARCO since 1997. EX-99.(A)(1) 2 RECOMMENDATION LETTER TO STOCKHOLDERS EXHIBIT (A)(1) [LOGO] UNION TEXAS PETROLEUM 1330 Post Oak Boulevard (77056) P.O. Box 2120 Houston, Texas 77252-2120 Telephone (713) 968-2752 Facsimile (713) 968-2720 JOHN WHITMIRE Chairman and Chief Executive Officer May 8, 1998 Dear Stockholder: On May 4, 1998, Union Texas Petroleum Holdings, Inc. (the "Company"), Atlantic Richfield Company ("ARCO") and VWK Acquisition Corp. (the "Purchaser"), a wholly-owned subsidiary of ARCO, entered into a merger agreement providing for the acquisition of all of the issued and outstanding shares of the Common Stock, par value $.05 per share, of the Company at $29.00 cash per share. The Purchaser has today commenced a cash tender offer for all outstanding shares of Common Stock at a price of $29.00 net per share. The tender offer is conditioned, among other things, upon a majority of the outstanding shares being validly tendered. The merger agreement provides that, following the tender offer, all shares of the Common Stock of the Company which are not acquired through the tender offer will be acquired through a merger at the same $29.00 cash price. At a meeting on May 3, 1998, your Board of Directors unanimously approved the tender and the merger and unanimously recommended that stockholders accept the offer. Enclosed for your consideration are copies of the tender offer materials and the Company's Schedule 14D-9, which are being filed today with the Securities and Exchange Commission. These documents should be read carefully. In particular, I call your attention to Item 4 of the enclosed Schedule 14D-9, which describes both the reasons for the Board's recommendation and certain additional factors that stockholders may wish to consider before taking action with respect to the offer. Your Board of Directors believes that the proposed acquisition of the Company by ARCO is fair and in the best interests of our stockholders. Each principal executive officer and director of the Company currently intends to tender their shares for purchase by ARCO (except for shares that are subject to certain restrictions) and, if a stockholder vote is required, to vote in favor of the merger. Sincerely, /s/ John L. Whitmire John L. Whitmire Chairman of the Board EX-99.(A)(2) 3 PRESS RELEASE ANNOUNCING THE MERGER AND OFFER EXHIBIT (A)(2) - -------------------------------------------------------------------------------- LOGO UNION TEXAS PETROLEUM NEWS RELEASE - -------------------------------------------------------------------------------- FOR IMMEDIATE RELEASE May 4, 1998 ARCO ANNOUNCES MERGER AGREEMENT WITH UNION TEXAS PETROLEUM $3.3 BILLION DEAL SUBSTANTIALLY INCREASES ARCO'S INTERNATIONAL PRODUCTION AND RESERVES KKR, CONTROLLING 25.6% OF UNION TEXAS STOCK, SIGNS COMMITMENT TO TENDER UNION TEXAS INTEREST TO ARCO LOS ANGELES AND HOUSTON - ARCO (NYSE: ARC) and Union Texas Petroleum (NYSE: UTH) announced today that they have signed a definitive merger agreement under which ARCO will acquire for cash all outstanding shares of Union Texas common stock for $29 per share in a transaction valued at approximately $3.3 billion, including debt and preferred stock of Union Texas. The agreement was approved unanimously by the Boards of Directors of both companies. In connection with the transaction, ARCO has obtained a commitment from Kohlberg Kravis Roberts & Co. to tender its holdings of 25.6 percent of the outstanding Union Texas common shares pursuant to the tender offer. ARCO Chairman and Chief Executive Officer Mike R. Bowlin called the agreement "an important building block" for the company. "This acquisition is consistent with our strategy of building scale and presence in 5 to 6 core producing areas as a means of creating shareholder value," Bowlin added. "Over 90 percent of Union Texas' assets are located in ARCO's core producing areas, specifically Venezuela, Indonesia, the North Sea and Alaska. The combination of the two companies solidifies ARCO's position as a significant player in those regions and is another step toward accomplishing our goal of becoming a great global player." Bowlin noted that "the transaction is especially attractive to ARCO because of the exceptional degree of overlap between the assets of the two companies and the ability to implement significant cost reductions as a consequence." Bowlin said he expects the combination to eventually yield after- tax cost savings of at least $85 million per year. The transaction will immediately add 140,000 barrels per day of oil equivalent (BOE) to ARCO's production. Union Texas expects strong production growth over the near term from assets such as the Britannia field in the North Sea, the Boqueron and DZO concessions in Venezuela, and the Alpine field in Alaska. The transaction will also add 573 million barrels of proved reserves for a gross cost of $5.76 per BOE. ARCO estimates it is paying approximately $5 per proved BOE based on costs attributable to producing oil and gas assets. In addition, probable and possible reserves also have been identified for future development. "In addition to strengthening our core areas," Bowlin noted, "Union Texas offers several new venture options to ARCO, ranging from its long- established operations in Pakistan to its growing position in Kazakhstan and Azerbaijan in the Caspian region. Finally, Union Texas' long-term experience in Indonesia's LNG business should prove valuable as we continue development and marketing of ARCO's Tangguh gas reserves discovered last year." John Whitmire, Chairman and Chief Executive Officer of Union Texas, said that "ARCO's tender offer reflects the proven value and potential of Union Texas Petroleum. Over the past two years, Union Texas' management team and our employees around the world have made significant progress in creating exciting growth prospects for our company in areas such as Venezuela, Kazakhstan, China and Northern Africa. I believe it was Union Texas' growth performance that attracted ARCO to our organization." Bowlin said he expects the acquisition to be accretive to operating cash flow in the first year and only modestly dilutive to earnings through next year. He noted that there is little downside risk in this transaction as Union Texas' production from known resources is rising and the cost reductions anticipated are totally within ARCO's control. ARCO expects the tender offer will be completed by the end of the company's second quarter. ARCO plans to finance the transaction using commercial paper and other short-term borrowings backed by existing and additional bank facilities. Under the terms of the merger agreement, ARCO will commence an all-cash tender offer for all of Union Texas' outstanding common stock on or prior to May 8, 1998. Any shares not purchased in the tender offer will be acquired for $29 per share in cash pursuant to a merger after completion of the tender offer. As of March 31, 1998, Union Texas had approximately 85.25 million shares outstanding. The transaction is subject to usual closing conditions, including regulatory approvals. Union Texas Petroleum is a Houston-based oil and gas company with 1997 sales of $909 million and assets of $2.0 billion. In addition to its Caspian Sea exploration projects and major operations in Indonesia, the North Sea and Venezuela, the company also has operations in Pakistan, where it produces approximately 45 percent of the country domestic oil output. ARCO is a Los Angeles-based integrated oil and gas company with 1997 earnings of $1.8 billion and global assets of $25.3 billion. Worldwide operations include all aspects of exploration, production and marketing of crude oil, natural gas, and natural gas liquids, as well as refining, marketing and transportation of petroleum products. ARCO is also the majority owner of ARCO Chemical Company. ### [Some of the matters discussed in this news release are foward-looking statements that involve risks and uncertainties. Actual results could differ materially based on numerous factors, including the realized level of crude oil and natural gas production and other risks detailed from time to time in the company's SEC reports, including the 1997 report on Form 10-K.] For information call: ARCO: (Media) Albert Greenstein, 213-486-3384; (Investors) Dennis Schiffel, 213-486-1511 UTP: (Media) Carol Cox, 713-968-2714; (Investors) John Zimmerrnan, 713-963-2740 ARCO-UNION TEXAS PERSPECTIVES - -------------------------------------------------------------------------------- ASSETS UTP total proved reserves: 573 million barrels of oil equivalent (BOE) of which 25% is from the United Kingdom, 37% from Indonesia, 27% from Venezuela, 5% from Pakistan, and 6% from Alaska. 1997 UTP production was 44 million BOE (51% natural gas), which is expected to increase with development of operations in Venezuela, the Britannia field in the U.K., and the Alpine field in Alaska. ARCO-UTP SYNERGY U.K. NORTH SEA: Adds to ARCO's growing presence in the Central North Sea. - -------------- Britannia (9.42% interest), one of the largest gas and condensate projects in the U.K., is expected to begin production in August, 1998. Net proved reserves are 54 million BOE. The Alba oil field (15.5%) overlies the Britannia field with 34 million BOE reserves. The Piper/Claymore and associated satellite fields (20% interest) add 33 million BOE of reserves. UTP's 25% interest in the Sean peak shaver fields enhances ARCO's strong presence in the Southern Gas Basin with 20 million BOE reserves. 1997 average net production from the U.K as a whole was 49,000 BOE per day. INDONESIA: Enhances ARCO's current oil and gas operations and fits with ARCO's - ---------- Tangguh LNG project scheduled for startup in 2003/2004. UTP operations include a 37.8% interest (26.25% direct, 11.56% indirect through Unimar) in the Sanga Sanga production sharing contract (PSC) with production supplying the Bontang LNG plant. UTP has a 50% interest in Unimar whose subsidiary VICO operates the Bontang PSC and is part operator of the Bontang LNG facility. Proved reserves were 219 million BOE at the end of 1997 while average net production was 57,000 BOE per day. VENEZUELA: Builds upon ARCO's Hamaca project and third reactivation round - --------- fields. Operator of the DZO unit (100%). In addition, UTP expects to take operatorship of the Boqueron field later this year. Boqueron has 40 million barrels of reserves while the DZO has 114 million barrels. Net production is currently 27,000 BOE per day from the DZO. PAKISTAN: Adds scope to ARCO's current portfolio. UTP is operator with 30% - -------- equity in oil and gas production from 35 fields in the Badin areas in southeastern Pakistan. Proved reserves are 27 million BOE at the end of 1997 while average net production was 13,000 BOE per day. ALASKA: Increases ARCO's 56% interest in the Alpine field by 22%. Total field - ------ reserves are estimated at 365 million barrels. UTP's share of proved reserves is 32 million BOE. EXPLORATION UTP has attractive ventures in Kazakhstan and Azerbaijan. ARCO, through its LUKARCO joint venture partnership with LUKOIL, has a 12.5% interest in the Caspian Pipeline Consortium and a 5% interest in the Tengiz oil field in Kazakhstan. Other UTP prospects are in Trinidad, Tunisia, Papua New Guinea, Italy, China, Greece, Yemen, Jordan, Bolivia, and Egypt, and Algeria. ARCO operates a crude oil upgrade project at the Rhourde el Baguel field in Algeria. PETROCHEMICALS UTP has a 41% interest and operates an olefins plant in Louisiana. Interests also include related natural gas liquids plant, pipelines and storage. - ------------------------------------------------------------------------ As of December 1997 ARCO UTP COMBINED - ------------------------------------------------------------------------ Financial - --------- Revenues ($MM) 19,272 933 20,205 Net Income ($MM) 1,771 136 1,907 Cash from Operations ($M) 3,722 272 3,994 Production Oil (mbbl/d) 641 58 699 Gas (mmcf/d) 1,910 365 2,275 Combined (mboepd) 959 119 1,077 % International 23% 100% 32% Reserves Oil (mmbl) 2,699 296* 2,995 Gas (bcf) 8,472 1,605 10,077 Combined (mmboe) 4,111 573 4,684 % International 27% 94% 35% - ------------------------------------------------------------------------ * Including acquisition of Desarrollo Zulia Occidental (DZO) in February 1998 - ------------------------------------------------------------------------ EX-99.(A)(3) 4 OPINION OF SALOMON SMITH BARNEY EXHIBIT (A)(3) LOGO May 3, 1998 Board of Directors Union Texas Petroleum Holdings, Inc. 1330 Post Oak Boulevard P.O. Box 2120 Houston, Texas 77056 Members of the Board: You have requested our opinion as investment bankers as to the fairness, from a financial point of view, to the holders of shares of common stock, par value $0.05 per share ("Company Common Stock") of Union Texas Petroleum Holdings, Inc. (the "Company") of the consideration to be received by such holders in the proposed acquisition of the Company by Atlantic Richfield Company ("Acquiror") pursuant to the Agreement and Plan of Merger (the "Agreement"), dated May 3, 1998, among Acquiror, VWK Acquisition Corp. ("Sub") and the Company. As more specifically set forth in the Agreement, Sub will commence a tender offer (the "Proposed Tender Offer") to purchase all outstanding shares of Company Common Stock at a price of $29.00 per share. Following consummation of the Proposed Tender Offer, Sub will be merged with and into the Company (or, at the election of Acquiror, the Company will be merged with and into Sub) (the "Proposed Merger" and, collectively with the Proposed Tender Offer, the "Proposed Transaction") and each then outstanding share of Company Common Stock (other than shares held in the treasury of the Company, shares owned by Acquiror, Sub or any other wholly owned subsidiary of Acquiror or of the Company, and shares as to which appraisal rights have been properly exercised under applicable law) will be converted into the right to receive, in cash, the amount paid for a share of Company Common Stock pursuant to the Proposed Tender Offer. In connection with rendering our opinion, we have reviewed and analyzed material bearing upon the financial and operating condition and prospects of the Company including, among other things, the following: (i) the final draft of each of the Agreement and the stockholder's agreement between Acquiror and the Company's principal stockholder; (ii) certain publicly available information concerning the Company, including the Annual Report on Form 10-K of the Company for the period ended December 31, 1997 and the amendment thereto and the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 1998; (iii) certain internal information of the Company, primarily financial in nature, including projections, concerning the business and operations of the Company furnished to us by the Company for purposes of our analysis; (iv) certain publicly available information concerning the trading of, and the trading market for, the Company Common Stock; (v) certain publicly available information with respect to certain publicly traded companies that we believe to be comparable to the Company and the trading markets for certain of such other companies' securities; and (vi) certain publicly available information concerning the nature and terms of certain other transactions that we consider relevant to our inquiry. We have also considered such other information, financial studies, analyses, investigations and financial, economic and market criteria that we deemed relevant. We have also discussed the foregoing, as well as other matters we believe relevant to our inquiry, with the management of the Company. In our review and analysis and in arriving at our opinion, we have assumed and relied upon the accuracy and completeness of all of the financial and other information provided to us or publicly available and have neither attempted independently to verify nor assumed any responsibility for verifying any of such information and have further relied upon the assurance of management of the Company that they are not aware of any facts that would make any of such information inaccurate or misleading. We have not conducted a physical inspection SALOMON BROTHERS INC Seven World Trade Center New York NY 10048 of any of the properties or facilities of the Company, nor have we made or obtained or assumed any responsibility for making or obtaining any independent evaluations or appraisals of any of such properties or facilities, nor have we been furnished with any such evaluations or appraisals. With respect to projections, we have been advised by management of the Company that such projections were reasonably prepared on bases reflecting the best currently available estimates and judgment of the Company's management as to the future financial performance of the Company and we express no view with respect to such projections or the assumptions on which they were based. We have also assumed that the definitive Agreement will not, when executed, contain any terms or conditions that differ materially from the terms and conditions contained in the draft of such document we have reviewed and that the Proposed Transaction will be consummated in a timely manner and in accordance with the terms of the Agreement. In conducting our analysis and arriving at our opinion as expressed herein, we have considered such financial and other factors as we have deemed appropriate under the circumstances including, among others, the following: (i) the historical and current financial position and results of operations of the Company; (ii) the business prospects of the Company; (iii) the historical and current market for the Company Common Stock and for the equity securities of certain other companies that we believe to be comparable to the Company; and (iv) the nature and terms of certain other acquisition transactions that we believe to be relevant. We have also taken into account our assessment of general economic, market and financial conditions as well as our experience in connection with similar transactions and securities valuation generally. We have also considered the process that resulted in the negotiation of the Agreement, including discussions with certain other potential acquirors. Our opinion necessarily is based upon conditions as they exist and can be evaluated on the date hereof and we assume no responsibility to update or revise our opinion based upon circumstances or events occurring after the date hereof. Our opinion is, in any event, limited to the fairness, from a financial point of view, of the consideration to be received by the holders of Company Common Stock in the Proposed Transaction and does not address the Company's underlying business decision to effect the Proposed Transaction or constitute a recommendation to any holder of Company Common Stock as to whether such holder should tender such stock in the Proposed Tender Offer or as to how such holder should vote with respect to the Proposed Merger. As you are aware, Salomon Brothers Inc, now doing business as Salomon Smith Barney (collectively with all other entities doing business as Salomon Smith Barney, "Salomon Smith Barney"), is acting as financial advisor to the Company in connection with the Proposed Transaction and will receive a fee for its services, a substantial portion of which is contingent upon consummation of the Proposed Transaction. Additionally, Salomon Smith Barney or its affiliates have previously rendered certain investment banking and financial advisory services to the Company and Acquiror and certain of its affiliates, for which we received customary compensation. In addition, in the ordinary course of our business, Salomon Smith Barney may actively trade the debt and equity securities of the Company for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. Salomon Smith Barney and its affiliates (including Travelers Group Inc.) may have other business relationships with the Company or Acquiror. This opinion is intended for the benefit and use of the Company (including its management and directors) in considering the transaction to which it relates and may not be used by the Company for any other purpose or reproduced, disseminated, quoted or referred to by the Company at any time, in any manner or for any purpose, without the prior written consent of Salomon Smith Barney. Based upon and subject to the foregoing, it is our opinion as investment bankers that, as of the date hereof, the consideration to be received by the holders of Company Common Stock in the Proposed Transaction is fair, from a financial point of view, to such holders. Very truly yours, /s/ Salomon Smith Barney Salomon Smith Barney EX-99.(A)(4) 5 OPINION OF PETRIE PARKMAN EXHIBIT (a)(4) LOGO May 3, 1998 The Board of Directors Union Texas Petroleum Holdings, Inc. 1330 Post Oak Boulevard Houston, Texas 77056 Members of the Board: Atlantic Richfield Company, a Delaware corporation ("Parent"), VWK Acquisition Corp., a Delaware corporation ("Sub"), and Union Texas Petroleum Holdings, Inc., a Delaware corporation (the "Company"), propose to enter into an agreement and plan of merger (the "Merger Agreement"), which provides for, among other things, the tender offer (the "Offer") by Sub for all of the issued and outstanding shares of common stock, par value $.05 per share (the "Shares"), of the Company at $29.00 per Share, net to the seller in cash, and the merger (the "Merger") of Sub with and into the Company, as a result of which the Company will become a wholly owned subsidiary of Parent. Upon consummation of the Merger, each Share (other than Shares owned by the Company, Sub, Parent or any wholly-owned subsidiary of the Company, Sub or Parent) will be converted into the right to receive $29.00 in cash. You have requested our opinion as to whether the per Share consideration to be received by the holders of the Shares in the Offer and the Merger is fair from a financial point of view to such holders. In arriving at our opinion, we have, among other things: 1.reviewed certain publicly available business and financial information relating to the Company, including (a) the Annual Reports on Form 10-K and related audited financial statements for the fiscal years ended December 31, 1996 and December 31, 1997 and (b) the Quarterly Report on Form 10-Q and related unaudited financial statements for the fiscal quarter ended March 31, 1998; 2.reviewed estimates of the Company's oil and gas reserves prepared by (a) DeGolyer & MacNaughton ("D&M") as of January 1, 1997 and January 1, 1998 and (b) the management and staff of the Company as of December 31, 1996, December 31, 1997 and March 31, 1998; 3.analyzed certain historical and projected financial and operating data of the Company prepared by the management and staff of the Company; 4.discussed the current and projected operations and prospects of the Company with the management and staff of the Company; 5.reviewed the historical trading history of the Shares; 6.compared recent stock market capitalization indicators for the Company with the recent stock market capitalization indicators for certain other publicly traded independent energy companies; 7.compared the financial terms of the Offer and the Merger with the financial terms of certain other transactions that we deemed to be relevant; 8.reviewed drafts dated May 2, 1998 of the Merger Agreement and the related stockholder agreement; 9.reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as we have deemed necessary or appropriate. In preparing our opinion, we have assumed and relied upon, without assuming any responsibility for verification, the accuracy and completeness of any information supplied or otherwise made available to us by the Company. We have further relied upon the assurances of the management of the Company that it is unaware of any facts that would make the information provided to us incomplete or misleading in any material respect. With respect to projected financial and operating data, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgment of the management of the Company relating to the future financial and operational performance of the Company. With respect to the estimates of oil and gas reserves, we have assumed that they have been reasonably prepared on bases reflecting the best available estimates and judgments of the management of the Company and D&M relating to the oil and gas properties of the Company. We have not made an independent evaluation or appraisal of the assets or liabilities of the Company or, except for the estimates of oil and gas reserves referred to above, been furnished with such an evaluation or appraisal. Our opinion relates solely to the fairness from a financial point of view of the per Share consideration to be received by the holders of Shares in the Offer and the Merger. This opinion is for the use and benefit of the Board of Directors of the Company and does not constitute a recommendation to any holder of Shares as to whether such holder should tender any Shares pursuant to the Offer or how such holder should vote on the Merger. We have not been asked to consider, and this opinion does not address, the after-tax consequences of the Offer or the Merger to any particular holder of Shares. As you are aware, we have acted as financial advisor to the Company and we will receive a fee from the Company, a substantial portion of which is contingent upon the consummation of the Merger, and we will receive a fee for rendering this opinion. Our opinion is rendered on the basis of conditions in the securities markets and the oil and gas markets prevailing as of the date hereof and the condition and prospects, financial and otherwise, of the Company as they have been represented to us as of the date hereof or as they were reflected in the materials and discussions described above. Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the per Share consideration to be received by the holders of Shares in the Offer and the Merger is fair from a financial point of view to such holders. Very truly yours, /s/ Petrie Parkman & Co., Inc. PETRIE PARKMAN & CO., INC. EX-99.(C)(1) 6 VOTING SECURITIES AND CERTAIN BENEFICIAL OWNERS EXHIBIT (c)(1) VOTING SECURITIES AND CERTAIN BENEFICIAL OWNERS At the close of business on March 10, 1998, the record date for determination of stockholders entitled to notice of and to vote at the meeting, there were issued and outstanding 85,169,892 shares of the Company's common stock, par value $.05 per share ("Common Stock"), excluding Common Stock held by the Company, each share being entitled to one vote upon each of the matters to be voted upon at the meeting. There are no other voting securities outstanding. The presence in person or by proxy of the holders of a majority of the issued and outstanding Common Stock, excluding Common Stock held by the Company, is necessary to constitute a quorum at this meeting. In the absence of a quorum (42,584,947 shares) at the meeting, the meeting may be adjourned from time to time without notice, other than announcement at the meeting, until a quorum shall be formed. A plurality of the votes of the shares present in person or by proxy at the meeting and entitled to vote is required for the election of directors, meaning that the 12 nominees with the largest number of affirmative votes will be elected as directors. The affirmative vote of a majority of the shares present in person or by proxy at the meeting and entitled to vote is required for the approval to amend the 1994 Incentive Plan. Any other matter that may come before the meeting shall be adopted if the votes cast for such matter exceed the votes cast against. Under Delaware law and under the Company's Restated Certificate of Incorporation, each share of Common Stock entitles a stockholder to one vote. In certain circumstances, a stockholder will be considered to be present at the meeting for quorum purposes but will not be deemed to have cast a vote on a matter. Such circumstances exist when a stockholder is present but abstains from voting on a matter or when shares are represented at the meeting by a proxy conferring authority to vote only on certain matters, as in the case of broker non-votes. In connection with the approval of the amendment of the 1994 Incentive Plan, abstentions will be treated as negative votes and, therefore, will affect the outcome of such votes. In conformity with the Company's Bylaws, shares abstaining from voting on any other matter or not voted on certain matters coming before the meeting, including broker non-votes, will not be treated as votes cast with respect to those matters, and therefore will not affect the outcome of any such matter. The table below sets forth certain information as of March 10, 1998, regarding the beneficial ownership of the Common Stock, excluding Common Stock held by the Company, by (i) each person known by the Company to own beneficially more than 5% of its outstanding shares of Common Stock, (ii) each director of the Company, (iii) the five executive officers of the Company named in the Summary Compensation Table and (iv) all executive officers and directors of the Company as a group:
AMOUNT AND PERCENTAGE OF NATURE OF SHARES OF BENEFICIAL COMMON STOCK NAME OWNERSHIP(1) OUTSTANDING ---- ------------ ------------- Petroleum Associates, L.P.(2)............................... 21,833,334 25.6% KKR Partners II, L.P.(2).................................... 9 West 57th Street New York, New York 10019 GSB Investment Management, Inc.(3).......................... 4,424,912 5.2% 301 Commerce Street Fort Worth, Texas 76102 Robert L. Barry, Director (4)............................... 12,000 * Glenn A. Cox, Director(4)(5)................................ 27,000 * Edward A. Gilhuly, Director(2).............................. 0 -- James H. Greene, Jr., Director(2)........................... 0 -- Henry R. Kravis, Director(2)................................ 0 -- Michael W. Michelson, Director(2)........................... 0 -- Wylie B. Pieper, Director (4)............................... 13,000 * Stanley P. Porter, Director(4).............................. 20,000 * George R. Roberts, Director(2).............................. 0 -- Richard R. Shinn, Director(4)............................... 22,000 * Sellers Stough, Director(4)................................. 21,000 * John L. Whitmire(4)(6)(7)................................... 227,888 * Chairman of the Board and Chief Executive Officer William M. Krips, Senior Vice President(4)(6)............... 205,451 * Arthur W. Peabody, Jr., Senior Vice President(4)(6)......... 269,590 * Newton W. Wilson, III, Regional Vice President(4)(6)........ 139,891 * Larry D. Kalmbach(4)(6)..................................... 91,928 * Vice President and Chief Financial Officer All executive officers and directors as a group, including the above (group equals 23 persons)(4)(6)(8).............. 1,419,473 1.7%
- --------------- * Less than 1%. (1) Beneficial ownership of Common Stock, except as noted. (2) KKR Associates is the sole general partner of each of Petroleum Associates, L.P. ("Petroleum Associates") and KKR Partners II, L.P. (collectively, the "KKR Partnerships") and possesses sole voting and investment power with respect to the 21,833,334 shares owned by such stockholders. KKR Associates is a limited partnership of which Henry R. Kravis, George R. Roberts, Michael W. Michelson, James H. Greene, Jr., Edward A. Gilhuly (all directors of the Company), Robert I. MacDonnell, Paul E. Raether, Michael T. Tokarz, Perry Golkin, Clifton S. Robbins and Scott Stuart are the general partners and Messrs. Kravis and Roberts are also the members of the Executive Committee of KKR Associates. None of the aforementioned individuals beneficially owns any other shares of Common Stock. (Footnotes continued on following page) 2 Petroleum Associates made its investment in the Company in 1985. The limited partnership agreement pursuant to which Petroleum Associates was organized expired on December 31, 1997 in accordance with the terms of the limited partnership agreement. The terminated Petroleum Associates partnership continues to be in existence for a winding-up period after such date. The limited partnership agreement provides that, in connection with the dissolution and winding up of Petroleum Associates, KKR Associates has the sole discretion regarding the timing (which may be one or more years after the expiration of the partnership agreement) and the manner of the disposition of the Common Stock of the Company owned by Petroleum Associates, including public or private sales of such Common Stock, the distribution of such Common Stock to the limited partners of Petroleum Associates or a combination of the foregoing. If shares of the Company's Common Stock are distributed to the limited partners of Petroleum Associates, each limited partner will thereafter have sole discretion with respect to its Common Stock. In addition, pursuant to the limited partnership agreement, Petroleum Associates will distribute to KKR Associates for its own account, concurrently with any sales of shares owned by Petroleum Associates, cash and/or shares of Common Stock that together have a fair market value equal to approximately 20% of the profits realized with respect to the shares sold and distributed. The Company has agreed that, upon request of the KKR Partnerships, the Company will register under the Securities Act of 1933, as amended (the "Securities Act") and applicable state securities laws the sale of the Company's Common Stock owned by the KKR Partnerships as to which registration has been requested. The Company's obligation is subject to certain limitations relating to a minimum amount required for registration, the timing of a registration and other similar matters. The Company is obligated to pay any registration expenses incidental to such registration, excluding underwriters' commissions and discounts. The KKR Partnerships currently own approximately 25.6% of the issued and outstanding shares of Common Stock of the Company, excluding shares held by the Company. As a result, the KKR Partnerships and their general partners may be able to exercise substantial influence over the Company, through their representation on the Board and by reason of their significant voting power with respect to the election of directors and actions submitted to a vote of stockholders. See also "Compensation Committee Interlocks and Insider Participation." (3) GSB Investment Management, Inc. is a registered investment advisor that pursuant to a Schedule 13G dated February 10, 1998 reported such shares. (4) Includes the following shares issuable upon the exercise of outstanding or issuable stock options that are exercisable within 60 days after March 10, 1998: (i) 17,000 for each of Messrs. Cox, Porter, Shinn and Stough; (ii) 8,000 for Messrs. Pieper and Barry; (iii) 142,500 for Mr. Whitmire; 172,894 for Mr. Krips; 168,694 for Mr. Peabody; 129,293 for Mr. Wilson; 75,026 for Mr. Kalmbach; and (iv) 1,049,931 for all executive officers and directors as a group. (5) Voting and investment power are shared with Veronica Cox with respect to 10,000 shares, all of which are held in the Glenn A. Cox Trust, UTA. (6) Shares held by executive officers in the Company's Savings Plan for Salaried Employees are included in the table. (7) Voting and investment power are shared with Virginia Whitmire with respect to 9,700 shares, all of which are held in the Virginia Kempton Whitmire Revocable Trust dated September 7, 1995. (8) As of March 10, 1998, the executive officers of the Company include the five executive officers named in the Summary Compensation Table and the other officers listed as Executive Officers. See "Executive Officers." 3 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Two of the current members of the Compensation Committee, Mr. Michelson and Mr. Gilhuly, are affiliates of KKR and the KKR Partnerships. The KKR Partnerships collectively own approximately 25.6% of the Company's outstanding Common Stock. In connection with the 1985 Stock Acquisition, the Company agreed to pay each of KKR and Allied a fee for financial advisory services of $250,000 per year, increasing at a compounded rate of 10% per annum. The Company is obligated to continue to pay this annual advisory service fee to KKR until KKR or its affiliates own less than 20% of the number of shares of Common Stock outstanding. During 1997, KKR was paid $748,943 for such financial advisory services pursuant to this Consulting Agreement. See "Voting Securities and Certain Beneficial Owners." 4 EXECUTIVE COMPENSATION AND OTHER INFORMATION EXECUTIVE COMPENSATION The following table sets forth information regarding aggregate cash compensation, stock option awards and other compensation earned by the Company's Chief Executive Officer and the four other most highly compensated executive officers for services rendered in all capacities to the Company and its subsidiaries in the years 1995 to 1997. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES ------------------------------------- UNDERLYING NAME AND OTHER ANNUAL OPTIONS/SARS ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) GRANTED(3) COMPENSATION(4) ------------------ ---- -------- -------- --------------- ------------ --------------- John L. Whitmire.......... 1997 $600,000 $600,000 -- 175,000 $48,000 Chairman of the Board and 1996 $586,957 $565,500 $577,873(5) 345,000 $28,000 Chief Executive Officer William M. Krips.......... 1997 $324,000 $198,500 -- 61,000 $25,920 Senior Vice President 1996 $314,667 $205,300 -- 39,100 $25,173 1995 $305,000 $193,000 -- 39,100 $24,400 Arthur W. Peabody, Jr..... 1997 $320,500 $198,500 -- 61,000 $25,640 Senior Vice President 1996 $310,000 $205,300 -- 39,100 $24,800 1995 $296,250 $193,000 -- 39,100 $23,700 Newton W. Wilson, III..... 1997 $304,000 $197,100 -- 41,000 $24,320 Regional Vice President 1996 $294,667 $170,000 -- 31,600 $23,574 1995 $285,000 $170,000 -- 31,600 $22,800 Larry D. Kalmbach......... 1997 $272,000 $169,300 -- 37,000 $21,760 Vice President and 1996 $267,000 $154,900 -- 31,600 $21,360 Chief Financial Officer 1995 $255,833 $150,000 -- 31,600 $16,400
- --------------- (1) Includes compensation under the Company's Incentive Compensation Plan (the "Incentive Compensation Plan"), which program is under the 1994 Incentive Plan and provides cash awards for executive officers and employees of the Company. For a description of the Incentive Compensation Plan, see "Report of the Organization and Compensation Committee and the Section 16 Committee of the Board of Directors on Executive Compensation." Awards are paid currently in a lump sum or may be deferred pursuant to the Deferred Plan. No incentive compensation accrued in 1997, 1996 or 1995 was deferred by any of the executive officers to later years, except for the Chief Executive Officer who deferred 100% of his 1997 award into restricted shares of Common Stock under the Deferred Plan. (2) During each of the three years ended December 31, 1995, 1996 and 1997, perquisites for each individual named in the Summary Compensation Table, other than Mr. Whitmire in 1996, aggregated less than 10% of the total annual salary and bonus reported for such individual in the Summary Compensation Table, or $50,000, if lower. Accordingly, no such amounts are included in the Summary Compensation Table. (3) Each option granted included an equal number of stock appreciation rights ("SARs"). (4) Information in this column includes amounts contributed by the Company under the Company's Savings Plan for Salaried Employees (the "Savings Plan") and Supplemental Non-Qualified Savings Plan for Executive Employees (the "Supplemental Savings Plan"). The Company's matching contributions to the Savings Plan for 1997 were in the respective amounts of: $9,500.00 for Mr. Whitmire, $9,500.00 for Mr. Krips, $9,500.00 for Mr. Peabody, $8,486.64 for Mr. Wilson, and $9,500.00 for Mr. Kalmbach. The Company's matching contributions to the Supplemental Savings Plan for 1997 were in the respective (Footnotes continued on following page) 5 amounts of: $38,500.00 for Mr. Whitmire, $16,420.00 for Mr. Krips, $16,140.01 for Mr. Peabody, $15,833.36 for Mr. Wilson, and $12,259.97 for Mr. Kalmbach. (5) Includes certain amounts in connection with Mr. Whitmire's employment in January 1996, including the purchase of Mr. Whitmire's home in Bartlesville, Oklahoma at its appraised value of $388,000 and special payment of $170,000 related to relocation to Houston, Texas by the Company. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS The following table sets forth information concerning the grant of stock options and tandem SARs under the Company's 1994 Incentive Plan to the executive officers named in the Summary Compensation Table: OPTION/SAR GRANTS IN 1997
INDIVIDUAL GRANTS -------------------------------------------------------------------- PERCENT GRANT REPRESENTS NUMBER OF OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO ALL GRANT DATE OPTIONS/SARS EMPLOYEES IN EXERCISE EXPIRATION PRESENT GRANTED(1) 1997 PRICE(2) DATE VALUE(3) ------------ -------------- -------- ---------- ------------ John L. Whitmire................ 175,000 10.8% $23.0312 10/22/2007 1,304,662.73 William M. Krips................ 61,000 3.8% $23.0312 10/22/2007 454,768.15 Arthur W. Peabody, Jr........... 61,000 3.8% $23.0312 10/22/2007 454,768.15 Newton W. Wilson, III........... 41,000 2.5% $23.0312 10/22/2007 305,663.84 Larry D. Kalmbach............... 37,000 2.3% $23.0312 10/22/2007 275,842.98
- --------------- (1) A total of 1,613,200 options were granted on October 23, 1997. Options were received by all U.S.-based employees, with 539,000 options (57,103 of which were ISOs) being granted to the executive officers and 1,074,200 options being granted to 513 other employees. The options become exercisable for 25% of the shares after the expiration of one year from the date of grant, 50% after the expiration of two years, 75% after the expiration of three years and in full after the expiration of four years. Options are granted for a term of ten years, subject to termination between 90 days to three years following termination of employment. Each option vests in full upon death, disability, normal retirement, voluntary resignation for the purpose of accepting employment with Virginia Indonesia Company, involuntary termination of an executive officer, or a change in control (generally defined as liquidation or dissolution of the Company or acquisition of 50% or more of the Company's voting stock or 75% or more of the Company's assets, other than such a transaction with the KKR Partnerships, but not a merger or consolidation unless the Board determines by a majority vote that such transaction is a change in control). Upon the occurrence of a change-in-control event, including specified sales of Common Stock by the KKR Partnerships, the options held by executive officers are automatically exchanged for cash equal to the difference in the value of the Common Stock and the option exercise price subject to certain provisions in the 1994 Incentive Plan. In addition, each option to executive officers is accompanied by an equivalent number of SARs. The SARs allow the optionee, subject to certain restrictions, to surrender his option in return for a payment in cash or shares of Common Stock or a combination thereof equal in value to the excess of the fair market value of the shares of Common Stock represented by the option over the option price thereof. The SARs are subject to the same vesting, expiration and termination provisions as the related option. Options are not transferable, except transfers (other than ISOs) by officers to family members, family entities or private foundations. See "Report of the Organization and Compensation Committee and the Section 16 Committee of the Board of Directors on Executive Compensation" and Appendix A. (Footnotes continued on following page) 6 (2) The options other than ISOs contain an "early payment provision" whereby the Board, the Compensation Committee or the Section 16 Committee may authorize the Company to make a cash payment, equal to the difference in the market value of a share of Common Stock on the date of payment and the exercise price, to the holder of the option and adjust the exercise price of the option to the then market price of the Common Stock. (3) To calculate the present value of option/SAR grants in 1997, the Company has used the Black-Scholes option pricing model. The actual value, if any, an executive may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised, so that there is no assurance the value realized by an executive will be at or near the value estimated by the Black-Scholes model. The estimated values under that model are based on assumptions that include (i) a stock price volatility of 25.45%, calculated using monthly stock prices for the three years prior to the grant date, (ii) an interest rate of 6.0%, (iii) a dividend yield of 1.03% and (iv) an option exercise term of 5.5 years. This value has been adjusted to reflect any risk of forfeiture prior to vesting. The Securities and Exchange Commission (the "SEC") requires disclosure of the potential realizable value or present value of each grant. The Company's use of the Black-Scholes model to indicate the present value of each grant is not an endorsement of this valuation. OPTION/SAR EXERCISES AND HOLDINGS The following table sets forth information with respect to the executive officers named in the Summary Compensation Table concerning the exercise of options and SARs during 1997 and unexercised options and SARs held as of the end of 1997, which include grants made under the Company's 1985 and 1992 Stock Option Plans and the 1994 Incentive Plan. AGGREGATED OPTION/SAR EXERCISES IN 1997 AND OPTION/SAR VALUES AT DECEMBER 31, 1997
NUMBER OF SECURITIES VALUE OF UNEXERCISED NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY SECURITIES OPTIONS/SARS HELD AT OPTIONS/SARS HELD AT UNDERLYING 1997 FISCAL YEAR-END 1997 FISCAL YEAR-END(2) OPTIONS/SARS VALUE --------------------------- --------------------------- NAME EXERCISED REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ -------------- ----------- ------------- ----------- ------------- John L. Whitmire........ 0 $ 0 142,500 377,500 $158,203 $158,203 William M. Krips........ 31,330 $262,388.75 172,894 126,450 $502,257 $ 71,174 Arthur W. Peabody, Jr.................... 23,800 $229,075.00 192,494 126,450 $684,519 $ 71,174 Newton W. Wilson, III... 19,330 $166,117.21 138,958 93,900 $426,438 $ 57,522 Larry D. Kalmbach....... 0 $ 0 75,026 85,275 $163,409 $ 52,157
- --------------- (1) Market value of the Company's Common Stock at the time of exercise, minus the exercise price, multiplied by the number of shares underlying the options or SARs exercised. (2) Value calculated by subtracting the exercise price from the market value of the Company's Common Stock on December 31, 1997, which was $20.71875 based on the average of the high and low sales price on December 31, 1997 on the New York Stock Exchange, multiplied by the number of shares underlying the unexercised options or SARs. 7 PENSION BENEFITS Certain employees of the Company, including each of its executive officers, are participants in the Company's Salaried Employees' Pension Plan (the "Pension Plan"). The table below illustrates the annual straight-life annuity benefits payable to an employee under the Pension Plan as if the employee were age 65 in 1997.
ESTIMATED ANNUAL PENSION BENEFIT FOR YEARS OF CREDITED SERVICE INDICATED ----------------------------------------------------------------------------- AVERAGE 5 10 15 20 25 30 35 40 ANNUAL PAY YEARS YEARS YEARS YEARS YEARS YEARS YEARS YEARS ---------- ------- ------- ------- ------- ------- ------- ------- ------- $ 300,000............ 24,600 49,200 73,800 98,400 123,000 147,600 172,200 196,800 400,000........... 32,800 65,600 98,400 131,200 164,000 196,800 229,600 262,400 500,000........... 41,000 82,000 123,000 164,000 205,000 246,000 287,000 328,000 600,000........... 49,200 98,400 147,600 196,800 246,000 295,200 344,400 393,600 700,000........... 57,400 114,800 172,200 229,600 287,000 244,400 401,800 459,200 800,000........... 65,600 131,200 196,800 262,400 328,000 393,600 459,200 524,800 900,000........... 73,800 147,600 221,400 295,200 369,000 442,800 516,600 590,400 1,000,000........... 82,000 164,000 246,000 328,000 410,000 492,000 574,000 656,000 1,100,000........... 90,200 180,400 270,600 360,800 451,000 541,200 631,400 721,600 1,200,000........... 98,400 196,800 295,200 393,600 492,000 590,400 688,800 787,200 1,300,000........... 106,600 213,200 319,800 426,400 533,000 639,600 746,200 852,800 1,400,000........... 114,800 229,600 344,400 459,200 574,000 688,800 803,600 918,400 1,500,000........... 123,000 246,000 369,000 492,000 615,000 738,000 861,000 984,000
The Pension Plan is a noncontributory, tax-qualified plan and provides that the normal retirement age is 65. The benefits listed in the table above are not subject to any reduction for Social Security benefits or, with respect to the executive officers named in the Summary Compensation Table, for other offset amounts. The amount of pension payable at normal or later retirement under the Pension Plan is based on an employee's years of credited service and the employee's average pay (including salary, Incentive Compensation Plan payments that are not deferred, elective deferrals made under the Company's Savings Plan or Section 125 cafeteria plans, and severance pay (excluding officers), but excluding amounts deferred under a deferred compensation plan, income from an exercise of a stock option or SAR and certain other fringe benefits as specified in the Pension Plan) during the most highly paid five consecutive years of the employee's last ten years of employment. An employee who was employed by the Company on or after April 29, 1990, may elect to receive a lump sum payment at retirement in lieu of a pension. The Code places certain maximum limitations on the amount of benefits that may be payable under tax-qualified plans, such as the Pension Plan. Any excess over such maximum limitation calculated in accordance with the provisions of the Pension Plan will be paid separately by the Company through one or more unfunded excess benefit plans. Such excess benefit plans also provide benefits to certain employees in excess of those provided under the Pension Plan, based upon deferred compensation, severance pay and certain additional service that is not taken into account under the Pension Plan and to the extent the formula in effect for the Pension Plan prior to 1989 would produce a larger benefit than the current formula. Such additional benefits are calculated and included in the table above, with the exception of benefits related to the formula in effect prior to 1989 and a special supplemental benefit to Mr. Whitmire. In 1988, the Company adopted a trust pursuant to which the Company may, at its discretion, including in the event of a change of control, contribute amounts to the trust to provide for all or part of the benefits the Company is obligated to pay pursuant to the excess benefit plans. Any assets placed in the trust will remain subject to the general unsecured creditors of the Company. At December 31, 1997, the following individuals had the number of years of credited service indicated: Mr. Whitmire, 1; Mr. Krips, 33; Mr. Peabody, 16; Mr. Wilson, 12; and Mr. Kalmbach, 23. Mr. Whitmire is also entitled to receive a special supplemental benefit to ensure that he receives compensation for any loss of total pension benefit as a result of his retirement from his previous employer. See "Report of the Organization 8 and Compensation Committee and the Section 16 Committee of the Board of Directors -- Chief Executive Officer Compensation." EXECUTIVE SEVERANCE PLAN The Company's Executive Severance Plan provides for certain salary and other severance benefits to certain of the Company's employees, including each of the Company's executive officers, if the employee's employment with the Company is terminated under certain circumstances following a change of control (as defined therein) of the Company. For purposes of the Executive Severance Plan, the acquisition by affiliates of KKR of approximately 50% of the Common Stock from Allied (the "1985 Stock Acquisition") constituted a change of control of the Company. The period following such change of control through the later of March 31, 1999, or 24 months after a change of control is referred to as the "Protected Period." Since benefits are payable if employment with the Company is terminated during the Protected Period, benefits could be required to be paid in the future to employees who are covered by the Executive Severance Plan. The Executive Severance Plan does not restrict the termination of a participant's employment, and no benefits are payable if the participant voluntarily terminates his or her employment, accepts employment with the purchaser of assets from the Company, or receives a comparable offer of employment (as defined in the plan) by the purchaser of assets from the Company. Certain offers of continued employment either at lower compensation or that require a participant to change his or her work site are deemed involuntary terminations of employment. If a change of control occurs, certain reductions in benefits and changes in an employee's responsibilities are also deemed involuntary terminations of employment. After a review of a July 31, 1997 report from Towers Perrin, an independent consultant, and recommendations made by Towers Perrin based on such report, the Board approved amendments to the Executive Severance Plan at its September 1997 meeting. Such report contained a summary of typical industry change of control agreements based on a survey of over one hundred companies and of energy industry peer group (including companies in the Dow Jones Secondary Oil Index) change of control agreements. Such amendments include, among other matters, an expansion of the number of persons eligible for the plan including officers and certain key employees, an increase in the amount of benefits in the event of a change of control after September 5, 1997, an increase in the number of years of credited service for pension and excess benefit plans, the addition of a savings plan match, an excise tax gross-up in the event of a change of control and the "golden parachute" provision of the Code applies and outplacement services. A participant in the Executive Severance Plan who is involuntarily terminated other than for gross cause during the Protected Period is now entitled to receive his or her base salary together with incentive compensation payments for a period of not less than 24, nor greater than 36 months, as specified in the Executive Severance Plan as to such participant, or 36 months in the event a change of control occurs after September 5, 1997. Payments under the Executive Severance Plan will not continue, however, past the month in which the participant attains age 65. Also, an employee who is so terminated is entitled to have the months of payments credited toward calculation of benefits payable under the excess benefit plans. Under the Executive Severance Plan, Messrs. Whitmire, Krips and Peabody are entitled to 36 months of benefits, and Messrs. Wilson and Kalmbach are entitled to 24 months of benefits, except in the event of a change of control, Messrs. Wilson and Kalmbach are entitled to 36 months of benefits. See "Description of Certain Employment Agreements and Changes of Employment Arrangements." A participant entitled to Executive Severance Plan benefits is also entitled to receive a payment equal to 24% of his or her base salary, which is equivalent to three years of a Company match under the Company's Savings Plan at 8% a year, the continuation of certain basic life and medical insurance coverage and outplacement services. In the event any payments made under the Executive Severance Plan result in the imposition of excise tax under the "golden parachute" provision of the Code, such payments are grossed up so that the participant receives the net amount he or she is otherwise entitled to under the plan. An employee who either becomes entitled to salary and benefit continuation pursuant to the Executive Severance Plan after a change of control or who was receiving benefits pursuant to the Executive Severance Plan on the date of such change of control is entitled to receive in a lump sum any cash benefits which he or she is entitled to receive or which remain to be paid as of the change of control. Assuming that Messrs. Whitmire, Krips, Peabody, Wilson and Kalmbach were entitled to receive payments as 9 of December 31, 1997, such payments would total $3,204,000, $1,535,760, $1,535,760, $1,395,360 and $1,248,480, respectively. The Company may generally terminate the Executive Severance Plan, but no termination of the Plan is permitted prior to the later of March 31, 1999, or 24 months after a change of control. In addition, no termination may adversely affect the rights of participants already receiving benefits at the time of termination. DESCRIPTION OF CERTAIN EMPLOYMENT AGREEMENTS AND CHANGES OF EMPLOYMENT ARRANGEMENTS In connection with the 1985 Stock Acquisition by affiliates of KKR of approximately 50% of the Company's stock from Allied, the Company summarized in letter agreements its existing understandings with certain officers, including the executive officers named in the Summary Compensation Table, except Mr. Whitmire, regarding compensation and benefits. In all cases, these letter agreements provide for employment at will, which may be terminated by the Company or such officers at any time, with or without cause. The compensation and benefits summarized in the letter agreements are consistent with the Compensation and Benefits Agreement among the Company, Allied and affiliates of KKR, which was executed in connection with the 1985 Stock Acquisition, in part as an inducement for employees to continue employment with the Company. Such letter agreements have not been formally amended since the original date of the agreements to reflect changes made in benefits resulting from promotions and increased or changed job responsibilities. Currently, each of Messrs. Whitmire, Krips, Peabody, Wilson and Kalmbach has an annual incentive compensation (bonus), as determined by the Compensation Committee, and each is covered by the Executive Severance Plan, 1985 and 1992 Stock Option Plans (other than Mr. Whitmire), 1994 Incentive Plan, Deferred Plan, Pension Plan, Savings Plan, Supplemental Savings Plan and supplemental executive retirement plans. See "Executive Compensation and Other Information -- Executive Severance Plan" and "Report of the Organization and Compensation Committee and the Section 16 Committee of the Board of Directors on Executive Compensation." 10 APPENDIX A UNION TEXAS PETROLEUM HOLDINGS, INC. 1994 INCENTIVE PLAN (AS AMENDED AND RESTATED) SECTION 1. Purpose of the Plan. The Union Texas Petroleum Holdings, Inc. 1994 Incentive Plan (the "Plan") is intended to promote the interests of Union Texas Petroleum Holdings, Inc., a Delaware corporation (the "Company"), by encouraging employees of the Company, its subsidiaries and affiliated entities, and non-employee directors of the Company to acquire or increase their equity interest in the Company and to provide a means whereby employees may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company thereby advancing the interests of the Company and its shareholders. The Plan is also contemplated to enhance the ability of the Company, its subsidiaries and affiliated entities to attract and retain the services of individuals who are essential for the program, growth and profitability of the Company. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Performance Award, Stock Compensation Award, Deferred Shares, Bonus Shares, Other Stock-Based or Cash Award. "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. "Bonus Shares" shall mean an award of Shares granted pursuant to Section 6(e) of the Plan. "Cash Award" shall mean an award payable in cash granted pursuant to Section 6(g) of the Plan. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations thereunder. "Committee" shall mean the Organization and Compensation Committee of the Board. "Covered Employees" shall have the meaning specified in Section 162(m)(3) of the Code. "Deferred Shares" shall mean an Award of the right to receive Shares issued at the end of a Restricted Period which is granted pursuant to Section 6(f) of the Plan. "Disability" shall mean (i) with respect to an Employee, becoming permanently disabled under the standards of the Company's or Affiliate's long-term disability program as determined by the Committee or (ii) with respect to an Eligible Director, inability to perform duties and services as a director of the Company by reason of a medically determinable physical or mental impairment supported by medical evidence which in the opinion of the Committee can be expected to result in death or which can be expected to last for a continuous period of not less than twelve (12) months. "Eligible Director" shall mean a director of the Company who is not (i) an Employee or (ii) a general partner, limited partner or employee of Kohlberg Kravis Roberts & Co. "Employee" shall mean any employee of the Company or of any Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. A-1 "Fair Market Value" shall mean the fair market value of the property or other item being valued, as determined by the Committee. With respect to Shares, if the Shares are traded on a national stock exchange, the fair market value of a Share on a particular date shall be equal to the average of the reported high and low sales prices of the Share on such exchange on that date, or if no prices are reported on that date, on the last preceding date on which such prices of the Share are so reported. If the Shares are publicly traded but are not traded on a national stock exchange at the time a determination of its fair market value is required to be made hereunder, its fair market value shall be deemed to be equal to the average between the closing bid and asked price of the Share on the most recent date the Shares were publicly traded. In the event the Shares are not publicly traded at the time a determination of its fair market value is required to be made hereunder, the determination of fair market value shall be made in good faith by the Committee. "Incentive Stock Option" or "ISO" shall mean an option granted under Section 6(a) of the Plan that is intended to qualify as an "incentive stock option" under Section 422 of the Code or any successor provision thereto. "Non-Qualified Stock Option" or "NQO" shall mean an option granted under Sections 6(a) or 6(h) of the Plan that is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. "Other Stock-Based Award" shall mean any right granted under Section 6(g) of the Plan. "Participant" shall mean any individual granted an Award under the Plan. Any other provisions hereof to the contrary notwithstanding, no Eligible Director may receive benefits under this Plan except for Non-Qualified Stock Options as provided in Section 6(h). "Performance Award" shall mean any right granted under Section 6(d) of the Plan. "Person" shall mean individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Restricted Period" shall mean the period established by the Committee with respect to an Award during which the Award either remains subject to forfeiture or is not exercisable by the Participant. "Restricted Stock" shall mean any Share, prior to the lapse of restrictions thereon, granted under Section 6(c) of the Plan. "Retirement" shall mean (i) with respect to an Employee, retirement as determined by the Committee, and (ii) with respect to an Eligible Director, termination of service as a director or honorary director, after at least five (5) years of continuous service. "Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" shall mean the Securities and Exchange Commission, or any successor thereto. "Section 16 Committee" shall mean a committee consisting of two or more members of the Board, each of whom satisfy the requirements of the definition of a "non-employee director" under Rule 16b-3. "Shares" or "Common Shares" or "Common Stock" shall mean the common stock of the Company, $0.05 par value, and such other securities or property as may become the subject of Awards or become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan. "Stock Appreciation Right" or "Right" shall mean any right to receive the appreciation of Shares granted under Section 6(b) of the Plan. "Stock Compensation" shall mean any right granted under Section 6(e) of the Plan. A-2 "Substitute Award" shall mean Awards granted in assumption of, or in substitution for, outstanding awards previously granted by (i) a company acquired by the Company or one or more of its Affiliates, or (ii) a company with which the Company or one or more of its Affiliates combines. SECTION 3. Administration. The Plan shall be administered by the Committee, which Committee shall consist of at least two members. A majority of the Committee shall constitute a quorum, and the acts of the members of the Committee who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Committee in writing, shall be the acts of the Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible Employee; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any stockholder and any Employee. The provisions of this Section 3 with respect to decisions made by, and authority of, the Committee shall be subject to the controlling provisions of Section 6(h). Notwithstanding the foregoing, the Section 16 Committee shall have full power and authority to take any of the actions described in clauses (i) through (ix) above and any other action necessary or desirable to ensure compliance with the requirements of, and to provide the exemption of transactions under the Plan pursuant to, Section 16 of the Exchange Act and the rules and regulations promulgated thereunder, and further, to ensure compliance with the requirements of Section 162(m) of the Code and the rules and regulations promulgated thereunder, to the extent Awards are intended to qualify thereunder. References in the Plan to the "Committee" shall mean the "Section 16 Committee" when it is necessary or desirable that such action be taken by the Section 16 Committee and not by the Committee to satisfy such objectives. SECTION 4. Shares Available for Awards. (a) Shares Available. Subject to adjustment as provided in Section 4(c), the number of Shares with respect to which Awards may be granted under the Plan shall be 8,000,000. If, after the effective date of the Plan, any Shares covered by an Award granted under the Plan, or to which such an Award relates, are forfeited, or if an Award otherwise terminates or is canceled without the delivery of Shares or of other consideration, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards may be granted, to the extent of any such forfeiture, termination or cancellation, shall again be, or shall become, to the extent permissible under Rule 16b-3, Shares with respect to which Awards may be granted. In the event that any Option or other Award granted hereunder is exercised through the delivery of Shares, the number of Shares available for Awards (other than an Incentive Stock Option) under the Plan shall be increased by the number of Shares surrendered, to the extent permissible under Rule 16b-3. Notwithstanding the foregoing, no more than 2,400,000 Shares available for Awards shall be issued as Restricted Stock. A-3 (b) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. (c) Adjustments. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Shares (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that with respect to Awards of Incentive Stock Options and Awards intended to qualify as performance based compensation under Section 162(m)(4)(C) of the Code, no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code or would cause such Award to fail to so qualify under Section 162(m) of the Code, as the case may be, or any successor provisions thereto; and provided, further, that the number of Shares subject to any Award denominated in Shares shall always be a whole number. SECTION 5. Eligibility. Eligible Directors shall be granted Awards only pursuant to Section 6(h) of the Plan. All Employees shall be eligible to be designated a Participant for Awards under the Plan, other than Awards granted pursuant to Section 6(h) to Eligible Directors. However, no Employee under this Plan may receive in any calendar year Stock Options and/or Rights that, in the aggregate, are with respect to more than 500,000 Shares (tandem Awards shall be deemed to be one Award for this purpose). SECTION 6. Awards. (a) Options. Subject to the provisions of the Plan, the Committee shall have authority to determine the Employees to whom Options shall be granted, the number of Shares to be covered by each Option, the purchase price therefor and the conditions and limitations applicable to the exercise of the option including the following terms and conditions and such additional terms and conditions, as the Committee shall determine are not inconsistent with the provisions of the Plan. (i) Exercise Price. The purchase price per Share purchasable under an Option shall be determined by the Committee at the time each Option is granted; provided, however, that the purchase price per Share shall not be less than 100% of the Fair Market Value on the date of grant, except in the case of Options that are Substitute Awards. (ii) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, and the method or methods by which, and the form or forms (which may include, without limitation, cash, Shares, outstanding Awards, Shares that would otherwise be acquired upon exercise of the Option, other securities or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price) in which payment of the exercise price with respect thereto may be made or deemed to have been made. Pursuant to Section 7(b) of the Plan, the Committee may, at its discretion, accelerate the time at which Options may be exercised and otherwise modify the time or methods of exercise of the Options. (iii) Incentive Stock Options. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. Incentive Stock Options may be granted only to employees of the Company and its "subsidiaries" within the meaning of Section 424(f) of the Code. A-4 (b) Stock Appreciation Rights. Subject to the provisions of the Plan, the Committee shall have authority to determine the Employees to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. A Stock Appreciation Right may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. A Stock Appreciation Right granted in tandem with or in addition to another Award may be granted either at the same time as such other Award or at a later time. (i) Grant Price. The grant price of a Stock Appreciation Right shall be determined by the Committee; provided, however, that the grant price shall not be less than 100% of the Fair Market Value on the date of grant or on the date of original grant of any related Award, except in the case of Stock Appreciation Rights that are Substitute Awards. (ii) Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of exercise, methods of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. (c) Restricted Stock. Subject to the provisions of the Plan, the Committee shall have authority to determine the Employees to whom Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each such Participant, the duration of the Restricted Period during which, and the conditions under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. (i) Dividends. Unless otherwise determined by the Committee, Restricted Stock Awards shall provide for the payment of dividends during the Restricted Period. Any Restricted Stock Award may require that any or all dividends or other distributions paid on the Restricted Stock during the Restricted Period be automatically sequestered and held in a bookkeeping cash account (with or without interest) or reinvested on an immediate or deferred basis in additional shares of Common Stock, which credit or shares may be subject to the same restrictions as the underlying Award or such other restrictions as the Committee may determine. Dividends paid on Restricted Stock may be paid directly to the Participant, may be subject to risk of forfeiture and/or transfer restrictions during any period established by the Committee, all as determined by the Committee in its discretion. (ii) Registration. Any Restricted Stock may be evidenced in such manner as the Committee shall deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Restricted Stock granted under the Plan, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock. (iii) Forfeiture and Restrictions Lapse. Except as otherwise determined by the Committee or the terms of the Award that granted the Restricted Stock, upon termination of a Participant's employment (as determined under criteria established by the Committee, including, without limitation, in the Committee's discretion, goals described under Section 6(d)(i)) for any reason during the applicable Restricted Period, all Restricted Stock shall be forfeited by the Participant and re-acquired by the Company. The Committee may, when it finds that a waiver would be in the best interests of the Company and not cause such Award, if it is intended to qualify as performance based compensation under Section 162(m) of the Code, to fail to so qualify under Section 162(m) of the Code, waive in whole or in part any or all remaining restrictions with respect to such Participant's Restricted Stock. Unrestricted Shares, evidenced in such manner as the Committee shall deem appropriate, shall be issued to the holder of Restricted Stock promptly after the applicable restrictions have lapsed or otherwise been satisfied. A-5 (iv) Transfer Restrictions. During the Restricted Period, Restricted Stock will be subject to the limitations on transfer as provided in Section 6(i)(iii). (d) Performance Awards. The Committee shall have authority to determine the Employees who shall receive a Performance Award, which shall (A) consist of a right, denominated or payable in cash, Shares, Deferred Shares, other securities or other property (including, without limitation, Restricted Stock, or any combination thereof), and (B) confer on the holder thereof rights valued as determined by the Committee and payable to, or exercisable by, such holder, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. (i) Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award and the amount of any payment or transfer to be made pursuant to any Performance Award. Without limiting the generality of the foregoing, it is intended that the Committee may establish performance goals applicable to Performance Awards granted to Participants who, in the judgment of the Committee, may be Covered Employees in such a manner as shall permit payments with respect thereto to qualify as "performance-based compensation" as described in Section 162(m)(4)(C) of the Code. It is specifically provided that the material terms of such performance goals for Participants who, in the judgment of the Committee, may be Covered Employees, shall, until changed by the Committee with the approval of the stockholders, if such stockholder approval is required by the Code, be as follows: (x) the business criteria on which the performance goals shall be based shall be the attainment of such target levels of either net income, cash flows, reserve additions or revisions, economic value added from reserves, total capitalization, total shareholder return, assets, exploration successes, production volumes, finding and development costs, costs reductions and savings, reportable incidents in safety or environmental matters, return on sales, profit margin, earnings per share or strategic or personal objectives tied to the foregoing, operational studies, implementing policies and plans, negotiating transactions and sales, developing long-term business goals, managerial responsibilities and assessments as may be specified by the Committee; and (y) the maximum amount of compensation that may be paid to any one Participant with respect to any one year shall be $1.5 million under an annual performance bonus Award and $1.5 million under a long-term Award with a performance period longer than one fiscal year. (ii) Payment of Performance Awards. Performance Awards may be paid in a lump sum or in installments following the close of the performance period or, in accordance with procedures established by the Committee, on a deferred basis. (e) Stock Compensation and Bonus Shares. (i) Stock Compensation. The Committee shall have the authority, in its discretion, to pay in Shares all, or such portion as it shall determine, of amounts payable (x) under any Award of the Plan, other than Performance Awards payable in cash as a short term annual incentive or Cash Awards granted in tandem with Restricted Stock or (y) if requested by an Employee, under any compensation program of the Company. The number and type of Shares to be distributed in lieu of the cash compensation to which an Employee would otherwise be entitled, as well as the terms and conditions of any such bonus awards, shall be determined by the Committee. (ii) Bonus Shares. The Committee may also grant Bonus Shares to eligible Employees. Each Bonus Share shall constitute a transfer of Common Shares to the Participant, without other payment therefor, as additional compensation for the Participant's services to the Company. (f) Deferred Shares. The Committee may also grant Awards of Deferred Shares to eligible Employees upon such terms and conditions as the Committee may determine. (i) Terms and Conditions. Each Deferred Share award shall constitute an agreement by the Company to issue or transfer a specified number of Shares to the Participant in the future, subject to the fulfillment during the Restricted Period of such conditions, including performance objectives or, as A-6 described in Section 6(d)(i), performance goals, if any, as the Committee may specify at the date of grant. During the Restricted Period, the Participant shall not have any right to transfer any rights under the subject Award, shall not have any rights of ownership in the Deferred Shares and shall not have any right to vote such shares. (ii) Dividends. Any Deferred Share award may provide that any or all dividends or other distributions paid on Shares during the Restricted Period be credited in a cash bookkeeping account (without interest) or that equivalent additional Deferred Shares be awarded, which account or shares may be subject to the same restrictions as the underlying Award or such other restrictions as the Committee may determine. (g) Other Stock-Based and Cash Awards. (i) Other Stock Based Awards. The Committee is hereby authorized to grant to eligible Employees an "Other Stock-Based Award," which shall consist of a right (i) which is not an Award or right described in Section 6(a), (b), (c), (d), (e) or (f) above and (ii) which is denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares) as are deemed by the Committee to be consistent with the purposes of the Plan; provided, that any such rights must comply, to the extent deemed desirable by the Committee, with Rule 16b-3 and applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award. (ii) Cash Awards. Subject to the provisions of the Plan, the Committee shall have authority to determine the Employees to whom Cash Awards shall be granted, the amount, and the terms or conditions, if any, as additional compensation for the Employee's services to the Company or its Affiliates. A Cash Award may be granted (simultaneously or subsequently) in tandem with another Award and may entitle a Participant to receive a specified amount of cash from the Company upon such other Award becoming taxable to the Participant, which cash amount may be based on a formula relating to the anticipated taxable income associated with such other Award and the payment of the Cash Award or other terms determined by the Committee. (h) Awards to Eligible Directors. (i) Initial Granting of Options. Subject to stockholder approval of the Plan pursuant to Section 10, and to the limitation of the number of shares of Stock set forth in Section 4(a), each Eligible Director who is elected or appointed to the Board for the first time on or after the effective date of this Plan amendment shall receive, as of the date of his or her election or appointment and without the exercise of the discretion of any person or persons, a Non-Qualified Stock Option exercisable for 5,000 shares of Stock (subject to adjustment in the same manner as provided in Section 7 hereof with respect to shares of Stock subject to Options then outstanding). Any nominee Eligible Director may make an irrevocable election in advance of election not to receive an option pursuant to this Section 6(h)(i). (ii) Annual Granting of Options. Subject to stockholder approval of the Plan pursuant to Section 10, and to the limitation of the number of shares of Stock set forth in Section 4(a), as of the date of the annual meeting of the stockholders of the Company in each year that the Plan is in effect as provided in Section 11 hereof (commencing with the 1998 annual meeting of stockholders), each Eligible Director who is in office immediately after such meeting and who is not then entitled to receive an Option pursuant to the preceding provisions of this Section 6(h) shall receive, without the exercise of the discretion of any person or persons, a Non-Qualified Stock Option exercisable for 3,000 shares of Stock (subject to adjustment in the same manner as provided in Section 7 hereof with respect to shares of Stock subject to Options then outstanding). Any Eligible Director may make an irrevocable election in advance not to receive an option pursuant to this Section 6(h)(ii). A-7 (iii) Other Terms and Conditions. The following provisions are applicable to Options granted pursuant to Sections 6(h)(i) and (ii): A. Options shall be exercisable on the day following the date of grant. B. The purchase price of a Share covered under an Option granted under this Section 6(h) shall be the Fair Market Value of a Share on the date of grant. C. The Option may be exercised in full at one time or in part from time to time by giving written notice, signed by the optionee exercising the Option, to the Company, stating the number of Shares with respect to which the Option is being exercised, accompanied by payment in full for such Shares, which payment may be in whole or in part in Shares of the Company already owned by said optionee, valued at Fair Market Value; provided, however, that (i) no Option shall be exercisable after ten (10) years from the date on which it was granted, and (ii) there shall be no such exercise at any one time for fewer than one hundred (100) Shares or for all of the remaining Shares then purchasable by the optionee exercising the Option, if fewer than one hundred (100) Shares. D. Each Option shall expire ten (10) years from the date of grant thereof, but shall be subject to earlier termination as follows. Options, to the extent exercisable as of the date an Eligible Director optionee ceases to serve as a director of the Company, must be exercised within six months of such date unless such event results from death, Disability or Retirement, in which case Options may be exercised by the optionee, the optionee's legal representative, heir or devisee, as the case may be, within two (2) years from the date of death or Disability and within three (3) years from the date of Retirement; provided, however, that no such event shall extend the normal expiration date of such Options. E. Upon exercise of the Option, subject to paragraph F below, delivery of a certificate for fully paid and nonassessable Shares shall be made either at the corporate office of the Company in Houston, Texas to the optionee exercising the Option at such time during ordinary business hours after fifteen (15) days but not more than thirty (30) days from the date of receipt of the notice by the Company as shall be designated in such notice, or at such time, place and manner as may be agreed upon by the Company and the optionee exercising the Option. F. Until the earlier to occur of the following events (i) the Eligible Director no longer serves as a director of the Company for any reason, (ii) a Change in Control, (iii) the approval by the Company's stockholders of a merger or consolidation or (iv) a tender offer for the Common Stock of the Company ("Termination of Restriction"), except as provided below, the Shares received by the Eligible Director upon the exercise of an Option granted pursuant to Section 6(h)(i) and (ii) shall not be subject to disposition by the Eligible Director, by sale, transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceeds (including bankruptcy), and any attempted disposition thereof, shall be null and void and of no effect; provided, however, that nothing in this Section 6(h)(iii)F shall prevent transfer by will, the applicable laws of descent and distribution or pursuant to a qualified domestic relations order or the disposition of Shares in an amount necessary to pay applicable taxes that become payable as a result of the exercise of the Option. The certificates evidencing the Shares may bear a legend restricting or incorporating the restrictions, and the Company may cause the certificates to be delivered upon issuance to the Secretary of the Company or such other depositary as may be designated by the Company as a depositary for safe-keeping until Termination of Restriction. Upon Termination of Restriction, the Company will cause a new certificate or certificates to be issued without legend in the name of such former director. G. Notwithstanding the foregoing, an Option or the Shares received by the Eligible Director upon the exercise of an Option may be transferred (in whole or in part) by the Eligible Director to (i) the spouse, children or grandchildren of the Eligible Director ("Immediate Director Family Members"), (ii) a trust or trust for the exclusive benefit of the Immediate Director Family A-8 Members and, if applicable, the Eligible Director, (iii) a partnership, limited liability company or other entity in which such Immediate Director Family Members and, if applicable, the Eligible Director are the only partners, members or stockholders, (iv) an organization described under Section 501(c)(3) of the Code and which is a private foundation within Section 509(a) of the Code or any trust the only beneficiary (other than an Immediate Family Member and if applicable, the Eligible Director) of which is an organization described under Section 501(c)(3) of the Code and which organization is a private foundation within Section 509(a) of the Code, or (v) to other persons or entities as approved by the Board. Following transfer, any such Option or Shares shall continue to be subject to the same terms and conditions as were applicable to the Option or Shares immediately prior to transfer. (iv) Notwithstanding anything in the Plan to the contrary, an Eligible Director shall be ineligible to receive a grant provided for in Section 6(h) if as of the date of such grant the director (i) is an employee of the Company or any Affiliate or (ii) has been an employee of the Company or any Affiliate for any part of the calendar year preceding the calendar year in which such a grant is to be made. (v) In the event that the number of Shares available for grants under the Plan is insufficient to make all grants provided for in this Section 6(h) hereby made on the applicable date, then all Eligible Directors who are entitled to a grant on such date shall share ratably in the number of Shares then available for grant under the Plan, and shall have no right to receive a grant with respect to the deficiencies in the number of available Shares and the grants under this Section 6(h) shall terminate. (vi) Except as expressly provided in this Section 6(h) grants made pursuant to this Section 6(h) shall be subject to the terms and conditions of the Plan; however, if there is a conflict between the terms and conditions of the Plan and this Section 6(h) then the terms and conditions of this Section 6(h) shall control. The Committee may not exercise any discretion with respect to this Section 6(h) which would be inconsistent with the intent expressed in Section 6(h)(vii). (vii) It is intended that the Plan meet the requirements of Rule 16b-3 and that any Eligible Director who is eligible to receive a grant or to whom a grant is made pursuant to this Section 6 will not for such reason cease to be a "non-employee director" within the meaning of Rule 16b-3 with respect to the Plan and other stock related plans of the Company. (viii) All Options under this Section 6(h) shall be evidenced by Award Agreements. (i) General. (i) Awards May Be Granted Separately or Together. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards or awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (ii) Forms of Payment by Company Under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments. (iii) Limits on Transfer of Awards. (A) Except as provided in (C) below, each Award, and each right under any Award, shall be exercisable only by the Participant during the Participant's lifetime, or, if permissible under applicable law, by the Participant's guardian or legal representative or by a transferee receiving such A-9 Award pursuant to a qualified domestic relations order (a "QDRO") as determined by the Committee. (B) Except as provided in (C) below, no Award and no right under any such Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant otherwise than by will or by the laws of descent and distribution (or, in the case of Restricted Stock, to the Company) or pursuant to a QDRO and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate. (C) The Committee may, in its discretion, adopt rules or guidelines under which any Award (other than an Option intended to constitute an Incentive Stock Option so long as transferability of an Incentive Stock Option is prohibited by the Code) previously granted or to be granted to a Participant may be transferred (in whole or in part pursuant to such form as approved by the Company) by the Participant to (i) the spouse, children or grandchildren of the Participant ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of the Immediate Family Members and, if applicable, the Participant, (iii) a partnership, limited liability company or other entity in which such Immediate Family Members and, if applicable, the Participant are the only partners, members or stockholders, (iv) an organization described under Section 501(c)(3) of the Code and which is a private foundation within Section 509(a) of the Code or any trust the only beneficiary (other than an Immediate Family Member and, if applicable, the Participant) of which is an organization described under Section 501(c)(3) of the Code and which organization is a private foundation within Section 509(a) of the Code, or (v) to other persons or entities as approved by the Board or the Committee in its discretion. Following transfer, any such Awards shall continue to be subject to the same terms and conditions as were applicable to the Award immediately prior to transfer; provided, however, that no transferred Award shall be exercisable or payable, as the case may be, unless arrangements satisfactory to the Company have been made to satisfy any tax withholding obligations the Company may have with respect to the Award. (iv) Term of Awards. The term of each Award (other than pursuant to Section 6(h)) shall be for such period as may be determined by the Committee; provided, that in no event shall the term of any Incentive Stock Option Award exceed a period of ten years from the date of its grant. (v) Share Certificates. All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the SEC, any stock exchange upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (vi) Consideration for Grants. Awards may be granted for no cash consideration or for such consideration as the Committee determines including, without limitation, such minimal cash consideration as may be required by applicable law. (vii) Delivery of Shares or other Securities and Payment by Participant of Consideration. No Shares or other securities shall be delivered pursuant to any Award until payment in full of any amount required to be paid pursuant to the Plan or the applicable Award Agreement, including satisfying all tax withholding obligations of the Company, is received by the Company. Such payment may be made by such method or methods and in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, withholding of Shares, cashless exercise with simultaneous sale, or any combination thereof; provided, that the combined value, as determined by the Committee, of all cash and cash equivalents and the Fair Market Value of any such Shares or other property so tendered to the Company, as of the date of such tender, is at least equal to the full amount required to be paid pursuant to the Plan or the applicable Award Agreement to the Company. A-10 SECTION 7. Amendment and Termination. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue, or terminate the Plan without the consent of any shareholder, Participant, other holder or beneficiary of an Award, or other Person; provided, however, that notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the stockholders of the Company no such amendment, alteration, suspension, discontinuation, or termination shall be made that would: (i) increase the total number of Shares available for Awards under the Plan, except as provided in Section 4(c) of the Plan; (ii) permit Incentive Stock Options to be granted with per Share grant, exercise or purchase prices of less than the Fair Market Value of a Share on the date of grant thereof; or (iii) result in this Plan no longer satisfying the requirements of Rule 16b-3. (b) Amendments to Awards. The Committee may waive any conditions or rights under, amend any terms of, or alter any Award theretofore granted (other than Awards granted pursuant to Section 6(h)), provided no change in any Award, other than pursuant to Section 7(c), shall reduce the benefit to Participant without the consent of such Participant. Notwithstanding the foregoing, with respect to any Award intended to qualify as performance-based compensation under Section 162(m) of the Code, no adjustment shall be authorized to the extent such adjustment would cause the Award to fail to so qualify. (c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(c) of the Plan) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. Notwithstanding the foregoing, with respect to any Award intended to qualify as performance-based compensation under Section 162(m) of the Code, no adjustment shall be authorized to the extent such adjustment would cause the Award to fail to so qualify. SECTION 8. Change in Control. (a) In addition to the Committee's authority set forth in Section 7(c) of the Plan, in order to maintain the Participants' rights in the event of any Change in Control, as hereinafter defined, the Committee, as constituted before such Change in Control, is hereby authorized and directed to provide for the acceleration of any time periods relating to the exercise or realization of all Awards so that such Award may be exercised or realized in full, and has sole discretion, as to any Award, either at the time such Award is made hereunder or any time thereafter, to take any one or more of the following actions: (i) provide for the purchase of any such Award, either automatically or upon the Participant's request, for an amount of cash equal to the amount that could have been attained upon the exercise of such Award or realization of the Participant's rights had such Award been currently exercisable or payable; (ii) make such adjustment to any such Award then outstanding as the Committee deems appropriate to reflect such Change in Control; or (iii) if equitable and in the best interests of the Company and its stockholders, cause (x) any such Award then outstanding to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation after such Change in Control or (y) the exercise period for any such Award then outstanding to terminate on a fixed date following such Change in Control provided the Participant receives written notice of such event and the fixed date at least twenty days prior to the effective date of such Change in Control. The Committee may, in its discretion, include such further provisions and limitations in any Award Agreement as it may deem equitable and in the best interests of the Company and its stockholders. A-11 (b) A "Change in Control" shall be deemed to occur (i) if any person or persons or entity or entities (other than Petroleum Associates, L.P., KKR Partners II, L.P. and any entity controlling, controlled by or under common control with any such entities, separately or in the aggregate ("KKR")) acquires 75% or more of the assets of the Company or a successor of the Company or such successor's parent corporation (based upon the then current fair market value thereof) or 50% or more of the Company's then outstanding voting stock or a successor's or such successor's parent corporation's then outstanding voting securities, and, if there shall be more than one class of voting securities thereof, then of the combined voting power held by all classes of voting securities of the Company, a successor corporation or its parent corporation (whether such acquisition of stock or assets occurs pursuant to a single transaction or several related transactions or series of transactions), (ii) upon the approval by the Company's stockholders of a plan of liquidation or dissolution of the Company or a successor of the Company or such successor's parent corporation, or (iii) upon the approval by the Company's stockholders of a merger or consolidation and such transaction was determined to be a Change in Control, which transaction and determination was approved by a majority of the Company's Board of Directors in actions taken prior to, and with respect to such transaction. SECTION 9. General Provisions. (a) No Rights to Awards. No Employee, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (b) Delegation. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or managers of the Company or any Affiliate, or to a committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to, or to cancel, modify or waive rights with respect to, or to alter, discontinue, suspend, or terminate Awards held by, Employees who are not officers or directors of the Company for purposes of Section 16 of the Exchange Act, or any successor Section thereto, or who are otherwise not subject to such Section. (c) Withholding. The Company or any Affiliate is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, Shares that would otherwise be issued pursuant to such Award (including automatic withholding), other Awards or other property) of any applicable taxes payable in respect of an Award, its exercise, the lapse of restrictions thereon, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Any Participant who is subject to Rule 16b-3 may direct the Company to withhold Shares from an Award or tender Shares to satisfy his tax withholding liability. (d) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other compensation arrangements (subject to shareholder approval of such other arrangement, if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (e) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (f) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable Federal law. (g) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed A-12 amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (h) Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. It is intended that the Plan and any grant of an Award made to a person subject to Section 16 of the Exchange Act meet all of the requirements of Rule 16b-3. If any provision of the Plan or any such Award would disqualify the Plan or such Award under, or would otherwise not comply with, Rule 16b-3, such provision or Award shall be construed or deemed amended to conform to Rule 16b-3. (i) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (j) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (k) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 10. Effective Date of the Plan. This Plan amendment and restatement shall be effective as of February 4, 1998, provided it is subsequently approved by the stockholders of the Company within 12 months thereafter. SECTION 11. Term of the Plan. No Award shall be granted under the Plan after November 27, 2004. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under any such Award shall, extend beyond such date. A-13 EX-99.(C)(2) 7 AGREEMENT AND PLAN OF MERGER EXHIBIT (c)(2) CONFORMED COPY ================================================================================ AGREEMENT AND PLAN OF MERGER Dated as of May 4, 1998, Among ATLANTIC RICHFIELD COMPANY, VWK ACQUISITION CORP. And UNION TEXAS PETROLEUM HOLDINGS, INC. ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE I The Offer and the Merger ------------------------ SECTION 1.01. The Offer................................. 2 SECTION 1.02. Company Actions........................... 4 SECTION 1.03. The Merger................................ 5 SECTION 1.04. Closing................................... 6 SECTION 1.05. Effective Time............................ 6 SECTION 1.06. Effects................................... 6 SECTION 1.07. Certificate of Incorporation and By-laws.............................. 6 SECTION 1.08. Directors................................. 7 SECTION 1.09. Officers.................................. 7 ARTICLE II Effect on the Capital Stock of the ---------------------------------- Constituent Corporations; Exchange of Certificates -------------------------------------------------- SECTION 2.01. Effect on Capital Stock................... 7 SECTION 2.02. Exchange of Certificates.................. 9 ARTICLE III Representations and Warranties of the Company --------------------------------------------- SECTION 3.01. Organization, Standing and Power.......... 11 SECTION 3.02. Company Subsidiaries; Equity Interests.... 12 SECTION 3.03. Capital Structure......................... 13 SECTION 3.04. Authority; Execution and Delivery; Enforceability....................... 14 SECTION 3.05. No Conflicts; Consents.................... 15 SECTION 3.06. SEC Documents; Undisclosed Liabilities.... 17 SECTION 3.07. Information Supplied...................... 18 SECTION 3.08. Absence of Certain Changes or Events...... 19 SECTION 3.09. Taxes..................................... 21 SECTION 3.10. Absence of Changes in Benefit Plans....... 23 SECTION 3.11. ERISA Compliance; Excess Parachute Payments............................. 23 2 SECTION 3.12. Litigation................................ 26 SECTION 3.13. Environmental Matters; Compliance with Environmental Laws; Other Applicable Laws.................. 26 SECTION 3.14. Title to Properties....................... 26 SECTION 3.15. Confidentiality and Other Agreements...... 27 SECTION 3.16. Brokers; Schedule of Fees and Expenses.... 27 SECTION 3.17. Opinion of Financial Advisor.............. 28 ARTICLE IV Representations and Warranties of Parent and Sub ------------------------------------------------ SECTION 4.01. Organization, Standing and Power.......... 28 SECTION 4.02. Sub....................................... 28 SECTION 4.03. Authority; Execution and Delivery; Enforceability....................... 28 SECTION 4.04. No Conflicts; Consents.................... 29 SECTION 4.05. Information Supplied...................... 30 SECTION 4.06. Brokers................................... 30 SECTION 4.07. Financing................................. 30 SECTION 4.08. Litigation................................ 30 SECTION 4.09. Interested Stockholder.................... 31 ARTICLE V Covenants Relating to Conduct of Business ----------------------------------------- SECTION 5.01. Conduct of Business....................... 31 SECTION 5.02. No Solicitation........................... 36 ARTICLE VI Additional Agreements --------------------- SECTION 6.01. Preparation of Proxy Statement; Stockholders Meeting................. 40 SECTION 6.02. Access to Information; Confidentiality.... 41 SECTION 6.03. Reasonable Efforts; Notification.......... 41 SECTION 6.04. Stock Options............................. 42 SECTION 6.05. Benefit Plans............................. 43 SECTION 6.06. Indemnification........................... 46 SECTION 6.07. Fees and Expenses......................... 48 SECTION 6.08. Public Announcements...................... 49 3 SECTION 6.09. Directors................................. 49 SECTION 6.10. Rights Agreement.......................... 51 SECTION 6.11. Stockholder Litigation.................... 51 SECTION 6.12. Performance by Sub........................ 51 SECTION 6.13. Dual Consolidated Losses.................. 51 ARTICLE VII Conditions Precedent -------------------- SECTION 7.01. Conditions to Each Party's Obligation To Effect the Merger.................... 51 ARTICLE VIII Termination, Amendment and Waiver --------------------------------- SECTION 8.01. Termination............................... 52 SECTION 8.02. Effect of Termination..................... 54 SECTION 8.03. Amendment................................. 54 SECTION 8.04. Extension; Waiver......................... 54 SECTION 8.05. Procedure for Termination, Amendment, Extension or Waiver.................. 55 ARTICLE IX General Provisions ------------------ SECTION 9.01. Nonsurvival of Representations and Warranties........................... 55 SECTION 9.02. Notices................................... 55 SECTION 9.03. Definitions............................... 56 SECTION 9.04. Interpretation; Disclosure Letters........ 56 SECTION 9.05. Severability.............................. 57 SECTION 9.06. Counterparts.............................. 57 SECTION 9.07. Entire Agreement; No Third-Party Beneficiaries........................ 57 SECTION 9.08. Governing Law............................. 57 SECTION 9.09. Assignment................................ 57 SECTION 9.10. Enforcement............................... 58 EXHIBIT A- Conditions of the Offer EXHIBIT B- Amendment to the Company Rights Agreement SCHEDULE I- Definitions AGREEMENT AND PLAN OF MERGER dated as of May 4, 1998, among ATLANTIC RICHFIELD COMPANY, a Delaware corporation ("Parent"), ------ VWK ACQUISITION CORP., a Delaware corporation ("Sub") and a --- wholly owned subsidiary of Parent, and UNION TEXAS PETROLEUM HOLDINGS, INC., a Delaware corporation (the "Company"). ------- WHEREAS the respective Boards of Directors of Parent, Sub and the Company have approved the acquisition of the Company by Parent on the terms and subject to the conditions set forth in this Agreement; WHEREAS in furtherance of such acquisition, Parent proposes to cause Sub to make a tender offer (as it may be amended from time to time as permitted under this Agreement, the "Offer") to purchase all the issued and outstanding ----- shares of common stock, par value $.05 per share, of the Company (the "Company ------- Common Stock"), including the associated Company Rights (as defined in Section - ------------ 3.03), at a price per share of Company Common Stock (including the associated Company Right) of $29.00, net to the seller in cash (such amount, or any greater amount per share paid pursuant to the Offer, the "Offer Price"), upon the terms ----------- and subject to the conditions set forth in this Agreement; WHEREAS the respective Boards of Directors of Parent, Sub and the Company have approved the merger (the "Merger") of Sub into the Company, or (at ------ the election of Parent) the Company into Sub, on the terms and subject to the conditions set forth in this Agreement, whereby each issued share of Company Common Stock not owned directly or indirectly by Parent or the Company will be converted into the right to receive the per share consideration paid pursuant to the Offer; WHEREAS simultaneously with the execution and delivery of this Agreement Parent and KKR Partners II, L.P. and Petroleum Associates, L.P., each a Delaware limited partnership (together, the "Principal Company Stockholder") ----------------------------- are entering into an agreement (the "Company Stockholder Agreement" and together ----------------------------- with this Agreement, the "Transaction Agreements") pursuant to which the ---------------------- Principal Company Stockholder has agreed to take specified actions in furtherance of the Offer and the Merger; and WHEREAS Parent, Sub and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Offer and the Merger and also to prescribe various conditions to the Offer and the Merger. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I The Offer and the Merger ------------------------ SECTION 1.01. The Offer. (a) Subject to the conditions of this ---------- Agreement, as promptly as practicable but in no event later than five business days after the date of this Agreement, Sub shall, and Parent shall cause Sub to, commence the Offer within the meaning of the applicable rules and regulations of the Securities and Exchange Commission (the "SEC"). The obligation of Sub to, --- and of Parent to cause Sub to, commence the Offer and accept for payment, and pay for, any shares of Company Common Stock tendered pursuant to the Offer shall be subject to the conditions set forth in Exhibit A (any of which may be waived by Sub in its sole discretion, provided that, without the consent of the Company, Sub may not, except as provided below, waive the Minimum Tender Condition (as defined in Exhibit A)). The initial expiration date of the Offer shall be the 20th business day following the commencement of the Offer (determined using Rule 14d-1(e)(6) of the SEC). Sub expressly reserves the right to modify the terms of the Offer, except that, without the consent of the Company, Sub shall not, except as provided in the next sentence, (i) reduce the number of shares of Company Common Stock subject to the Offer, (ii) reduce the price per share of Company Common Stock to be paid pursuant to the Offer, (iii) modify or add to the conditions set forth in Exhibit A, (iv) extend the Offer, (v) change the form of consideration payable in the Offer or (vi) otherwise amend the Offer in any manner materially adverse to the holders of Company Common Stock. Notwithstanding the foregoing, Sub may, without the consent of the Company, (i) extend the Offer, if at the scheduled expiration date of the Offer any of the conditions to Sub's obligation to purchase shares of Company Common Stock are not satisfied, until such time as such conditions are satisfied or waived, (ii) extend the Offer for any period required by any rule, regulation, interpretation or position of the SEC or the staff thereof applicable to the Offer, (iii) extend the Offer for any reason for a period of not more than 10 business days beyond the latest expiration date that would otherwise be permitted under clause (i) or (ii) of this sentence (a "Parent ------ Extension Period"); provided that if Sub shall extend the Offer pursuant to - ---------------- this clause (iii), it shall waive during any Parent Extension Period all conditions of the Offer set 2 forth in Exhibit A other than the Minimum Tender Condition and the conditions set forth in paragraphs (d) and (g) in Exhibit A; and (iv) if the option granted pursuant to Section 4 of the Company Stockholder Agreement is then exercisable, reduce the number of shares of Company Common Stock necessary to satisfy the Minimum Tender Condition (as defined in Exhibit A) to that number of shares which, together with the shares of Company Common Stock that may be purchased by Parent upon exercise of the option granted pursuant to Section 4 of the Company Stockholder Agreement, would represent at least a majority of the Fully Diluted Shares (as defined in Exhibit A). If any of the conditions of the Offer set forth in Exhibit A (other than the Minimum Tender Condition) is not satisfied on any scheduled expiration date of the Offer, then, if requested by the Company, Sub shall extend the Offer one or more times (the period of each such extension to be determined by Sub) for up to 30 days in the aggregate for all such extensions, provided that at the time of such extension any such condition is reasonably capable of being satisfied and the Company has not received a Company Takeover Proposal (as defined in Section 5.02(a)). On the terms and subject to the conditions of the Offer and this Agreement, Sub shall, and Parent shall cause Sub to, pay for all shares of Company Common Stock validly tendered and not withdrawn pursuant to the Offer that Sub becomes obligated to purchase pursuant to the Offer as soon as practicable after the expiration of the Offer. (b) On the date of commencement of the Offer, Parent and Sub shall file with the SEC a Tender Offer Statement on Schedule 14D-1 with respect to the Offer, which shall contain an offer to purchase and a related letter of transmittal and summary advertisement (such Schedule 14D-1 and the documents included therein pursuant to which the Offer will be made, together with any supplements or amend ments thereto, the "Offer Documents"). Each of Parent, --------------- Sub and the Company shall promptly correct any information pro vided by it for use in the Offer Documents if and to the extent that such information shall have become false or misleading in any material respect, and each of Parent and Sub shall take all steps necessary to amend or supplement the Offer Documents and to cause the Offer Documents as so amended or supplemented to be filed with the SEC and to be disseminated to the Company's stockholders, in each case as and to the extent required by applicable Federal securities laws. Parent and Sub shall provide the Company and its counsel in writing with any comments Parent, Sub or their counsel may receive from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments. 3 (c) Parent shall provide or cause to be provided to Sub on a timely basis the funds necessary to purchase any shares of Company Common Stock that Sub becomes obligated to purchase pursuant to the Offer. SECTION 1.02. Company Actions. (a) The Company Board (as defined in ---------------- Section 3.04(b)) has approved of and consented to the Offer, the Merger and the other transactions contemplated by the Transaction Agreements (collectively, the "Transactions"). ------------ (b) On the date the Offer Documents are filed with the SEC, the Company shall file with the SEC a Solicitation/ Recommendation Statement on Schedule 14D-9 with respect to the Offer (such Schedule 14D-9, as amended from time to time, the "Schedule 14D-9") containing the recommen dations described in -------------- Section 3.04(b) and shall mail the Schedule 14D-9 to the stockholders of the Company. Each of the Company, Parent and Sub shall promptly correct any information provided by it for use in the Schedule 14D-9 if and to the extent that such information shall have become false or misleading in any material respect, and the Company shall take all steps necessary to amend or supplement the Schedule 14D-9 and to cause the Schedule 14D-9 as so amended or supplemented to be filed with the SEC and disseminated to the Company's stockholders, in each case as and to the extent required by applicable Federal securities laws. The Company shall provide Parent and its counsel in writing with any comments the Company or its counsel may receive from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments. (c) In connection with the Offer, the Company shall cause its transfer agent to furnish Sub promptly with mailing labels containing the names and addresses of the record holders of Company Common Stock as of a recent date and of those persons becoming record holders subsequent to such date, together with copies of all lists of stockholders, security position listings and computer files and all other information in the Company's possession or control regarding the beneficial owners of Company Common Stock, and shall furnish to Sub such information and assistance (including updated lists of stockholders, security position listings and computer files) as Parent may reasonably request in communicating the Offer to the Company's stockholders. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Transactions, Parent and Sub shall hold in confidence the information contained in any such labels, listings and files, shall use such information 4 only in connection with the Offer and the Merger and, if this Agreement shall be terminated, shall, upon request, deliver to the Company all copies of such information then in their possession. (d) Prior to the expiration of the Offer, the Company (i) shall take all actions necessary to cause all outstanding Company Stock Options (as defined in Section 6.04(b)), whether or not otherwise vested pursuant to their terms, to be fully vested and exercisable in full upon the consummation of the Offer subject to compliance with applicable law, and (ii) shall, subject to compliance with applicable law, make an offer to pay each holder of a Company Stock Option that is not automatically subject to a cash payment upon consummation of the Offer, promptly after the consummation of the Offer and in exchange for the cancelation of such Company Stock Option, an amount in cash equal to (x)(1) the excess, if any, of the Offer Price over the exercise price per share of Company Common Stock subject to such Company Stock Option multiplied by (2) the number of shares of Company Common Stock for which such Company Stock Option shall not theretofore have been exercised, less (y) such amounts as may be required to be deducted or withheld with respect thereto under the Code (as defined in Section 3.11) or under any provision of state, local or foreign tax law (the amount determined in accordance with the foregoing clauses (x) and (y), the "Option ------ Spread"). The payments made by the Company to holders of Company Stock Options - ------ pursuant to clause (ii) of the preceding sentence shall be made automatically and promptly after the consummation of the Offer; provided, however, that such -------- ------- holders may request and receive in lieu of such payment and in exchange for their Company Stock Options the number of shares of Company Common Stock equal to the aggregate Option Spread for the shares of Company Common Stock for which such holders' Company Stock Options are then exercisable divided by the Offer Price. In addition, and subject to compliance with applicable law, the Company may take any actions necessary to purchase Company Common Stock from those officers of the Company and members of the Company Board as are designated in the Company Disclosure Letter (as defined in Section 3.02(a)) by the Company Board, and such purchase shall take place after the consummation of the Offer at a price per share equal to the Offer Price. SECTION 1.03. The Merger. On the terms and subject to the conditions ----------- set forth in this Agreement, and in accordance with the Delaware General Corporation Law (the "DGCL"), Sub shall be merged with and into the Company at ---- the Effective Time (as defined in Section 1.05). At the Effective Time, the separate corporate existence of Sub 5 shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation"). Notwithstanding the foregoing, Parent may elect at --------------------- any time prior to the Merger, instead of merging Sub into the Company as provided above, to merge the Company with and into Sub, in which case Sub shall be the Surviving Corporation; provided, however, that the Company shall not -------- ------- be deemed to have breached any of its representations, warranties or covenants set forth in this Agreement solely by reason of such election. In such event, the parties shall execute an appropriate amendment to this Agreement in order to reflect the foregoing. At the election of Parent, any direct or indirect wholly owned subsidiary of Parent may be substituted for Sub as a constituent corporation in the Merger. In such event, the parties shall execute an appropriate amendment to this Agreement in order to reflect the foregoing. SECTION 1.04. Closing. The closing (the "Closing") of the Merger -------- ------- shall take place at the offices of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York 10019 at 10:00 a.m. on the second business day following the satisfaction (or, to the extent permitted by law, waiver by all parties) of the conditions set forth in Section 7.01, or as soon as practicable after all the conditions set forth in Section 7.01 have been satisfied (or, to the extent permitted by law, waived by the parties entitled to the benefits thereof), or at such other place, time and date as shall be agreed in writing between Parent and the Company. The date on which the Closing occurs is referred to in this Agreement as the "Closing Date". ------------ SECTION 1.05. Effective Time. Prior to the Closing, Parent shall --------------- prepare, and on the Closing Date or as soon as practicable thereafter Parent shall file with the Secretary of State for the State of Delaware, a certificate of merger or other appropriate documents (in any such case, the "Certificate of -------------- Merger") executed in accordance with the relevant provisions of the DGCL and - ------ shall make all other filings or recordings required under the DGCL. The Merger shall become effective at such time as the Certificate of Merger is duly filed with such Secretary of State, or at such other time as Parent and the Company shall agree and specify in the Certificate of Merger (the time the Merger becomes effective being the "Effective Time"). -------------- SECTION 1.06. Effects. The Merger shall have the effects set forth -------- in Section 259 of the DGCL. SECTION 1.07. Certificate of Incorporation and By-laws. (a) The ----------------------------------------- Restated Certificate of Incorporation of the Company, as in effect immediately prior to the Effective 6 Time, shall be amended at the Effective Time so that the first paragraph of Article Fourth of such Restated Certifi cate of Incorporation reads in its entirety as follows: "The total number of shares of all classes of stock which the corporation shall have authority to issue is (i) 1,000 shares of Common Stock, par value $0.01 per share and (ii) 1,750,000 shares of Preferred Stock, par value $0.01 per share, all of which have been designated as 7.14% Series A Cumulative Preferred Stock, par value $.01 per share.", and, as so amended, such Certificate of Incorpora tion shall be the Certificate of Incorporation of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. (b) The By-laws of Sub as in effect immediately prior to the Effective Time shall be the By-laws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. SECTION 1.08. Directors. The directors of Sub immediately prior to ---------- the Effective Time shall be the directors of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. SECTION 1.09. Officers. The officers of the Company immediately --------- prior to the Effective Time shall be the officers of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. ARTICLE II Effect on the Capital Stock of the ---------------------------------- Constituent Corporations; Exchange of Certificates -------------------------------------------------- SECTION 2.01. Effect on Capital Stock. At the Effective Time, by ------------------------ virtue and without any action on the part of the holder of any shares of Company Common Stock or any shares of capital stock of Sub: (a) Capital Stock of Sub. Each issued and outstanding share of --------------------- capital stock of Sub shall be converted into and become one fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation. 7 (b) Cancelation of Treasury Stock and Parent-Owned Stock. Each share ----------------------------------------------------- of Company Common Stock that is owned by the Company, Parent or Sub or any wholly owned subsidiary of the Company, Parent or Sub shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and no cash or other consideration shall be delivered in exchange therefor. (c) Conversion of Company Common Stock. Subject to Sections 2.01(b) ----------------------------------- and 2.01(e), each issued share of Company Common Stock shall be converted into the Offer Price. The cash payable upon the conversion of shares of Company Common Stock pursuant to this Section 2.01(c) is referred to as the "Merger ------ Consideration". As of the Effective Time, all such shares of Company Common - ------------- Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Company Common Stock shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration upon surrender of such certificate in accordance with Section 2.02, without interest. (d) Series A Preferred To Remain Outstanding. Each share of the ----------------------------------------- Company's 7.14% Series A Cumulative Preferred Stock (the "Series A Preferred") ------------------ outstanding at the Effective Time shall remain outstanding and be unaffected by the Merger, except as provided in Section 2.01(e). (e) Appraisal Rights. Notwithstanding anything in this Agreement to ----------------- the contrary, shares ("Appraisal Shares") of Company Common Stock and Series A ---------------- Preferred that are outstanding immediately prior to the Effective Time and that are held by persons who are entitled to demand and properly demand appraisal of such Appraisal Shares pursuant to, and who comply in all respects with, Section 262 of the DGCL ("Section 262") shall not (i) be converted into ----------- the Merger Consideration as provided in Section 2.01(c), in the case of such shares of the Company Common Stock, or (ii) remain outstanding, in the case of such shares of the Series A Preferred, but rather the holders of Appraisal Shares shall be entitled to payment of the fair market value of such Appraisal Shares in accordance with Section 262; provided, however, that if any holder of -------- ------- Appraisal Shares shall fail to perfect or otherwise shall waive, withdraw or lose the right to appraisal under Section 262, then the right of such holder to be paid the fair value of such holder's Appraisal Shares shall cease and such Appraisal Shares shall be treated as if they had been converted as of the Effective Time into the Merger Consideration, as 8 provided in Section 2.01(c) in the case of the Company Common Stock, and shall remain outstanding, as provided in Section 2.01(d) in the case of the Series A Preferred. The Company shall serve prompt notice to Parent of any demands received by the Company for appraisal of any shares of Company Common Stock, and Parent shall have the right to participate in and direct all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Parent, make any payment with respect to, or settle or offer to settle, any such demands, or agree to do any of the foregoing. SECTION 2.02. Exchange of Certificates. (a) Paying Agent. Prior to ------------------------- ------------- the Effective Time, Parent shall select a bank or trust company to act as paying agent (the "Paying Agent") for the payment of the Merger Consideration upon ------------ surrender of certificates representing Company Common Stock. Parent shall take all steps necessary to enable and cause the Surviving Corporation to provide to the Paying Agent immediately following the Effective Time all the cash necessary to pay for the shares of Company Common Stock converted into the right to the Merger Consideration pursuant to Section 2.01(c) (such cash being hereinafter referred to as the "Exchange Fund"). ------------- (b) Exchange Procedure. As soon as reasonably practicable after the ------------------- Effective Time, the Paying Agent shall mail to each holder of record of a certificate or certificates (the "Certificates") that immediately prior to the ------------ Effective Time represented outstanding shares of Company Common Stock whose shares were converted into the right to receive the Merger Consideration pursuant to Section 2.01, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in a form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancelation to the Paying Agent or to such other agent or agents as may be appointed by the Parent, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Paying Agent, the holder of such Certificate shall be entitled to receive in exchange therefor the amount of cash into which the shares of Company Common Stock theretofore represented by such Certificate shall have been converted pursuant to Section 2.01, and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the 9 Company, payment may be made to a person other than the person in whose name the Certificate so surrendered is registered, if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of such Certificate or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 2.02, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the amount of cash, without interest, into which the shares of Company Common Stock theretofore represented by such Certificate shall have been converted pursuant to Section 2.01. No interest shall be paid or shall accrue on the cash payable upon the surrender of any Certificate. If a mutilated Certificate is surrendered to the Paying Agent or if the holder of a Certificate submits an affidavit to the Paying Agent stating that the Certificate has been lost, destroyed or wrongfully taken, such holder shall furnish an indemnity bond sufficient in the judgment of the Parent to protect the Parent, the Surviving Corporation and the Paying Agent from any loss which any of them may suffer. (c) No Further Ownership Rights in Company Common Stock. The Merger ---------------------------------------------------- Consideration paid in accordance with the terms of this Article II upon conversion of any shares of Company Common Stock shall be deemed to have been paid in full satisfaction of all rights pertaining to such shares, subject, however, to the Surviving Corporation's obligation to pay any dividends or make any other distributions with a record date prior to the Effective Time that may have been declared or made by the Company on such shares in accordance with the terms of this Agreement or prior to the date of this Agreement and which remain unpaid at the Effective Time, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of shares of Company Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, any certificates formerly representing shares of Company Common Stock are presented to the Surviving Corporation or the Paying Agent for any reason, they shall be canceled and exchanged as provided in this Article II. (d) Termination of Exchange Fund. Any portion of the Exchange Fund ----------------------------- that remains undistributed to the holders of Company Common Stock as provided in this Section 2.02 for one year after the Effective Time shall be delivered to Parent, upon demand, and any holder of Company Common Stock 10 who has not theretofore complied with this Article II shall thereafter look only to Parent for payment of its claim for the Merger Consideration. (e) No Liability. None of Parent, Sub, the Company or the Paying ------------- Agent shall be liable to any person in respect of any cash from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Subject to the last sentence of Section 2.02(b), if any Certificate has not been surrendered prior to the date on which the Merger Consideration in respect of such Certificate would otherwise escheat to or become the property of any Governmental Entity (as defined in Section 3.05), any such shares, cash, dividends or distributions in respect of such Certificate shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interest of any person previously entitled thereto. (f) Investment of Exchange Fund. The Paying Agent shall invest any ---------------------------- cash included in the Exchange Fund, as directed by Parent, on a daily basis. If for any reason (including losses) the Exchange Fund is inadequate to pay the amounts to which holders of Company Common Stock shall be entitled under this Section 2.02, Parent and the Surviving Corporation shall in any event be liable for payment thereof. The Exchange Fund shall not be used except as provided in this Agreement. Any interest and other income resulting from such investments shall be paid to Parent. (g) Withholding Rights. Parent and the Surviving Corporation shall be ------------------- entitled to deduct and withhold from the consideration otherwise payable to any holder of Company Common Stock pursuant to this Agreement such amounts as may be required to be deducted and withheld with respect to the making of such payment under the Code or under any provision of state, local or foreign tax law. ARTICLE III Representations and Warranties of the Company --------------------------------------------- The Company represents and warrants to Parent and Sub as follows except as set forth in the Filed Company SEC Documents (as defined in Section 3.08): SECTION 3.01. Organization, Standing and Power. (a) Each of the --------------------------------- Company and each Significant Company 11 Subsidiary (as defined below) is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has full corporate power and authority and, to the Company's Knowledge, possesses all governmental franchises, licenses, permits, authorizations and approvals necessary to enable it to own, lease or otherwise hold its properties and assets and to conduct its businesses as presently conducted, other than such franchises, licenses, permits, authorizations and approvals, the lack of which, individually or in the aggregate, would not have a Company Material Adverse ------------------------ Effect (as defined below). The Company and each Significant Company Subsidiary - ------ is duly qualified to do business in each jurisdiction where the nature of its business or their ownership or leasing of its properties make such qualification necessary or the failure to so qualify would reasonably be expected to have a Company Material Adverse Effect. The Company has made available to Parent true and complete copies of the Restated Certificate of Incorporation of the Company, as amended to the date of this Agreement (as so amended, the "Company Charter"), --------------- and the By-laws of the Company, as amended to the date of this Agreement (as so amended, the "Company By-laws"), and the comparable charter and organizational --------------- documents of each Significant Company Subsidiary, in each case as amended through the date of this Agreement. For purposes of this Agreement, a "Significant Company Subsidiary" means any subsidiary of the Company that ------------------- ---------- constitutes a significant subsidiary within the meaning of Rule 1-02 of Regulation S-X of the SEC. As used in this Agreement, "Company Material Adverse ------------------------ Effect" means (a) any materially adverse effect on the business, assets, - ------ properties, financial condition or results of operations of the Company and the Company Subsidiaries (as defined in Section 3.02) taken as a whole, or (b) any prevention or material delay in the ability of the Company to consummate the Offer, the Merger and the other Transactions, which has occurred or would reasonably be expected to occur as a result of any change, effect, event, occurrence or state of facts; provided, however, with respect to clauses (a) and -------- ------- (b), other than any change, effect, event, occurrence or state of facts, to the extent such change, effect, event, occurrence or state of facts is the result of adverse changes in economic conditions, or of conditions or adverse changes in or affecting the worldwide energy industry generally, including, but not limited to, changes in markets and prices for oil, gas and other hydrocarbons or hydrocarbon products. SECTION 3.02. Company Subsidiaries; Equity Interests. The letter, --------------------------------------- dated as of the date of this Agreement, from the Company to Parent and Sub (the "Company ------- 12 Disclosure Letter") lists each Significant Company Subsidiary. All the - ----------------- outstanding shares of capital stock of each Significant Company Subsidiary have been validly issued and are fully paid and nonassessable and, except as set forth in the Company Disclosure Letter, are owned by the Company, by another subsidiary of the Company (a "Company Subsidiary") or by the Company and another ------------------ Company Subsidiary, free and clear of all pledges, liens, charges, mortgages, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens"). ----- SECTION 3.03. Capital Structure. The authorized capital stock of the ------------------ Company consists of 200,000,000 shares of Company Common Stock and 15,000,000 shares of preferred stock, par value $.01 per share (the "Company Preferred ----------------- Stock", and together with the Company Common Stock, the "Company Capital - ----- --------------- Stock"). At the close of business on (i) March 31, 1998, 85,248,101 shares of Company Common Stock and 1,750,000 shares of Series A Preferred were issued and outstanding, (ii) March 31, 1998, 2,581,182 shares of Company Common Stock were held by the Company in its treasury, (iii) April 20, 1998, 6,033,471 shares of Company Common Stock were subject to outstanding Company Stock Options and not more than 4,250,475 additional shares of Company Common Stock were reserved for issuance pursuant to the Company's 1994 Incentive Plan, as amended, for stock options, SARs, and other awards of Company Common Stock which had not been granted as of the date of this Agreement, (iv) March 31, 1998, 45,000,000 shares of Company Common Stock were reserved for issuance in connection with the rights (the "Company Rights") issued pursuant to the Company Rights Agreement -------------- (as defined in Section 6.10) and (v) March 31, 1998, 100,000 shares of Company Common Stock were reserved for issuance pursuant to the Company's Amended and Restated Deferred Compensation Plan and 45,000 shares of Company Common Stock were reserved for issuance pursuant to the defined contribution retirement plan for employees of Virginia Indonesia Company. Except as set forth above and with respect to the Company's Savings Plan for Salaried Employees, at the close of business on May 1, 1998, no shares of capital stock or other voting securities of the Company were issued, reserved for issuance or outstanding. There are no outstanding Company SARs (as defined in Section 6.04) that were not granted in tandem with a related Company Stock Option. All outstanding shares of Company Capital Stock are, and all such shares that may be issued prior to the Effective Time will be when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to or issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any 13 provision of the DGCL, the Company Charter, the Company By-laws or any Contract (as defined in Section 3.05) to which the Company is a party or otherwise bound. There are not any bonds, debentures, notes or other indebtedness of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of the Company may vote ("Voting Company Debt"). Except as set forth above, as of the date ------------------- of this Agreement, there are not any options, warrants, rights, convertible or exchangeable securities, "phantom" stock rights, stock appreciation rights, stock-based performance units, commitments, Contracts, arrangements or undertakings of any kind to which the Company or any Company Subsidiary is a party or by which any of them is bound (i) obligating the Company or any Company Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity interests in, or any security convertible or exercisable for or exchangeable into any capital stock of or other equity interest in, the Company or of any Company Subsidiary or any Voting Company Debt, (ii) obligating the Company or any Company Subsidiary to issue, grant, extend or enter into any such option, warrant, call, right, security, commitment, Contract, arrangement or undertaking or (iii) that give any person the right to receive any economic benefit or right similar to or derived from the economic benefits and rights accruing to holders of Company Capital Stock. As of the date of this Agreement, except as disclosed in the Company Disclosure Letter and as contemplated by Section 1.02(d), there are not any outstanding contractual obligations of the Company or any Company Subsidiary to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any Company Subsidiary. SECTION 3.04. Authority; Execution and Delivery; Enforceability. (a) -------------------------------------------------- The Company has all requisite corporate power and authority to execute this Agreement and to consummate the Transactions, subject to compliance with the HSR Act (as defined in Section 3.05(a)) and the EC Regulations (as defined in Section 3.05(a)). The execution and delivery by the Company of each Transaction Agreement to which it is a party and the consummation by the Company of the Transactions have been duly authorized by all necessary corporate action on the part of the Company, subject, in the case of the Merger, to receipt of the Company Stockholder Approval (as defined in Section 3.04(c)). This Agreement has been duly and validly executed and delivered by the Company and, assuming this Agreement constitutes a valid and binding obligation of each of the other parties hereto, this Agreement constitutes a valid and binding agreement of the 14 Company, enforceable against the Company, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (b) The Board of Directors of the Company (the "Company Board"), at a ------------- meeting duly called and held, duly and unanimously adopted resolutions (i) approving this Agreement and the Company Stockholder Agreement, the Offer, the Merger and the other Transactions, (ii) determining that the terms of the Offer, the Merger and the other Transactions are fair to and in the best interests of the Company and its stockholders, (iii) recommending that the holders of Company Common Stock accept and tender their shares of Company Common Stock pursuant to the Offer and (iv) recommending that the Company's stockholders adopt this Agreement. Such resolutions are sufficient to render Section 203 of the DGCL inapplicable (A) to Parent and Sub by reason of their entering into this Agreement and the Company Stockholder Agreement or consummating any of the Transactions and (B) to the Offer, the Merger and the other Transactions. To the Company's Knowledge, no other state takeover statute or similar statute or regulation applies or purports to apply to the Company with respect to this Agreement and the Company Stockholder Agreement, the Offer, the Merger or any other Transaction. Each of the Company's directors and principal executive officers named in the Company Disclosure Letter either (x) has advised the Company that such person intends to tender all shares of Company Common Stock owned by such person pursuant to the Offer or (y) has been designated in the Company Disclosure Letter pursuant to Section 1.02(d). (c) The only vote of holders of any class or series of Company Capital Stock necessary to approve and adopt this Agreement and the Merger is the adoption of this Agreement by the holders of a majority of the outstanding Company Common Stock (the "Company Stockholder Approval"). The affirmative vote ---------------------------- of any holders of Company Capital Stock is not necessary to approve any Transaction Agreement other than this Agreement or to consummate the Offer or any Transaction other than the Merger. SECTION 3.05. No Conflicts; Consents. (a) Except as disclosed in the ----------------------- Company Disclosure Letter, the execution and delivery by the Company of this Agreement do not, and the consummation of the Offer, the Merger and the other Transactions and compliance with the terms hereof 15 and thereof 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, cancelation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of the Company or any Company Subsidiary under, any provision of (i) the Company Charter, the Company By-laws or the comparable charter or organizational documents of any Company Subsidiary, (ii) any contract, lease, license, indenture, note, bond, agreement, permit, concession, franchise or other instrument (a "Contract") to which the Company or any -------- Company Subsidiary is a party or by or to which any of their respective properties or assets is bound or subject, except for such conflicts, violations or defaults (or rights of termination, cancelation or acceleration) as to which requisite waivers or consents have been obtained or will be obtained prior to acceptance for payment of shares of Company Common Stock by Sub pursuant to the Offer or which would not in the aggregate have a Company Material Adverse Effect; or (iii) subject to the filings and other matters referred to in the following sentence, to the Knowledge of the Company, any judgment, order or decree ("Judgment") or statute, law, ordinance, rule or regulation ("Applicable -------- ---------- Law") applicable to the Company or any Company Subsidiary or their respective - --- properties or assets, including, without limitation, the Applicable Law of any foreign country, except for such conflicts, violations or defaults which would not in the aggregate have a Company Material Adverse Effect and would not prevent or delay in any material respect the consummation of the Transactions. To the Knowledge of the Company, no consent, approval, license, permit, order or authorization ("Consent") of, or registration, declaration or filing with, ------- any Federal, state, local or foreign government or any court of competent jurisdiction, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a "Governmental Entity"), is ------------ ------ required to be obtained or made by or with respect to the Company or any Company Subsidiary in connection with the execution, delivery and performance of any Transaction Agreement to which it is a party or the consummation of the Transactions, other than (i) compliance with and filings under (A) the Hart- Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") and (B) the --- --- rules and regulations of the Council of the European Communities (the "European -------- Council") and of the Commission of the European Communities (the "European -------- ---------- -------- Commission"), including, without limitation, Council Regulation (EEC) No 4064/89 - ---------- of 21 December 1989 on the control of concentration between undertakings (as amended) (OJ L 257/14, 21.9.90) and Commission Regulation (EC) 16 No 447/98 of 1 March 1998 on the notifications, time limits and hearings provided for Council Regulation (EEC) No 4064/89 on the control of concentrations between undertakings (OJ L 61/1/, 2.3.98) (the "EC Regulations") -- ----------- and the rules and regulations of any Governmental Entity to which a reference is made pursuant to the EC Regulations, (ii) the filing with the SEC of (A) the Schedule 14D-9, (B) a proxy or information statement relating to the approval and adoption of this Agreement and the Merger by the Company's stockholders (the "Proxy Statement"), (C) any information statement (the "Information Statement") ----- --------- ----------- --------- required under Rule 14f-1 in connection with the Offer and (D) such reports and statements under Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may be required in connection with this Agreement and -------- --- the Company Stockholder Agreement, the Offer, the Merger and the other Transactions, (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 the other jurisdictions in which the Company is qualified to do business, (iv) compliance with and such filings as may be required under applicable U.S. Federal, state or local environmental laws, (v) such filings as may be required in connection with any taxes, (vi) filings under any applicable state takeover law, (vii) where the failure to obtain such consent, approval or authorization, or to make such filing or notification, would not in the aggregate have a Company Material Adverse Effect and (viii) such other items (A) required solely by reason of the participation of Parent (as opposed to any third party) in the Transactions or (B) as are set forth in the Company Disclosure Letter. (b) The Company and the Company Board have taken all action necessary to (i) render the Company Rights inapplicable to this Agreement, the Company Stockholder Agreement, the Offer, the Merger and the other Transactions and (ii) ensure that (A) neither Parent nor any of its affiliates or associates is or will become an "Acquiring Person" (as defined in the Company Rights Agreement) by reason of this Agreement or the Company Stockholder Agreement, the Offer, the Merger or any of the other Transactions, (B) a "Distribution Date" (as defined in the Company Rights Agreement) shall not occur by reason of this Agreement or the Company Stockholder Agreement, the Offer, the Merger or any of the other Transactions and (C) the Company Rights shall expire immediately prior to the consummation of the Offer. SECTION 3.06. SEC Documents; Undisclosed Liabilities. The Company --------------------------------------- has filed all reports, schedules, forms, statements and other documents required to be filed 17 by the Company with the SEC since January 1, 1996, pursuant to Sections 13(a) and 15(d) of the Exchange Act (the "Company SEC Documents"). As --------------------- of its respective date, each Company SEC Document complied in all material respects with the requirements of the Exchange Act or the Securities Act of 1933, as amended (the "Securities Act"), as the case may be, and the rules and -------------- regulations of the SEC promulgated thereunder applicable to such Company SEC Document, and did not contain any untrue statement of a material fact or 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. Except to the extent that information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Company 10-K"), has been revised or superseded by a Company SEC Document - ------------------ filed prior to the date of this Agreement, and except as disclosed in the Company Disclosure Letter, as of the date of this Agreement, the 1997 Company 10-K does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company included in the Company 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 ("GAAP") (except, in the case of ---- 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 in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the Filed Company SEC Documents, as of the date of this Agreement neither the Company nor any Company Subsidiary has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of the Company and its consolidated subsidiaries or in the notes thereto and that, individually or in the aggregate, would reasonably be expected to have a Company Material Adverse Effect. None of the Company Subsidiaries is, or has at any time since January 1, 1996, been, subject to the reporting requirements of Sections 13(a) and 15(d) of the Exchange Act. 18 SECTION 3.07. Information Supplied. None of the information supplied --------------------- or to be supplied by the Company for inclusion or incorporation by reference in (i) Offer Documents, the Schedule 14D-9 or any Information Statement will, at the time such document is filed with the SEC, at any time it is amended or supplemented or at the time it is first published, sent or given to the Company's stockholders, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) the Proxy Statement will, at the date it is first mailed to the Company's stockholders or, unless promptly corrected, at the time of the Company Stockholders Meeting (as defined in Section 6.01) or, unless promptly corrected, at the time of any action by written consent in lieu of a meeting pursuant to Section 228 of the DGCL with respect to this Agreement and the Merger, as applicable, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Schedule 14D- 9, the Information Statement and the Proxy Statement will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, except that no representation is made by the Company with respect to statements made or incorporated by reference therein based on information supplied by Parent or Sub for inclusion or incorporation by reference therein. SECTION 3.08. Absence of Certain Changes or Events. Except as ------------------------------------- contemplated by or expressly permitted in this Agreement and as disclosed in the Company SEC Documents filed and publicly available prior to the date of this agreement (the "Filed Company SEC Documents") or in the Company Disclosure --------------------------- Letter, since December 31, 1997, the Company has conducted its business only in the ordinary course, and during such period there has not been: (i) any change (which would reasonably be expected, individually or in the aggregate, to have a Company Material Adverse Effect) in the Company's interest (as of December 31, 1997) in any oil and gas exploration license, lease, area of mutual interest agreement, concession agreement, production sharing contract, operating service agreement or other agreement or arrangement evidencing an interest in hydrocarbons (an "Oil and Gas ----------- Interest"), or in any corporation, partnership or joint venture arrangement -------- which holds an Oil and Gas Interest, including, without limitation, the imposition of any Lien on any Oil and 19 Gas Interest other than (A) the terms and conditions of all leases, contracts for sale, purchase, exchange, refining or processing of hydrocarbons, unitization and pooling designations, declarations, orders and agreements, gas balancing or deferred production agreements, processing agreements and plant agreements, pipeline, gathering and transportation agreements, (B) easements, rights of way, servitudes, permits, surface leases and other rights with respect to surface obligations, (C) Liens for taxes or assessments not yet delinquent or being protested in good faith by appropriate action brought in the normal course, and (D) materialmen's, mechanic's, repairman's, employee's, contractor's, operator's and other similar Liens or charges, in all cases arising in the ordinary course of business and which were not made in violation of Section 5.01 (collectively, "Permitted Encumbrances"); ---------------------- (ii) any acquisition of, or any ongoing negotiations to acquire, any Oil and Gas Interest, or any interest in a corporation, partnership or joint venture arrangement which holds an Oil and Gas Interest, that, individually or in the aggregate, involves or would involve a required commitment by the Company to make an investment or expenditure in excess of $10,000,000; (iii) any change in the Company's petrochemical business (as in existence on December 31, 1997), including, without limitation, the Company's interest in the Geismar, Louisiana, olefins plant and the Company's role as operator thereof (the Company's petrochemical business being collectively referred to herein as the "Petrochemicals Interests"), ------------------------ the acquisition or building of new petrochemicals capacity or expansion of existing petrochemicals capacity, or disposition of (including by way of a contribution of assets or otherwise), all or any portion of the Petrochemical Interests or the alteration or amendment of any contracts relating to any Petrochemicals Interests but excluding, in each case, any change that would not reasonably be expected to have a Company Material Adverse Effect; (iv) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any Company Capital Stock (other than regular quarterly cash dividends not in excess of $.05 per share of Company Common Stock with usual record and payment dates and in accordance with the Company's present dividend policy and regular 20 quarterly cash dividends with respect to the Series A Preferred), or any repurchase for value by the Company of any Company Capital Stock; (v) any split, combination or reclassification of any Company Capital Stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of Company Capital Stock; (vi) (A) any granting by the Company or any Company Subsidiary to any director or executive officer of the Company or any Company Subsidiary of any increase in compensation, except in the ordinary course of business consistent with prior practice or as was required under employment agreements in effect as of December 31, 1997, (B) any granting by the Company or any Company Subsidiary to any such director or executive officer of any increase in severance or termination pay, except as was required under any employment, severance or termination agreements in effect as of December 31, 1997, or (C) any entry by the Company or any Company Subsidiary into any employment, severance or termination agreement with any such director or executive officer; (vii) any change in accounting methods, principles or practices by the Company or any Company Subsidiary materially affecting the consolidated assets, liabilities or results of operations of the Company, except insofar as may have been required by a change in GAAP; or (viii) unless Parent has otherwise agreed pursuant to Section 5.01(a), any action taken by the Company or any Company Subsidiary that would be prohibited after the date of this Agreement by Section 5.01(a) hereof, other than any of clauses (iv), (v), (xi), and (xvii) (insofar as clause (xvii) relates to clauses (iv), (v) and (xi)) of Section 5.01(a). SECTION 3.09. Taxes. (a) Each of the Company, each Company ------ Subsidiary and each affiliated, combined, consolidated or unitary group of which the Company or any Company Subsidiary is or has been a member (a "Company ------- Affiliated Group") has timely filed, or has caused to be timely filed on its - ---------------- behalf, all Tax Returns required to be filed by it, and all such Tax Returns are true, complete and accurate, except to the extent any failure to file or any inaccuracies in any filed Tax Returns would not, individually or in the aggregate, have a Company Material 21 Adverse Effect. All Taxes shown to be due on such Tax Returns, or otherwise owed by the Company, any Company Subsidiary or any Company Affiliated Group, have been timely paid, except to the extent that any failure to pay would not, individually or in the aggregate, have and would not reasonably be expected to have a Company Material Adverse Effect. (b) The most recent financial statements contained in the Filed Company SEC Documents reflect an adequate reserve for all Taxes payable by the Company and the Company Subsidiaries (including by virtue of being or having been a member of a Company Affiliated Group) for all Taxable periods and portions thereof through the date of such financial statements. No deficiency with respect to any Taxes has been proposed, asserted or assessed against the Company or any Company Subsidiary, and no requests for waivers of the time to assess any such Taxes are pending, except to the extent any such deficiency or request for waiver, individually or in the aggregate, would not have and would not reasonably be expected to have a Company Material Adverse Effect. There is no audit, examination, refund litigation, proposed adjustment or matter in controversy with respect to any Taxes due and owing by the Company, any Company Subsidiary or any Company Affiliated Group which matter would, individually or in the aggregate, have or would reasonably be expected to have a Company Material Adverse Effect. (c) The Company and each Company Subsidiary have complied with all rules and regulations relating to the withholding of Taxes, except to the extent failure to comply would not, individually or in the aggregate, have and would not reasonably be expected to have a Company Material Adverse Effect. (d) For purposes of this Agreement: "Taxes" shall include all forms of taxes, levies, imposts, duties, ----- charges or withholdings, whenever created or imposed, and whether of the United States or elsewhere, and whether imposed by a local, municipal, governmental, state, foreign, Federal or other Governmental Entity, or in connection with any agreement with respect to Taxes, including all interest, penalties and additions imposed with respect to such amounts. "Tax Return" shall mean all Federal, state, local, provincial and ---------- foreign Tax returns, declarations, statements, reports, schedules, forms and information returns and any amended Tax return relating to Taxes. 22 SECTION 3.10. Absence of Changes in Benefit Plans. Except as ------------------------------------ disclosed in the Filed Company SEC Documents or in the Company Disclosure Letter, from December 31, 1997 to the date of this Agreement, there has not been any adoption or amendment in any material respect by the Company or any Company Subsidiary of any collective bargaining agreement or any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, welfare, vacation, severance, disability, death benefit, hospitalization, medical or other plan, arrangement or understanding (whether or not legally binding) providing benefits to any current or former employee, officer or director of the Company or any Company Subsidiary except any such plan, arrangement or understanding the Company has adopted as required by law (collectively, "Company Benefit Plans"). Except as --------------------- disclosed in the Filed Company SEC Documents or in the Company Disclosure Letter, to the Knowledge of the Company, as of the date of this Agreement there are not any employment, consulting, indemnification severance or termination agreements or arrangements between the Company or any Company Subsidiary and any current or former employee, officer or director of the Company or any Company Subsidiary. SECTION 3.11. ERISA Compliance; Excess Parachute Payments. (a) The -------------------------------------------- Company Disclosure Letter contains a list of all "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes referred to herein as "Company ----- ------- Pension Plans"), "employee welfare benefit plans" (as defined in Section 3(1) of - ------------- ERISA) and all other Company Benefit Plans maintained, or contributed to, by the Company or any Company Subsidiary for the benefit of any current or former employees, officers or directors of the Company or any Company Subsidiary. The Company has used its best efforts to make available to Parent true, complete and correct copies in all material respects of (i) each Company Benefit Plan (or, in the case of any unwritten Company Benefit Plan, a description thereof), (ii) the most recent annual report on Form 5500 and Schedule B thereto (including any related actuarial valuation report) filed with the Internal Revenue Service with respect to each Company Benefit Plan (if any such report was required), (iii) the most recent summary plan description for each Company Benefit Plan for which such summary plan description is required and (iv) each trust agreement and group annuity contract relating to any Company Benefit Plan. (b) Except as disclosed in the Company Disclosure Letter, all Company Pension Plans intended to be qualified 23 under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") have been the subject of determination letters from the Internal Revenue Service to the effect that such Company Pension Plans are qualified and exempt from Federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, and no such determination letter has been revoked nor, to the Knowledge of the Company, has revocation been threatened, nor has any such Company Pension 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. The Company has made available to Parent true, complete and correct copies of the determination letters referred to herein. (c) Except as disclosed in the Company Disclosure Letter with respect to ENSTAR Corporation, no Company Pension Plan, other than any Company Pension Plan that is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA (a "Company Multiemployer Pension Plan"), had, as of the respective last annual valuation date for each such Company Pension Plan, an "unfunded benefit liability" (as such term is defined in Section 4001(a)(18) of ERISA), based on actuarial assumptions that have been furnished to Parent. None of the Company Pension Plans has an "accumulated funding deficiency" (as such term is defined in Section 302 of ERISA or Section 412 of the Code), whether or not waived. None of the Company, any Company Subsidiary, any officer of the Company or any Company Subsidiary or any of the Company Benefit Plans which are subject to ERISA, including the Company Pension Plans, any trusts created thereunder or any trustee or administrator thereof, has engaged in a "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject the Company, any Company Subsidiary or any officer of the Company or any Company Subsidiary to the tax or penalty on prohibited transactions imposed by such Section 4975 or to any liability under Section 502(i) or 502(1) of ERISA. None of such Company Benefit Plans and trusts has been terminated, nor has there been any "reportable event" (as that term is defined in Section 4043 of ERISA) for which the disclosure requirements of Section 4043.1 et seq., promulgated by the Pension -- --- Benefit Guaranty Corporation, have not been waived with respect to any Company Benefit Plan during the last five years. Neither the Company nor any Company Subsidiary has incurred a "complete withdrawal" or a "partial withdrawal" (as such terms are defined in Sections 4203 and 4205, respectively, of ERISA) since the 24 effective date of such Sections 4203 and 4205 with respect to any of the Multiemployer Pension Plan. (d) Except as disclosed in the Company Disclosure Letter, to the Knowledge of the Company, each Company Benefit Plan complies in all material respects with and has been administered, operated and maintained in all material respects in compliance with all applicable provisions of ERISA, the Code and other applicable laws. (e) With respect to each Company Benefit Plan, no action, suit, grievance, claim, arbitration or other manner of litigation with respect to the assets of such Plan (other than routine claims for benefits made in the ordinary course of plan administration for which plan administrator review procedures have not been exhausted) is pending, or to the Company's Knowledge, threatened or imminent against or with respect to the Company Benefit Plans or any Company Benefit Plan sponsor or fiduciary (as defined in Section 3(21) of ERISA). (f) With respect to any Company Benefit Plan that is an employee welfare benefit plan, except as disclosed in the Company Disclosure Letter, (i) no such Company Benefit Plan is unfunded or funded through a "welfare benefits fund" (as such term is defined in Section 419(e) of the Code), (ii) each such Company Benefit Plan that is a "group health plan" (as such term is defined in Section 5000(b)(1) of the Code), complies with the applicable requirements of Section 4980B(f) of the Code and (iii) each such Company Benefit Plan (including any such Plan covering retirees or other former employees) may be amended or terminated without material liability to the Company and the Company Subsidiary on or at any time after the Effective Time except as otherwise provided in this Agreement. (g) Other than payments that may be made to the persons listed in the Company Disclosure Letter (the "Primary Company Executives"), any amount that -------------------------- could be received (whether in cash or property or the vesting of property) as a result of the Offer, the Merger or any other Transaction by any employee, officer or director of the Company or any of its affiliates 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 Company Benefit Plan currently in effect would not be characterized as an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code). Set forth in the Company Disclosure Letter is (i) the estimated maximum amount that could be paid to each Primary Company Executive 25 as a result of the Offer, the Merger and the other Transactions under all employment, severance and termination agreements, other compensation arrangements and Company Benefit Plans currently in effect and (ii) the "base amount" (as defined in Section 280G(b)(3) of the Code) for each Primary Company Executive calculated as of the date of this Agreement. SECTION 3.12. Litigation. Except as disclosed in the Filed Company ----------- SEC Documents, there is no suit, action or proceeding not disclosed in the Company Disclosure Letter pending or, to the Knowledge of the Company, threatened against or affecting the Company or any Company Subsidiary that, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect, nor is there any Judgment outstanding against the Company or any Company Subsidiary that has had or would reasonably be expected to have a Company Material Adverse Effect. SECTION 3.13. Environmental Matters; Compliance with Laws. (a) ------------------------------------------- Except as disclosed in the Filed Company SEC Documents, there are no claims, investigations or administrative actions not disclosed in the Company Disclosure Letter pending or, to the Knowledge of the Company, threatened against or affecting the Company or any Company Subsidiary arising from or related to the harmful effects of, or the removal or remediation of, hazardous substances or pollutants that has had or would be reasonably expected to have a Company Material Adverse Effect. (b) Except as disclosed in the Filed Company SEC Documents or in the Company Disclosure Letter, to the Knowledge of the Company, the Company and the Company Subsidiaries are in compliance with all Applicable Laws, except for instances of noncompliance that, individually and in the aggregate, have not had and would not reasonably be expected to have a Company Material Adverse Effect. This Section 3.13 does not relate to matters with respect to Taxes, which are the subject of Section 3.09. SECTION 3.14. Title to Properties. Except as set forth in the -------------------- Company Disclosure Letter, as of the date of this Agreement, each of the Company and each of the Significant Company Subsidiaries has good title to, or valid leasehold or other ownership interests or rights in, all its properties and assets except: (i) for such interest or rights as are no longer used or useful in the conduct of its businesses or as 26 have been disposed of in the ordinary course of business, and (ii) for defects in title, easements, restrictive covenants and similar encumbrances or impediments that, in the aggregate, do not and will not interfere with its ability to conduct its business as currently conducted to the extent that such interference would not reasonably be expected to have a Company Material Adverse Effect. As of the date of this Agreement, none of the Company and the Significant Company Subsidiaries' properties and assets are subject to any Liens (other than Permitted Encumbrances) that, in the aggregate, interfere with the ability of the Company and the Company Subsidiaries to conduct business as currently conducted to an extent that have had or would reasonably be expected to have a Company Material Adverse Effect. SECTION 3.15. Confidentiality and Other Agreements. (a) The Company ------------------------------------- has no confidentiality agreement or standstill agreement with any third party with respect to a Company Takeover Proposal by such third party (each, a "Company Confidentiality Agreement") in effect as of the date of this Agreement - ---------------------------------- that has not been provided to Parent or Sub, other than those Company Confidentiality Agreements that are prohibited by their terms from being disclosed to Parent or Sub. (b) Except as set forth in the Company Disclosure Letter, none of the Company or any of its subsidiaries is subject to any noncompetition or similar agreement that prohibits or restricts the Company or any of its affiliates from engaging in any business or other activities. SECTION 3.16. Brokers; Schedule of Fees and Expenses. No broker, --------------------------------------- investment banker, financial advisor or other person, other than Salomon Brothers Inc, Smith Barney Inc. and Petrie Parkman & Co., Inc. (the "Financial --------- Advisors"), the fees and expenses of which will be paid by the Company, is - -------- entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the Offer, the Merger or any of the other Transactions based upon arrangements made by or on behalf of the Company or any Company Subsidiary or affiliate of the Company. The estimated fees and expenses incurred and to be incurred by the Company in connection with the Offer, the Merger and the other Transactions (including the fees of the Financial Advisors and the fees of the Company's legal counsel) are set forth in the Company Disclosure Letter. 27 The Company has furnished to Parent a true and complete copy of all agreements between the Company and the Financial Advisors relating to the Offer, the Merger and the other Transactions. SECTION 3.17. Opinion of Financial Advisor. The Company has received ----------------------------- the opinion of each of the Financial Advisors, dated the date of this Agreement, to the effect that, as of such date, the consideration to be received in the Offer and the Merger by the holders of the shares of Company Common Stock is fair to the Company's stockholders from a financial point of view, a signed copy of which opinion has been delivered to Parent. ARTICLE IV Representations and Warranties of Parent and Sub ------------------------------------------------ Parent and Sub, jointly and severally, represent and warrant to the Company as follows: SECTION 4.01. Organization, Standing and Power. (a) Each of Parent --------------------------------- and Sub is duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to conduct its businesses as presently conducted. SECTION 4.02. Sub. (a) Since the date of its incorporation, Sub has ---- not carried on any business or conducted any operations other than the execution of the Transaction Agreements to which it is a party, the performance of its obligations hereunder and thereunder and matters ancillary thereto. (b) The authorized capital stock of Sub consists of 1,000 shares of common stock, par value $0.01 per share, all of which have been validly issued, are fully paid and nonassessable and are owned by Parent free and clear of any Lien. SECTION 4.03. Authority; Execution and Delivery; Enforceability. -------------------------------------------------- Each of Parent and Sub has all requisite corporate power and authority to execute each Transaction Agreement to which it is a party and to consummate the Transactions. The execution and delivery by each of Parent and Sub of each Transaction Agreement to which it is a party and the consummation by it of the Transactions have been duly authorized by all necessary corporate action as the part of Parent and Sub. Parent, as sole stockholder of Sub, has approved and adopted this Agreement. Each of Parent and 28 Sub has duly executed and delivered each Transaction Agreement to which it is a party, and each Transaction Agreement to which it is a party constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. SECTION 4.04. No Conflicts; Consents. The execution and delivery by ----------------------- each of Parent and Sub of each Transaction Agreement to which it is a party, do not, and the consummation of the Offer, the Merger and the other Transactions and compliance with the terms hereof and thereof 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, cancelation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of Parent or any of its subsidiaries under, any provision of (i) the charter or organizational documents of Parent or any of its subsidiaries, (ii) any Contract to which Parent or any of its subsidiaries is a party or by or to which any of their respective properties or assets is bound or subject or (iii) subject to the filings and other matters referred to in the following sentence, any Judgment or Applicable Law applicable to Parent or any of its subsidiaries or their respective properties or assets, other than, in the case of clauses (ii) and (iii) above, any such items that, individually or in the aggregate, have not had and could not reasonably be expected to prevent or materially delay the ability of Parent to consummate the Offer, the Merger and the other Transactions (a "Parent Material Adverse Effect"). No Consent of, or registration, ------------------------------ declaration or filing with, any Governmental Entity is required to be obtained or made by or with respect to Parent or any of its subsidiaries in connection with the execution, delivery and performance of any Transaction Agreement to which Parent or Sub is a party or the consummation of the Transactions, other than (i) compliance with and filings under (A) the HSR Act and (B) the EC Regulations and the rules and regulations of any Governmental Entity to which a reference is made pursuant to the EC Regulations, (ii) the filing with the SEC of (A) the Offer Documents and (B) such reports and statements under Sections 13 and 16 of the Exchange Act as may be required in connection with this Agreement and the Company Stockholder Agreement, the Offer, the Merger and the other Transactions, (iii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, (iv) compliance with and such filings as may be required under applicable environmental laws, (v) such filings as may be required in connection with the taxes described in Section 6.09, (vi) filings under any applicable state takeover law and 29 (vii) such other items (A) required solely by reason of the participation of the Company (as opposed to any third party) in the Transactions, (B) that, individually or in the aggregate, have not had and would not reasonably be expected to have a Parent Material Adverse Effect or (C) as are set forth in the letter, dated as of the date of this Agreement, from Parent to Sub. SECTION 4.05. Information Supplied. None of the information supplied --------------------- or to be supplied by Parent or Sub for inclusion or incorporation by reference in (i) Offer Documents, the Schedule 14D-9 or the Information Statement will, at the time such document is filed with the SEC, at any time it is amended or supplemented or at the time it is first published, sent or given to the Company's stockholders, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) the Proxy Statement will, at the date it is first mailed to the Company's stockholders or at the time of the Company Stockholders Meeting (if applicable), contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Offer Documents will comply as to form in all material respects with the requirements of the Securities Act and the rules and regulations thereunder, except that no representation is made by Parent or Sub with respect to statements made or incorporated by reference therein based on information supplied by the Company for inclusion or incorporation by reference therein. SECTION 4.06. Brokers. No broker, investment banker, financial -------- advisor or other person, other than Morgan Stanley & Co. Incorporated, the fees and expenses of which will be paid by Parent, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the Offer, the Merger and the other Transactions based upon arrangements made by or on behalf of Parent. SECTION 4.07. Financing. Parent and Sub have funds available ---------- sufficient to consummate the Offer and the Merger on the terms contemplated by this Agreement, and, at the expiration of the Offer and the Effective Time, Parent and Sub will have available all of the funds necessary for the acquisition of all shares of Common Stock pursuant to the Offer and the Merger, as the case may be, and to perform their respective obligations under this Agreement. 30 SECTION 4.08. Litigation. As of the date hereof, to the knowledge of ----------- Parent, no person has filed any action or suit against Parent with respect to this Agreement and the Transactions. SECTION 4.09. Interested Stockholder. Immediately prior to the ---------------------- execution and delivery of this Agreement and the Company Stockholder Agreement, neither Parent nor Sub was an "interested stockholder" of the Company, as such term is defined in Section 203(c)(5) of the DGCL. ARTICLE V Covenants Relating to Conduct of Business ----------------------------------------- SECTION 5.01. Conduct of Business. (a) Except for matters set forth -------------------- in the Company Disclosure Letter or otherwise contemplated by the Transaction Agreements, unless Parent shall otherwise agree, from the date of this Agreement to the Effective Time or earlier termination of this Agreement, the Company shall, and shall cause each Company Subsidiary to, conduct its business in the usual, regular and ordinary course consistent with past practice except as required to comply with changes in applicable law occurring after the date hereof (subject to the express restrictions set forth below in this Section 5.01, including, without limitation, the restrictions of clauses (iv) and (v) below) and, to the extent consistent therewith, use all commercially reasonable efforts to preserve intact its current business organization and keep available the services of its current officers and employees to maintain its goodwill and ongoing business. In addition, and without limiting the generality of the foregoing, except for matters set forth in the Company Disclosure Letter or otherwise contemplated by the Transaction Agreements, unless Parent shall otherwise agree, and except as required to comply with changes in applicable law occurring after the date hereof, from the date of this Agreement to the Effective Time, the Company shall not, and shall not permit any Company Subsidiary to, do any of the following without the prior written consent of Parent: (i) (A) declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock (other than regular quarterly cash dividends not in excess of $.05 per share of Company Common Stock with usual record and payment dates and in accordance with the Company's present dividend policy and regular quarterly cash dividends with respect to 31 the Series A Preferred), other than dividends and distributions by a direct or indirect wholly owned subsidiary of the Company to its parent, (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 the Company or any Company Subsidiary or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (ii) issue, deliver, sell or grant (A) any shares of its capital stock, (B) any Voting Company Debt or other voting securities, (C) any securities convertible into or exchangeable for, or any options, warrants or rights to acquire, any such shares, voting securities or convertible or exchangeable securities or (D) any "phantom" stock, "phantom" stock rights, stock appreciation rights or stock-based performance units, other than the issuance of Company Common Stock (and associated Company Rights) upon the exercise of Company Stock Options outstanding on the date of this Agreement or under the Company's Savings Plan for Salaried Employees, Deferred Compensation Plan or the defined contribution retirement plan for employees of Virginia Indonesia Company, and in accordance with their present terms; (iii) amend its certificate of incorporation, by-laws or other comparable charter or organizational documents; (iv) enter into, or amend, any material technical contract, long-term drilling rig contract, agreement to sell, purchase or share seismic and other geological or geophysical data, or any material contract for the purchase or sale of oil, gas, LPG, LNG, ethylene, propylene or other hydrocarbon or petrochemical products, other than in the ordinary course of business consistent with past practice; (v) (A) enter into, or amend, or negotiate to enter into or amend, any farm-out or farm-in arrangement, area of mutual interest agreement, exploration license, lease, concession agreement, production sharing contract, operating service agreement or similar agreement or arrangement evidencing an interest in hydrocarbons, or participate in any bidding group, bidding round or public hearing with respect thereto, (B) acquire, or negotiate to 32 acquire, any interest in a corporation, partnership or joint venture arrangement which holds an oil and gas interest of the type described in the foregoing clause (A), (C) sell, transfer, assign, relinquish or terminate (other than relinquishments or terminations required by the terms of existing agreements) or negotiate to take any such action with respect to, the Company's interest (as of the date of this Agreement) in any oil and gas exploration license, lease, area of mutual interest agreement, concession agreement, production sharing contract, operating service agreement or other agreement or arrangement evidencing an interest in hydrocarbons, or in the equity or debt securities of any corporation, partnership or joint venture arrangement which holds such an interest, including, without limitation, the imposition of any Lien (other than Permitted Encumbrances) on any of the foregoing, (D) give, or negotiate to give, any approvals relating to development plans, work plans, budgets or capital expenditure commitments in connection with any oil and gas interests of the type described in the foregoing clause (C), other than expenditures in the existing capital expenditure budget disclosed in the Company Disclosure Letter, or (E) make any change in the Petrochemical Interests, including, without limitation, the imposition of any Lien (other than Permitted Encumbrances) thereon, or enter into any agreements or negotiations to acquire or build new petrochemicals capacity or expand existing petrochemicals capacity, or dispose of (including, by way of a contribution of assets or otherwise), all or any portion of the Petrochemical Interests, or to alter or amend, in any material respect, any contracts relating to the Petrochemical Interests, other than in the ordinary course of business consistent with past practice; (vi) acquire or agree to acquire (A) by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business organization or division thereof or (B) any assets that are material, individually or in the aggregate, to the Company and the Company Subsidiaries taken as a whole; (vii) (A) grant to any officer or director of the Company or any Company Subsidiary any increase in compensation, except in the ordinary course of business consistent with prior practice or to the extent required under employment agreements in effect as of 33 the date of the most recent audited financial statements included in the Filed Company SEC Documents, (B) grant to any employee, officer or director of the Company or any Company Subsidiary any increase in severance or termination pay, except to the extent required under any agreement in effect as of December 31, 1997, (C) enter into any employment, consulting, indemnification, severance or termination agreement with any such employee, officer or director, (D) establish, adopt, enter into or amend in any material respect any collective bargaining agreement or Company Benefit Plan or (E) take any action to accelerate any rights or benefits, or make any material determinations not in the ordinary course of business consistent with prior practice, under any collective bargaining agreement or Company Benefit Plan; (viii) make any change in accounting methods, principles or practices materially affecting the reported consolidated assets, liabilities or results of operations of the Company, except insofar as may have been required by a change in GAAP or by operation of law; (ix) sell, lease, license or otherwise dispose of or subject to any Lien any properties or assets, except sales of inventory and excess or obsolete assets in the ordinary course of business consistent with past practice; (x) (A) incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or any Company Subsidiary, guarantee any debt securities of another person, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, except for short-term borrowings or trade obligations incurred in the ordinary course of business consistent with past practice, or (B) make any loans, advances or capital contributions to, or investments in, any other person, other than to or in the Company or any direct or indirect wholly owned subsidiary of the Company; (xi) make or agree to make any new capital expenditure or expenditures (other than expenditures in the existing capital expenditure budget disclosed in the Company Disclosure Letter) that, individually, is 34 in excess of $1,500,000 or, in the aggregate, are in excess of $5,000,000; (xii) make any material Tax election or settle or compromise any material Tax liability or refund, consent to any extension or waiver of the statute of limitations period applicable to any Tax claim or action, if any such election, settlement, compromise, consent or other action would have the effect of increasing the Tax liability or reducing any net operating loss, foreign tax credit, net capital loss or any other credit or tax attribute of the Company or any of the Company Subsidiaries (including, without limitation, deductions and credits related to alternative minimum Taxes); (xiii) enter into any hedging agreement or other financial agreement or arrangement designed to protect the Company against fluctuations in commodities prices or currency exchange rates, except agreements or arrangements entered into in the ordinary course of business consistent with past practice; (xiv) (A) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms or the terms of this Agreement, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) of the Company included in the Filed Company SEC Documents or incurred in the ordinary course of business consistent with past practice, (B) cancel any material indebtedness (individually or in the aggregate) or waive any claims or rights of substantial value or (C) waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company or any Company Subsidiary is a party; (xv) make any material change (including failing to renew) in the amount or nature of the insurance policies covering the Company and the Company Subsidiaries, other than pursuant to the terms of such existing policies as of the date of this Agreement; (xvi) enter into any agreements in connection with, or negotiate to give any approvals to, the amendment, extension, modification or waiver of any of 35 the terms and conditions (as in effect on the date of this Agreement) of the Indonesian Participating Units issued by Unimar Company, or any guarantee or "keep well" or other agreement to maintain any financial condition with respect thereto; or (xvii) authorize any of, or commit or agree to take any of, the foregoing actions. (b) The Company and Parent shall not, and shall not permit any of their respective subsidiaries to, take any action that would, or that would reasonably be expected to, result in (i) any of the representations and warranties of such party set forth in any Transaction Agreement to which it is a party that is qualified as to materiality becoming untrue, (ii) any of such representations and warranties that is not so qualified becoming untrue in any material respect or (iii) except as otherwise permitted by Section 5.02, any condition to the Offer set forth in Exhibit A, or any condition to the Merger set forth in Article VII, not being satisfied. (c) The Company shall promptly advise Parent orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen, would have, a Company Material Adverse Effect. SECTION 5.02. No Solicitation. (a) The Company shall not, nor shall ---------------- it permit any Company Subsidiary to, nor shall it authorize any officer, director or employee of, or any investment banker, attorney or other advisor or representative of, the Company or any Company Subsidiary (collectively, "Company ------- Representatives") to, and will use its reasonable best efforts to ensure that - --------------- none of the Company Representatives shall, (i) solicit, initiate or encourage the submission of, any Company Takeover Proposal, (ii) enter into any agreement with respect to any Company Takeover Proposal or (iii) participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, a Company Takeover Proposal; provided, -------- however, that, at any time during the period following the execution of the - ------- Agreement and prior to the consummation of the Offer (the "Applicable Period"), ----------------- the Company may, in response to a Company Superior Proposal (as defined in Section 5.02(b), including the determination by the Company Board set forth in such definition) that was not solicited by the Company or any Company Representative and that did not otherwise result from a breach or a deemed breach of this Section 5.02(a), and subject to providing prior written notice of its 36 decision to take such action to Parent (the "Company Notice") and compliance -------------- with Section 5.02(c), for a period of no more than ten business days following delivery of the Company Notice (which period shall be extended to the end of the 48-hour period following the receipt by Parent of the notice from the Company that it is prepared to accept a Company Superior Proposal referred to in Section 5.02(b)), (x) furnish information with respect to the Company to any person making a Company Superior Proposal pursuant to a customary confidentiality agreement as determined by the Company after consultation with its outside counsel, and (y) participate in discussions or negotiations regarding such Company Superior Proposal. Without limiting the fore going, it is agreed that any action that is in violation of or inconsistent with the restrictions set forth in the preceding sentence by any executive officer of the Company or any Company Subsidiary or any Company Representative or affiliate of the Company, whether or not such person is purporting to act on behalf of the Company or any Company Subsidiary or otherwise, shall be deemed to be a breach of this Section 5.02(a) by the Company. For purposes of this Agreement, "Company ------- Takeover Proposal" means any inquiry, proposal or offer from any person relating - -------- -------- to any direct or indirect acquisition or purchase of a business that constitutes 15% or more of the net revenues, net income or the assets of the Company and the Company Subsidiaries taken as a whole, or 15% or more of any class of equity securities of the Company or any Significant Company Subsidiary, any tender offer or exchange offer that if consummated would result in any person beneficially owning 15% or more of any class of equity securities of the Company or any Company Subsidiary, or any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company or any Company Subsidiary, other than the transactions contemplated by this Agreement. The Company shall be permitted to deliver only one Company Notice with respect to each person making a Company Superior Proposal. (b) Except as expressly permitted by this Section 5.02, neither the Company Board nor any committee thereof shall (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Parent, the approval or recommendation by the Company Board or any such committee of this Agreement, the Offer or the Merger, (ii) approve or cause the Company to enter into any letter of intent, agreement in principle or any legally binding acquisition agreement or similar agreement (any such legally binding agreement, a "Company Acquisition ------------------- Agreement") relating to any Company Takeover Proposal or (iii) approve or - --------- recommend, or propose to publicly approve or recommend, any Company 37 Takeover Proposal. Notwithstanding the foregoing, if the Company has received a Company Superior Proposal and if Sub has not accepted for payment any shares of Company Common Stock tendered pursuant to the Offer, the Company Board may (subject to this and the following sentences) terminate this Agreement, but only at a time that is during the Applicable Period and is more than 48 hours following Parent's receipt of written notice advising Parent that the Company Board is prepared to accept such Company Superior Proposal, specifying the material terms and conditions of such Company Superior Proposal and identifying the person making such Company Superior Proposal; provided, however, -------- ------- that (x) at the time of such termination, such Proposal continues to be a Company Superior Proposal, taking into account any amendment of the terms of the Offer or the Merger by Parent or any proposal by Parent to amend the terms of this Agreement, the Offer or the Merger or any other Company Takeover Proposal made by Parent (a "New Parent Proposal"), and (y) concurrently with or --- ------ -------- immediately after such termination, the Company Board shall cause the Company to enter into a Company Acquisition Agreement with respect to such Company Superior Proposal. For purposes of this Agreement, a "Company Superior Proposal" means ------- -------- -------- any proposal made by a third party to acquire, directly or indirectly, including pursuant to a tender offer, exchange offer, merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction, for consideration consisting of cash and/or securities, more than 50% of the outstanding shares of Company Common Stock or all or substantially all the assets of the Company and otherwise on terms which the Company Board determines in its good faith judgment (after consultation with a financial advisor of nationally recognized reputation) (x) is reasonably capable of being completed, taking into account all legal, financial, regulatory and other aspects of the proposal and the third party making such proposal, and (y) provides greater value to the holders of Company Common Stock (specifically taking into account the expected value of the consideration to be received by the holders of Company Common Stock on the date such consideration is expected to be received by such holders) than the cash consideration to be received by such stockholder pursuant to the Offer and the Merger, as the Offer and the Merger may be amended from time to time, or the value to the holders of Company Common Stock to be provided by any New Parent Proposal (specifically taking into account the expected value of the consideration expected to be received in the Offer, the Merger or any New Parent Proposal by the holders of Company Common Stock on the date such consideration is expected to be received by such holders). 38 (c) In addition to the obligations of the Company set forth in Sections 5.02(a) and 5.02(b), the Company promptly shall advise Parent orally and in writing of any Company Takeover Proposal or any inquiry or request for information with respect to or that could reasonably be expected to lead to any Company Takeover Proposal, the identity of the person making any such Company Takeover Proposal or inquiry or request for information and the material terms of any such Company Takeover Proposal or inquiry or request for information. The Company shall (i) keep Parent fully informed of the status including any change to the material terms of any such Company Takeover Proposal or inquiry or request for information and (ii) provide to Parent as soon as practicable after receipt or delivery thereof with copies of all correspondence and other written material sent or provided to the Company or any Company Representative or any affiliate of the Company from any third party in connection with any Company Takeover Proposal or inquiry or request for information or sent or sent or provided by the Company or any Company Representative or any affiliate of the Company to any third party in connection with any Company Takeover Proposal or inquiry or request for information; provided, however, that the Company shall -------- ------- not be required to provide any nonpublic information specified in this clause (ii) regarding the business or financial condition or prospects of such third party if the Company is prohibited from disclosing such information pursuant to a legally binding confidentiality agreement. (d) Nothing contained in this Section 5.02 shall prohibit the Company from taking and disclosing to its stockholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Company's stockholders if, in the good faith judgment of the Company Board, after consultation with outside counsel, failure so to disclose would be inconsistent with its obligations under applicable law; provided, however, that -------- ------- neither the Company nor its Board nor any committee thereof shall withdraw or modify, or propose publicly to withdraw or modify, its position with respect to this Agreement or in connection with the Offer or the Merger, or approve or recommend, or propose publicly to approve or recommend, a Company Takeover Proposal. 39 ARTICLE VI Additional Agreements --------------------- SECTION 6.01. Preparation of Proxy Statement; Stockholders Meeting. ----------------------------------------------------- (a) If the approval and adoption of this Agreement by the Company's stockholders is required by law, the Company shall, at Parent's request, as soon as practicable following the expiration of the Offer, prepare and file with the SEC the Proxy Statement in preliminary form, and the Company shall use its best efforts to respond as promptly as practicable to any comments of the SEC with respect thereto. The Company shall notify Parent promptly of the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff for amendments or supplements to the Proxy Statement or for additional information and shall supply Parent with copies of all correspondence between the Company or any of its representatives, on the one hand, and the SEC or its staff, on the other hand, with respect to the Proxy Statement. If at any time prior to receipt of the Company Stockholder Approval there shall occur any event that should be set forth in an amendment or supplement to the Proxy Statement, the Company shall promptly prepare and mail to its stockholders such an amendment or supplement. The Company shall not mail any Proxy Statement, or any amendment or supplement thereto, to which Parent reasonably objects. The Company shall use its best efforts to cause the Proxy Statement to be mailed to the Company's stockholders as promptly as practicable after filing with the SEC. (b) If the approval and adoption of this Agreement by the Company's stockholders is required by law, the Company shall, if requested by Parent and as soon as practicable following the expiration of the Offer, duly call, give notice of, convene and hold a meeting of its stockholders (the "Company ------- Stockholders Meeting") for the purpose of seeking the Company Stockholder - -------------------- Approval. The Company shall, through the Company Board, recommend to its stockholders that they give the Company Stockholder Approval. Without limiting the generality of the foregoing, the Company agrees that its obligations pursuant to the first sentence of this Section 6.01(b) shall not be affected by the commencement, public proposal, public disclosure or communication to the Company of any Company Takeover Proposal. Notwithstanding the foregoing, if Sub or any other subsidiary of Parent shall acquire at least 90% of the outstanding shares of each class of Company Capital Stock, the parties shall, at the request of Parent, take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after the expiration 40 of the Offer without a stockholders meeting in accordance with Section 253 of the DGCL. (c) Subject to any restrictions imposed by Applicable Law, Parent shall cause all shares of Common Stock purchased pursuant to the Offer and all other shares of Common Stock owned by Sub or any other subsidiary of Parent to be voted to adopt and approve this Agreement and the Merger at the Company Stockholders Meeting or, at the election of Parent, shall consent in writing to adoption and approval of this Agreement and the Merger pursuant to Section 228 of the DGCL. SECTION 6.02. Access to Information; Confidentiality. The Company --------------------------------------- shall, and shall cause each of its subsidiaries to, afford to Parent, and to Parent's directors, officers, employees, accountants, counsel, financial advisers, financing sources and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to all their respective properties, books, contracts, commitments, personnel and records and, during such period, the Company shall, and shall cause each of its subsidiaries to, furnish promptly to Parent (a) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of Federal or state securities laws and (b) all other information concerning its business, properties and personnel as Parent may reasonably request, subject to legally binding confidentiality restrictions with third parties. All nonpublic information exchanged pursuant to this Section 6.02 shall be subject to the confidentiality agreement dated as of April 25, 1998 between the Company and Parent (the "Confidentiality Agreement"). ------------------------- SECTION 6.03. Reasonable Efforts; Notification. (a) Upon the terms --------------------------------- and subject to the conditions set forth in this Agreement, each of the parties shall 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 Offer, the Merger and the other Transactions, including (i) the obtaining of all necessary actions or nonactions, waivers, consents and approvals from Governmental Entities and the making of all necessary registrations and filings (including filings with Governmental Entities, if any) 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, (ii) the obtaining 41 of all necessary consents, approvals or waivers from third parties, (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the Company Stockholder Agreement or the consummation of the Transactions, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed and (iv) the execution and delivery of any additional instruments necessary to consummate the Transactions and to fully carry out the purposes of the Transaction Agreements. In connection with and without limiting the foregoing, the Company and the Company Board shall (i) take all action necessary to ensure that no state takeover statute or similar statute or regulation is or becomes applicable to any Transaction or this Agreement or the Company Stockholder Agreement and (ii) if any state takeover statute or similar statute or regulation becomes applicable to this Agreement or the Company Stockholder Agreement, take all action necessary to ensure that the Offer, the Merger and the other Transactions may be consummated as promptly as practicable on the terms contemplated by the Transaction Agreements and otherwise to minimize the effect of such statute or regulation on the Offer, the Merger and the other Transactions. Nothing in this Agreement shall be deemed to require any party to waive any substantial rights or agree to any substantial limitation on its operations or to take any action that would result in any of the consequences referred to in paragraph (a) of Exhibit A. (b) The Company shall give prompt notice to Parent, and Parent or Sub shall give prompt notice to the Company, of (i) any representation or warranty made by it contained in any Transaction Agreement that is qualified as to materiality becoming untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becoming untrue or inaccurate in any material respect or (ii) the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under any Transaction Agreement; provided, -------- however, that no such notification shall affect the representations, warranties, - ------- covenants or agreements of the parties or the conditions to the obligations of the parties under any Transaction Agreement. SECTION 6.04. Stock Options. (a) Prior to the consummation of the -------------- Offer, the Company Board (or, if appropriate, any committee administering the Company Stock Plans) shall have adopted such resolutions or taken such other actions as are required to ensure that all Company Stock Options and all Company SARs heretofore granted under any Company Stock Plan that are outstanding at the Effective 42 Time shall not give the holder thereof the right to receive any capital stock of Parent, the Company or the Surviving Corporation after the Effective Time or to receive from Parent, the Company or the Surviving Corporation any consideration other than an amount of cash equal to the Option Spread. (b) In this Agreement: "Company Stock Option" means any option to purchase Company Common -------------------- Stock granted under any Company Stock Plan. "Company SAR" means any stock appreciation right linked to the price ----------- of Company Common Stock and granted under any Company Stock Plan. "Company Stock Plans" means the plans providing for the grant of ------------------- Company Stock Options or any other issuance of Company Capital Stock and listed in the Company Disclosure Letter. SECTION 6.05. Benefit Plans. (a) Parent shall cause the Surviving -------------- Corporation to (i) maintain for a period of one year after the Effective Time the Company Benefit Plans (other than plans providing for the issuance of Company Capital Stock or based on the value of Company Capital Stock) in effect on the date of this Agreement or (ii) make available to employees of the Company and the Company Subsidiaries (including employees transferred to employment with Parent or other subsidiaries of Parent) the employee benefit plans of Parent and its subsidiaries that are provided to similarly situated employees of Parent and its subsidiaries. (b) Following the Effective Time, Parent shall cause the Company and its subsidiaries to honor (subject to this Section 6.05 and Section 6.06) all obligations under any contracts, agreements and commitments of the Company and its subsidiaries prior to the date hereof (or as established or amended in accordance with or permitted by this Agreement) the existence of which does not constitute a violation of the terms of this Agreement, which apply to any current or former employee, or current or former director of the parties hereto or any of their subsidiaries; provided, however, that this undertaking is not -------- ------- intended to prevent the Company or any subsidiary of the Company from enforcing such contracts, agreements and commitments in accordance with their terms, including, any reserved right to amend, modify, suspend, revoke or terminate any such contract, agreement or commitment. 43 (c) Nothing herein shall be construed as giving any employee of the Company or any Company Subsidiary any right to continued employment following the Effective Time. (d) Parent agrees that for purposes of any of the Company Benefit Plans conferring rights on a current or former employee, officer or director as a result of a change of control of the Company, the consummation of the Merger shall be deemed to constitute a "Change of Control" (as that term is defined in such Company Benefit Plans). (e) If any employee or officer of the Company or any of the Company Subsidiaries becomes a participant in any employee benefit plan, program, practice or policy of Parent or any subsidiary of Parent or the Surviving Corporation, such employee or officer shall be given credit thereunder for all service prior to the Effective Time with the Company and the Company Subsidiaries or any predecessor employer (to the extent such credit was given by the Company) for purposes of eligibility and vesting (but not for benefit accrual purposes), except to the extent that crediting such service would result in duplication of benefits. (f) For a period of two years from the consummation of the Offer, if any segment or business of the Company or the Company Subsidiaries (a "Segment") ------- is sold or otherwise disposed of, Parent agrees, and shall cause the Surviving Corporation to agree, to provide, or cause the buyer of or other successor to such Segment to provide, each employee whose employment is involuntarily terminated after such sale or other disposition with severance benefits which are no less favorable than the severance benefits to which such employee would have been entitled had such employee's employment instead then been involuntarily terminated by the Company or the Company Subsidiaries, pursuant to the Company Benefit Plans existing as of the date hereof, but only to the extent that the obligations of the Company and the Company Subsidiaries under the Company Benefit Plans have not been discharged prior to such involuntary termination of employment. For the purposes of this Section 6.05(f) the term "involuntarily terminated" shall be used as such term is used in the relevant Company Benefit Plans. (g) On or before 90 days after the Closing Date, Parent shall (i) notify each management employee who is a participant in the Company's Executive Severance Plan (a "Participant") as to whether Parent intends to continue the employment of such Participant or to terminate the employment of such Participant, (ii) with respect to each Participant whose employment Parent intends to terminate, notify such Participant of the effective date of such 44 termination and the details of the terms and conditions of such Participant's employment intended by Parent to be applicable prior to the date of such termination, and (iii) with respect to each Participant to whom Parent intends to offer continued employment, notify such Participant of any desired changes Parent would make in the terms and conditions of such Participant's employment. (h) Parent shall maintain, or shall cause the Surviving Corporation or its successors to maintain, with respect to employees and former employees (and their eligible dependents) of the Company and the Company Subsidiaries who are participating in the Company's retiree medical plan as of the Effective Time or who should be eligible to participate in the Company's retiree medical plan if they retired as of the later of (i) the Effective Time or (ii) in the case of an employee who is involuntarily terminated for purposes of any Company severance plan (as currently in effect), as of the end of the salary continuation period under such severance plan, retiree medical coverage that is consistent with the retiree medical coverage provided to similarly situated employees and former employees of the Parent and its subsidiaries at such time. (i) Without regard to whether the Company's Salaried Employees' Pension Plan (the "CSEPP") or the Company's Supplemental Retirement Plan II (the ----- "SERP") are continued following the Effective Time, Parent shall cause the ---- benefits provided by Section 1.01(30)(C) of the CSEPP and Paragraphs (iv), (v) and (vi) of Article V of the SERP (pertaining to additional service credit under such plans for certain participants who are involuntarily terminated), with respect to employees of the Company as of the Effective Time who are involuntarily terminated from employment with Parent or any subsidiary of Parent within two years after the Effective Time, to be continued for a period of not less than two years following the Effective Time. (j) At Parent's election, the Company shall amend the CSEPP and Savings Plan for Salaried Employees to cause all employees of the Company and the Company Subsidiaries to become 100% vested in their accrued benefits under such plans as of the Effective Time. In all cases, any employee of the Company or a Company Subsidiary who is a participant in the CSEPP or the Savings Plan for Salaried Employees as of the Effective Time shall become 100% vested in his or her accrued benefits under such plans if and when such employee is involuntarily terminated within two years of the Effective Time. 45 SECTION 6.06. Indemnification. (a) Parent shall, to the fullest ---------------- extent permitted by law, cause the Surviving Corporation to honor all the Company's obligations to indemnify (including any obligations to advance funds for expenses) the current or former directors or officers of the Company and the Company Subsidiaries for acts or omissions by such directors and officers occurring at or prior to the Effective Time to the extent that such obligations of the Company exist on the date of this Agreement, whether pursuant to the Company Charter, the Company By-laws, individual indemnity agreements or otherwise, and such obligations shall survive the Merger and shall continue in full force and effect in accordance with the terms of the Company Charter, the Company By-laws and such individual indemnity agreements from the Effective Time until the expiration of the applicable statute of limitations with respect to any claims against such directors or officers arising out of such acts or omissions. (b) For a period of six years after the Effective Time, Parent shall cause to be maintained in effect the current policies of directors' and officers' liability insurance maintained by the Company (provided that Parent may substitute therefor policies with reputable and financially sound carriers of at least the same coverage and amounts containing terms and conditions which are no less advantageous) with respect to claims arising from or related to facts or events which occurred at or before the Effective Time; provided, -------- however, that Parent shall not be obligated to make annual premium payments for - ------- such insurance to the extent such premiums exceed 300% of the annual premiums paid as of the date hereof by the Company for such insurance (such 300% amount, the "Maximum Premium"). If such insurance coverage cannot be obtained at all, --------------- or can only be obtained at an annual premium in excess of the Maximum Premium, Parent shall maintain the most advantageous policies of directors' and officers' insurance obtainable for an annual premium equal to the Maximum Premium; provided further, if such insurance coverage cannot be obtained at all, Parent - -------- ------- shall purchase all available extended reporting periods with respect to pre- existing insurance in an amount which, together with all other insurance purchased pursuant to this Section 6.06(b), does not exceed the Maximum Premium. The Company represents to Parent that the Maximum Premium is $1,899,000. Parent agrees, and will cause the Company, not to take any action that would have the effect of limiting the aggregate amount of insurance coverage required to be maintained for the individuals referred to in this Section 6.06(b). 46 (c) From and after the consummation of the Offer, to the full extent permitted by the law, Parent shall, and shall cause the Company (or any successor to the Company) to, indemnify, defend and hold harmless the present officers and directors of the Company and its subsidiaries (each an "Indemnified ----------- Party") against all losses, claims, damages, liabilities, fees and expenses - ----- (including attorneys' fees and disbursements), judgments, fines and amounts paid in settlement (collectively, "Losses") arising out of actions or omissions occurring at or prior to the Effective Time in connection with this Agreement, the Company Stockholder Agreement, the Offer, the Merger and the other Transactions; provided, however, that an Indemnified Party shall not be entitled -------- ------- to indemnification under this Section 6.06(c) for Losses arising out of actions or omissions by the Indemnified Party constituting (i) a breach of this Agreement or the Company Stockholder Agreement, (ii) criminal conduct or (iii) any violation of federal, state or foreign securities laws. In order to be entitled to indemnification under this Section 6.06(c), an Indemnified Party must give Parent and the Company prompt written notice of any third party claim which may give rise to any indemnity obligation under this Section 6.06(c), and Parent and the Company shall have the right to assume the defense of any such claim through counsel of their own choosing, subject to such counsel's reasonable judgment that separate defenses that would create a conflict of interest on the part of such counsel are not available. If Parent and the Company do not assume any such defense, they shall be liable for all reasonable costs and expenses of defending such claim incurred by the Indemnified Party, including reasonable fees and disbursements of counsel and shall advance such reasonable costs and expenses to the Indemnified Party; provided, however, that -------- ------- such advance shall be made only after receiving an undertaking from the Indemnified Party that such advance shall be repaid if it is determined that such Indemnified Party is not entitled to indemnification therefor. Neither Parent nor the Company shall be liable under this Section 6.06(c) for any Losses resulting from any settlement, compromise or offer to settle or compromise any such claim or litigation or other action, without the prior written consent of Parent and the Company. (d) The Company shall not, and Parent shall not permit the Company to, amend or repeal any provision of the certificate of incorporation or by-laws of the Company after the consummation of the Offer if such action would adversely affect the rights of individuals who on or prior to the consummation of the Offer were entitled to advances, indemnification or exculpation thereunder, for actions or omissions by such individuals prior to the Effective Time. 47 The individuals referred to in the preceding sentence shall include any individuals serving as directors or officers of any subsidiaries of the Company at the Company's request, it being acknowledged by the parties hereto that each director or officer of the Company who is currently serving as a director or officer of a subsidiary of the Company is doing so at such request of the Company. (e) In the event the Surviving Corporation or any successor to the Surviving Corporation (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all its properties and assets to any person, then, and in each case, proper provision shall be made so that the successors of the Surviving Corporation honor the obligations of the Company set forth in this Section 6.06. SECTION 6.07. Fees and Expenses. (a) Except as provided below, all ----------------- fees and expenses incurred in connection with the Merger and the other Transactions shall be paid by the party incurring such fees or expenses, whether or not the Merger is consummated. (b) The Company shall pay to Parent a fee of $85,000,000 if: (i) the Company terminates this Agreement pursuant to Section 8.01(d); (ii) (A) after the date of this Agreement and prior to the termination of this Agreement, any person makes a Company Takeover Proposal, (B) the Offer shall have remained open until the scheduled expiration date immediately following the date such Company Takeover Proposal is made, (C) the Minimum Tender Condition is not satisfied at the expiration of the Offer, (D) this Agreement is terminated pursuant to Section 8.01(b)(iii) and (E) within 12 months of the date of termination of this Agreement, the Company executes a legally binding agreement or an agreement in principle pursuant to which any person, entity or group (other than Parent, Sub or any of their affiliates), in one transaction or a series of transactions, will acquire more than 50% of the outstanding Company Common Stock or assets of the Company through any open market purchases, merger, consolidation, tender or exchange offer, recapitalization, reorganization or other business combination (an "Acquisition Event"); or ----------------- 48 (iii) (A) after the date of this Agreement and prior to the termination of this Agreement, any person makes a Company Takeover Proposal, (B) this Agreement is terminated pursuant to Section 8.01(b)(iii) as a result of the failure of any condition set forth in paragraph (f) or (g) of Exhibit A, and (C) an Acquisition Event occurs within 12 months of the date of termination of this Agreement. Any fee due under this Section 6.07(b) shall be paid by wire transfer of same-day funds on the date of termination of this Agreement in the case of a fee due under clause (i) of the preceding sentence, or on the date such Acquisition Event is consummated in the case of a fee due under clause (ii) or (iii) of the preceding sentence. The payment of a fee pursuant to the foregoing clause (iii) as a result of any wilful breach by the Company of its representations, warranties or covenants shall in no way limit any remedy available to Parent or Sub for such breach, except that the receipt by Parent of such fee shall be taken into account in calculating any damages suffered by Parent or Sub as a result of such breach. SECTION 6.08. Public Announcements. (a) Parent and Sub, on the one --------------------- hand, and the Company, on the other hand, shall consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the Offer, the Merger and the other Transactions and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with any national securities exchange. (b) The Company shall give prior notice (which to the extent practicable shall be given in writing and on 24 hours' prior notice) to Parent and Sub of any proposed press release or other public statement not relating to the Offer, the Merger or any of the other Transactions, which notice shall include the text of such press release or public statement. SECTION 6.09. Directors. (a) Promptly upon the acceptance for ---------- payment of, and payment by Sub for, any shares of Common Stock pursuant to the Offer, Sub shall be entitled to designate such number of directors on the Company Board as will give Sub, subject to compliance with Section 14(f) of the Exchange Act, representation on the Company Board equal to at least that number of directors, rounded up to the next whole number, which is the product of 49 (a) the total number of directors on the Company Board (giving effect to the directors elected pursuant to this sentence) multiplied by (b) the percentage that (i) such number of shares of Company Common Stock so accepted for payment and paid for by Sub plus the number of shares of Company Common Stock otherwise owned by Sub or any other subsidiary of Parent bears to (ii) the number of such shares outstanding, and the Company shall, at such time, cause Sub's designees to be so elected; provided, however, that in the event -------- ------- that Sub's designees are appointed or elected to the Company Board, until the Effective Time the Company Board shall have at least three directors who are Directors on the date of this Agreement and who are not officers of the Company (the "Independent Directors"); and provided further that, in such event, if the ----------- --------- -------- ------- number of Independent Directors shall be reduced below three for any reason whatsoever, any remaining Independent Directors (or Independent Director, if there shall be only one remaining) shall be entitled to designate persons to fill such vacancies who shall be deemed to be Independent Directors for purposes of this Agreement or, if no Independent Directors then remain, the other directors shall designate three persons to fill such vacancies who shall not be officers, stockholders or affiliates of the Company, Parent or Sub, and such persons shall be deemed to be Independent Directors for purposes of this Agreement. Subject to applicable law, the Company shall take all action requested by Parent necessary to effect any such election, including mailing to its stockholders the Information Statement containing the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, and the Company shall make such mailing with the mailing of the Schedule 14D-9 (provided that Sub shall have provided to the Company on a timely basis all information required to be included in the Information Statement with respect to Sub's designees). In connection with the foregoing, the Company shall promptly, at the option of Sub, use its best efforts to either increase the size of the Company Board or obtain the resignation of such number of its current directors as is necessary to enable Sub's designees to be elected or appointed to the Company Board as provided above. (b) Following the election or appointment of Sub's designees pursuant to this Section 6.09 and prior to the Effective Time, any amendment or termination of this Agreement, extension for the performance or waiver of the obligations of Parent or Sub or waiver of the Company's rights hereunder shall require the concurrence of a majority of the Independent Directors. 50 SECTION 6.10. Rights Agreement. The Rights Agreement dated as of ----------------- September 12, 1997, between the Company and First Chicago Trust Company of New York, as Rights Agent (the "Company Rights Agreement"), has been amended as ------------------------ provided in Exhibit B. Except as approved in writing by Parent, neither the Company nor the Company Board shall (i) amend the Company Rights Agreement, (ii) redeem the Company Rights or (iii) take any action with respect to, or make any determination under, the Company Rights Agreement. SECTION 6.11. Stockholder Litigation. The Company shall give Parent ----------------------- the opportunity to participate in the defense or settlement of any stockholder litigation against the Company and its directors relating to any Transaction; provided, however, that no such settlement shall be agreed to without Parent's - -------- ------- consent, which shall not be unreasonably withheld. SECTION 6.12. Performance by Sub. Parent shall cause Sub to comply ------------------- with each of its obligations hereunder and pursuant to the Offer, including, without limitation, causing Sub to consummate the Offer and the Merger as contemplated herein, and Parent hereby guarantees the performance by Sub of such obligations. SECTION 6.13. Dual Consolidated Losses. If the Company or any ------------------------- Company Subsidiary has any dual consolidated loss that would be subject to recapture under Treasury Regulation Section 1.1503-2(g)(2) as a result of the Offer, the Merger or the other Transactions, the Company or such Company Subsidiary shall use its best efforts in conjunction with Parent to file, prior to the date that the Company becomes a member of Parent's consolidated group, a request with the Internal Revenue Service to enter into a closing agreement under Treasury Regulation Section 1.1503-2(g)(2)(iv)(B) to avoid such recapture. ARTICLE VII Conditions Precedent -------------------- SECTION 7.01. Conditions to Each Party's Obligation To Effect The --------------------------------------------------- Merger. The respective obligation of each party to effect the Merger is subject - ------- to the 51 satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) Stockholder Approval. If required by law, the Company shall have --------------------- obtained the Company Stockholder Approval. (b) Antitrust. The waiting period (and any extension thereof) ---------- applicable to the Merger under the HSR Act shall have been terminated or shall have expired. Any consents, approvals and filings under any foreign antitrust law (including, without limitation, the EC Regulations), the absence of which would prohibit the consummation of the Merger, shall have been obtained or made. (c) No Injunctions or Restraints. No temporary restraining order, ----------------------------- preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect; provided, however, that each of -------- ------- the parties shall have used all reasonable efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any such injunction or other order that may be entered. (d) Purchase of Stock. Sub shall have previously accepted for ------------------ payment and paid for Company Common Stock pursuant to the Offer. ARTICLE VIII Termination, Amendment and Waiver --------------------------------- SECTION 8.01. Termination. This Agreement may be terminated at any ------------ time prior to the Effective Time, whether before or after the Company Stockholder Approval: (a) by mutual written consent of Parent, Sub and the Company; (b) by either Parent or the Company: (i) if the Merger is not consummated on or before January 31, 1999 (the "Outside Date"), unless the failure to consummate the Merger ------------ is the result of a wilful and material breach of any Transaction Agreement by the party seeking to terminate this Agreement; provided, -------- however, that the passage of such period shall be tolled for any ------- 52 part thereof during which any party shall be subject to a nonfinal order, decree, ruling or action restraining, enjoining or otherwise prohibiting the consummation of the Merger; (ii) if any Governmental Entity issues an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable; or (iii) if as the result of the failure of any of the conditions set forth in Exhibit A to this Agreement, the Offer shall have terminated or expired in accordance with its terms without Sub having purchased any shares of Company Common Stock pursuant to the Offer; (c) by Parent, if, prior to the consummation of the Offer (and other than during any Parent Extension Period), the Company shall be in breach of any of its representations and warranties or fail to perform in any material respect any of its covenants and obligations contained in any Transaction Agreement, which breach or failure to perform would give rise to the failure of a condition set forth in Exhibit A (provided that Parent -------- is not then in wilful and material breach of any representation, warranty or covenant contained in any Transaction Agreement, and provided further, -------- ------- that such breach or failure to perform is not capable of being cured by the earlier of 15 days from the time it came to the Knowledge of the Company and the then scheduled expiration date of the Offer); (d) by the Company in accordance with Section 5.02(b); provided, -------- however, that, in order for the termination of this Agreement pursuant to ------- this clause (d) to be deemed effective, the Company shall have complied with all provisions contained in Section 5.02(b), including the notice provisions therein and with applicable requirements of Section 6.07, including the payment of the fee pursuant to Section 6.07(b); (e) by the Company, if, prior to the consummation of the Offer, the Parent or Sub shall be in breach of any of their representations and warranties or fail to perform in any material respect any of their covenants and obligations contained herein (provided, that the -------- 53 Company is not then in wilful and material breach of any representation, warranty or covenant contained in this Agreement and provided further, that -------- ------- such breach or failure to perform is not capable of being cured by the earlier of 15 days from the time it came to the knowledge of the Parent and the then scheduled expiration date of the Offer); (f) by the Company if the Offer has not been made in accordance with Section 1.01; or (g) by the Company if any event occurs which would result in the condition set forth in paragraph (e) of Exhibit A not being satisfied, and five business days have elapsed since such occurrence, unless Parent shall have waived its right to terminate this Agreement in accordance with Section 8.04 and its right not to consummate the Offer for the failure of such condition resulting from such event. SECTION 8.02. Effect of Termination. In the event of termination of ---------------------- this Agreement by either the Company or Parent as provided in Section 8.01, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of Parent, Sub or the Company, other than Section 3.16, Section 4.06, Section 6.02, Section 6.07, this Section 8.02 and Article IX and except to the extent that such termination results from the wilful and material breach by a party of any representa tion, warranty, covenant or obligation set forth in any Transaction Agreement. SECTION 8.03. Amendment. This Agreement may be amended by the ---------- parties at any time before or after receipt of the Company Stockholder Approval; provided, however, that after receipt of the Company Stockholder Approval, there - -------- ------- shall be made no amendment that by law requires further approval by such stockholders without the further approval of such stockholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties. SECTION 8.04. Extension; Waiver. Subject to the provisions of ------------------ Section 6.09(b), at any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to the proviso of Section 8.03, waive compliance with any of the agreements or conditions contained in this 54 Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights. SECTION 8.05. Procedure for Termination, Amendment, Extension or --------------------------------------------------- Waiver. A termination of this Agreement pursuant to Section 8.01, an amendment - ------- of this Agreement pursuant to Section 8.03 or an extension or waiver pursuant to Section 8.04 shall, in order to be effective, require in the case of Parent, Sub or the Company, action by its Board of Directors or the duly authorized designee of its Board of Directors. ARTICLE IX General Provisions ------------------ SECTION 9.01. Nonsurvival 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. This Section 9.01 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. SECTION 9.02. Notices. All notices, requests, claims, demands and -------- other communications under this Agree ment shall be in writing and shall be deemed given upon receipt by 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 Atlantic Richfield Company 515 South Flower Street Los Angeles, CA 90071 Attention: John R. Lucas, Esq. with a copy to: Cravath, Swaine & Moore 825 Eighth Avenue New York, NY 10019 Attention: Alan C. Stephenson, Esq. 55 (b) if to the Company, to Union Texas Petroleum Holdings, Inc. 1330 Post Oak Boulevard Houston, TX 77056 Attention: Alan Crain, Jr. Esq. with a copy to: King & Spalding 1185 Avenue of the Americas New York, NY 10036 Attention: Mark Zvonkovic, Esq. SECTION 9.03. Definitions. For purposes of this Agreement: ------------ An "affiliate" of any person means another person that directly or --------- indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person. "Knowledge of the Company" or "Company's Knowledge" means, when used ------------------------ ------------------- in any representation, covenant or warranty of the Company contained herein, the actual knowledge of or what should reasonably have been known by any officer or director of the Company. A "person" means any individual, firm, corporation, partnership, ------ company, limited liability company, trust, joint venture, association, Governmental Entity or other entity. A "subsidiary" of any person means another person, an amount of the ---------- voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests of which) is owned directly or indirectly by such first person. SECTION 9.04. Interpretation; Disclosure Letter. 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 56 Agreement, they shall be deemed to be followed by the words "without limitation". Any matter disclosed in any section of the Company Disclosure Letter shall be deemed disclosed for all purposes and all sections of the Company Disclosure Letter. SECTION 9.05. Severability. If any term or other provision of this ------------- Agreement is invalid, illegal or incapable of being enforced by any rule or law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. SECTION 9.06. Counterparts. This Agreement may be executed in one or ------------- more 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 9.07. Entire Agreement; No Third-Party Beneficiaries. The ----------------------------------------------- Transaction Agreements, taken together, (a) constitute the entire agreement, and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the Transactions and (b) except for the provisions of Article II, Section 6.04 and Section 6.06, are not intended to confer upon any person other than the parties any rights or remedies. SECTION 9.08. Governing Law. This Agreement shall be governed by, -------------- and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. SECTION 9.09. Assignment. Neither this Agreement nor any of the ----------- rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by opera tion of law or otherwise 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 formed solely for the purpose of engaging in the 57 transactions contemplated hereby, which has not engaged in any business activities or conducted any operations other than in connection with the transactions contemplated hereby, but no such assignment shall relieve Sub of any of its obligations under this Agreement. Any purported assignment without such consent shall be void. Subject to the preceding sentences, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. SECTION 9.10. Enforcement. The parties agree that irreparable damage ------------ would occur in the event that any of the provisions of any Transaction 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 any Transaction Agreement and to enforce specifically the terms and provisions of each Transaction Agreement in any Delaware state court or any Federal court located in the State of Delaware, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any Delaware state court or any Federal court located in the State of Delaware in the event any dispute arises out of any Transaction Agreement or any Transaction, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (c) agrees that it will not bring any action relating to any Transaction Agreement or any Transaction in any court other than any Delaware state court or any Federal court sitting in the State of Delaware and (d) waives any right to trial by jury with respect to any action related to or arising out of any Transaction Agreement or any Transaction. 58 IN WITNESS WHEREOF, Parent, Sub and the Company have duly executed this Agreement, all as of the date first written above. ATLANTIC RICHFIELD COMPANY, by /s/ Terry G. Dallas ----------------------- Name: Terry G. Dallas Title:Senior Vice President and Treasurer VWK ACQUISITION CORP., by /s/ Terry G. Dallas ---------------------- Name: Terry G. Dallas Title:President UNION TEXAS PETROLEUM HOLDINGS, INC., by /s/ John L. Whitmire -------------------- Name:John L. Whitmire Title:Chairman and Chief Executive Officer EXHIBIT A Conditions of the Offer ----------------------- Notwithstanding any other term of the Offer or this Agreement, Sub shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-l(c) under the Exchange Act (relating to Sub's obligation to pay for or return tendered shares of Company Common Stock promptly after the termination or withdrawal of the Offer), to pay for any shares of Common Stock tendered pursuant to the Offer unless (i) there shall have been validly tendered and not withdrawn prior to the expiration of the Offer that number of shares of Company Common Stock which would represent at least a majority of the Fully Diluted Shares (the "Minimum Tender Condition"), ------------------------ (ii) any waiting period under the HSR Act applicable to the purchase of shares of Company Common Stock pursuant to the Offer shall have expired or been terminated and (iii) any waiting or other period under the EC Regulations applicable to the Offer or the Merger, or the exercise by Parent or Sub of full ownership and voting rights with respect to such shares of Company Common Stock acquired pursuant to the Offer and the Merger, shall have expired or been terminated, and the European Commission shall have taken all such action as shall be required so that Parent and Sub may consummate the Offer and the Merger and exercise full ownership and voting rights with respect to the shares of Company Common Stock to be acquired pursuant to the Offer and the Merger. The term "Fully Diluted Shares" means all outstanding securities entitled generally -------------------- to vote in the election of directors of the Company on a fully diluted basis, after giving effect to the exercise or conversion of all options, rights and securities exercisable or convertible into such voting securities, other than potential dilution attributable to the Rights. Furthermore, notwithstanding any other term of the Offer or this Agreement, Sub shall not be required to commence the Offer, accept for payment or, subject as aforesaid, to pay for any shares of Company Common Stock not theretofore accepted for payment or paid for, and may terminate or amend the Offer, with the consent of the Company or if, at any time on or after the date of this Agreement and before the acceptance of such shares for payment or the payment therefor, any of the following conditions exists: (a) there shall be threatened or pending any suit, action or proceeding by any Governmental Entity in any of the significant geographical regions in which the Company or any of the Company Subsidiaries operates or by or before the European Commission (i) challenging the acquisition by Parent or Sub of any Company Common Stock, seeking to restrain or prohibit the making or consummation of the Offer or the Merger or any other Transaction, or seeking to obtain from the Company, Parent or Sub any damages in connection with the Offer, the Merger or this Agreement that are material in relation to the Company and its subsidiaries taken as whole, (ii) seeking to prohibit or limit the ownership or operation by the Company, Parent or any of their respective subsidiaries of any material portion of the business or assets of the Company, Parent or any of their respective subsidiaries, or to compel the Company, Parent or any of their respective subsidiaries to dispose of or hold separate any material portion of the business or assets of the Company, Parent or any of their respective subsidiaries, as a result of the Offer, the Merger or any of the other Transaction, (iii) seeking to impose limitations on the ability of Parent or Sub to acquire or hold, or exercise full rights of ownership of, any shares of Company Common Stock, including the right to vote the Company Common Stock purchased by it on all matters properly presented to the stockholders of the Company, (iv) seeking to prohibit Parent or any of its subsidiaries from effectively controlling in any material respect the business or operations of the Company and the Company Subsidiaries in connection with the Offer, the Merger or this Agreement, or (v) which otherwise is reasonably likely to have a Company Material Adverse Effect; (b) any statute, rule, regulation, legislation, interpretation, judgment, order or injunction shall be enacted, entered, enforced, promulgated, amended or issued in any of the significant geographical regions in which the Company or any of the Company Subsidiaries operates or by the European Council or the European Commission with respect to, or shall be deemed applicable to, or any consent or approval shall be withheld with respect to, (i) Parent, the Company or any of their respective subsidiaries or (ii) the Offer, the Merger or any of the other Transactions, by any Governmental Entity that is reasonably likely to result, directly or indirectly, in any of the consequences referred to in paragraph (a) above; (c) since the date of this Agreement, there shall have occurred any event, change, effect or development that, individually or in the aggregate, has had or would be reasonably expected to have a Company Material Adverse Effect, and if a Company Material Adverse Effect has occurred, it shall be continuing; 2 (d) there shall be any temporary, preliminary or permanent restraining order or injunction or other legal restraint or prohibition by any Governmental Entity that prevents or makes illegal the consummation of the Offer, the Merger or any of the other Transactions; (e) there shall have occurred and continued for at least three calendar days: (i) a general suspension of trading in, or limitation on prices for, securities on the New York Stock Exchange, any national securities exchange or the NASDAQ National Market System (excluding suspensions or limitations resulting from physical damage or interference with such exchanges not related to market conditions); (ii) a decline of at least 30% in the Dow Jones Industrial Index; (iii) a declaration of a banking moratorium or suspension of payments in respect of banks in the United States; (iv) a mandatory limitation by the United States Government or a change in the general financial, banking or capital markets which materially and adversely affects the ability of major financial institutions in the United States to extend credit; (v) a commencement of war, armed hostilities or other major national or international crisis directly involving the United States (other than an action involving personnel of the United Nations) or (vi) in the case of any of the foregoing existing on the date of this Agreement, a material acceleration or worsening thereof; (f) any representation and warranty of the Company or any other party (other than Parent and Sub) in this Agreement or the Company Stockholder Agreement shall not be true and correct in all material respects (provided that any representation or warranty of the Company or any other party (other than Parent and Sub) contained herein or therein that is qualified by a materiality standard or a Material Adverse Effect qualification shall not be further qualified hereby) as of the date of this Agreement and (except with respect to Section 3.14 and to the extent such representations or warranties expressly relate to an earlier date) as of the scheduled or extended expiration of the Offer; (g) the Company shall have failed to comply with the provisions of Section 5.01(a)(v) of this Agreement, or the Company or any other party (other than Parent and Sub) shall have failed to comply with any agreement or covenant in any material respect of the Company or any other party (other than Parent and Sub) to be 3 performed or complied with by any of them under this Agreement or the Company Stockholder Agreement; or (h) there shall have been issued, delivered, sold or granted any Company Common Stock pursuant to the Company Rights Agreement; or (i) this Agreement shall have been terminated in accordance with its terms; which in the sole judgment of Sub or Parent, in the case of any such condition, and regardless of the circumstances giving rise to any such condition (including any action or inaction by Parent or any of its affiliates), makes it inadvisable, to proceed with such acceptance for payment or payment. The foregoing conditions are for the sole benefit of Sub and Parent and may be asserted by Sub or Parent regardless of the circumstances giving rise to such condi tion or may be waived by Sub and Parent in whole or in part at any time and from time to time in their sole discretion. The failure by Parent, Sub or any other affiliate of Parent at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and circum stances shall not be deemed a waiver with respect to any other facts and circumstances and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. 4 EXHIBIT B AMENDMENT TO RIGHTS AGREEMENT BETWEEN UNION TEXAS PETROLEUM HOLDINGS, INC. AND FIRST CHICAGO TRUST COMPANY OF NEW YORK THIS AMENDMENT TO RIGHTS AGREEMENT (this "Amendment") is made as of this third day of May, 1998 by and between Union Texas Petroleum Holdings, Inc., a Delaware corporation (the "Company"), and First Chicago Trust Company of New York, a New York corporation, as rights agent (the "Rights Agent"). Capitalized terms used but not defined herein shall have the meanings give to such terms in the Merger Agreement (as defined below). WHEREAS, the Corporation is entering into an Agreement and Plan of Merger (as the same may be amended from time to time, the "Merger Agreement") among the Company, Atlantic Richfield Company, a Delaware corporation ("Parent"), and VWK Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Parent ("the Sub"), providing for transactions (collectively, the "Merger") pursuant to which, among other things, the Company will become a wholly-owned subsidiary of Parent and the former stockholders of the Company will receive the Merger Consideration; WHEREAS, the Company and the Rights Agent are parties to a Rights Agreement dated as of September 12, 1997 (the "Rights Agreement"); and WHEREAS, the parties desire to amend the Rights Agreement in connection with the execution and delivery of the Merger Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein set forth, the parties hereby agree as follows: 1. The definition of "Acquiring Person" set forth in Section 1 of the Rights Agreement is hereby amended by adding the following sentence to the end of that definition: Notwithstanding the foregoing, no Person shall be or become an Acquiring Person by reason of (i) the execution and delivery of the Agreement and Plan of Merger dated as of May 4, 1998 among the Company, Atlantic Richfield Company, a Delaware corporation ("Parent"), and , a Delaware corporation ("Sub"), (the "Merger Agreement") or the execution of any amendment thereto, (ii) the purchase of Common Stock by Parent or Sub pursuant to (A) the Offer or (B) Section 4 of the Stockholder Agreement dated May 4, 1998 among Parent, KKR Partners II, L.P., a Delaware limited partnership, and Petroleum Associates, L.P., a Delaware limited partnership (the "Stockholder Agreement") or (iii) the consummation of the other Transactions. 2. Section 7(a)(i) of the Rights Agreement shall be amended to read in its entirety as follows: (i) the earlier of (1) the consummation of the Offer (as defined in the Merger Agreement) or (2) the Close of Business on September 30, 2007. 3. The definition of "Stock Acquisition Date" included in Section 1 of the Rights Agreement shall be 2 amended by adding the following sentence to the end of such definition: Notwithstanding anything else set forth in this Agreement, a Stock Acquisition Date shall not be deemed to have occurred by reason of (i) the public announcement, public disclosure, execution and delivery or amendment of the Merger Agreement, (ii) the public announcement, public disclosure, execution and delivery or amendment of the Stockholder Agreement, (iii) the purchase of Common Stock by Parent or Sub pursuant to (A) Section 4 of the Stockholder Agreement or (B) the consummation of the Offer or (iv) the consummation of any of the other Transactions. 4. Section 3(a) of the Rights Agreement shall be amended by adding the following sentence to the end thereof: Notwithstanding anything else set forth in this Agreement, no Distribution Date shall be deemed to have occurred by reason of (i) the execution and delivery or amendment of the Merger Agreement, (ii) the execution and delivery or amendment of the Stockholder Agreement, (iii) the purchase of Common Stock by Parent or Sub pursuant to (A) Section 4 of the Stockholder Agreement or (B) the consummation of the Offer or (iv) the consummation of any of the other Transactions. 5. The first paragraph of Section 13(c) of the Rights Agreement shall be amended to read in its entirety as follows: The Company shall not consummate any consolidation, merger, sale or transfer referred to in Section 13(a) (other than any such transaction contemplated by the Merger Agreement or the Stockholder Agreement) unless the Principal Party shall have a sufficient number of authorized shares of its 3 Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and the Principal Party involved therein shall have executed and delivered to the Rights Agent an agreement confirming that the requirements of Section 13(a) and (b) shall promptly be performed in accordance with their terms and that such consolidation, merger, sale or transfer of assets shall not result in a default by the Principal Party under this Agreement as the same shall have been assumed by the Principal Party pursuant to Sections 13(a) and (b) hereof and further providing that, as soon as practicable after executing such agreement pursuant to this Section 13, the Principal Party will: 6. The Rights Agreement, as amended by this Amendment, shall remain in full force and effect in accordance with its terms. 7. This Amendment shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. This Amendment may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, 4 covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated. IN WITNESS WHEREOF, the parties herein have caused this Amendment to be duly executed and attested, all as of the date and year first above written. UNION TEXAS PETROLEUM HOLDINGS, INC., by /s/ John L. Whitmire ----------------------- Name: John L. Whitmire Title: Chairman of the Board and Chief Executive Officer Attest: /s/ A.R. Crain, Jr. ------------------------------ Name: A.R. Crain, Jr. Title: Vice President and General Counsel FIRST CHICAGO TRUST COMPANY OF NEW YORK, RIGHTS AGENT, 5 by /s/ John Piskaldo ---------------------------- Name: John Piskaldo Title: Assistant Vice President Attest: /s/ illegible ----------------- Name: Title: 6 SCHEDULE I Definitions ----------- Term Defined in Section - ---- ------------------ "Acquisition Event" 6.07(b) "affiliate" 9.03 "Applicable Law" 3.05(a) "Applicable Period" 5.02(a) "Appraisal Shares" 2.01(e) "Certificate of Merger" 1.05 "Certificates" 2.02(b) "Closing" 1.04 "Closing Date" 1.04 "Code" 3.11(b) "Company" Recitals "Company Acquisition Agreement" 5.02(b) "Company Affiliated Group" 3.09(a) "Company Benefit Plans" 3.10 "Company Board" 3.04(b) "Company By-Laws" 3.01 "Company Capital Stock" 3.03 "Company Charter" 3.01 "Company Common Stock" Recitals "Company Confidentiality Agreement" 3.15(a) "Company Disclosure Letter" 3.02(a) "Company Material Adverse Effect" 3.01 "Company Multiemployer Pension Plan" 3.11(c) "Company Notice" 5.02(a) "Company Pension Plans" 3.11(a) "Company Preferred Stock" 3.03 "Company Representatives" 5.02(a) "Company Rights" 3.03 "Company Rights Agreement" 3.03 "Company SAR" 6.04(b) "Company SEC Documents" 3.06 "Company Stockholder Agreement" Recitals "Company Stockholder Approval" 3.04(c) "Company Stockholder Meeting" 6.01(b) "Company Stock Option" 6.04(b) "Company Stock Plans" 6.04(b) "Company Subsidiary" 3.02(a) "Company Superior Proposal" 5.02(b) "Company Takeover Proposal" 5.02(a) "Company's Knowledge 9.03 "Confidentiality Agreement" 6.02(b) "Contract" 3.05(a) "Consent" 3.05(a) "CSEPP" 6.05(i) "DGCL" 1.03 "EC Regulations" 3.05(a) "Effective Time" 1.05 2 "ERISA" 3.11(a) "European Commission" 3.05(a) "Exchange Act" 3.05(a) "Exchange Fund" 2.02(a) "Filed Company SEC Documents" 3.08 "Financial Advisors" 3.16 "Fully Diluted Shares" Exhibit A "GAAP" 3.06 "Governmental Entity" 3.05(a) "HSR Act" 3.05(a) "Indemnified Party" 6.06(a) "Independent Directors" 6.10 "Information Statement" 3.05(a) "Judgment" 3.05(a) "Knowledge" 9.03 "Liens" 3.02(a) "Losses" 6.06(c) "Maximum Premium" 6.06(b) "Merger" Recitals "Merger Consideration" 2.01(c) "Minimum Trade Condition" Exhibit A "New Parent Proposal" 5.02(b) "1997 Company 10-K" 3.06 "Offer" Recitals "Offer Documents" 1.01(b) "Oil and Gas Interest" 3.08 "Offer Price" Recitals "Option Spread 1.02(d) "Outside Date" 8.01(b) "Parent" Recitals "Parent Extension Period" 1.01(a) "Parent Material Adverse Effect" 4.04 "Participant" 6.05(g) "Paying Agent" 2.02(a) "Permitted Encumbrances" 3.02 "person" 9.03 "Petrochemicals Interests" 3.08 "Primary Company Executives" 3.11(g) "Principal Company Stockholder" Recitals "Proxy Statement" 3.05(a) "SEC" 1.01(a) "Section 262" 2.01(e) "Securities Act" 3.06 "SERP" 6.05(i) "Schedule 14D-9" 1.02(b) "Segment" 6.05(f) "Series A Preferred" 2.01(d) "Significant Company Subsidiary" 3.01 "Sub" Recitals "subsidiary" 9.03 "Surviving Corporation" 1.03 3 "Taxes" 3.09(f) "Tax Return" 3.01(f) "Transaction Agreements" Recitals "Transactions" 1.02(a) "Voting Company Debt" 3.03 EX-99.(C)(3) 8 STOCKHOLDERS AGREEMENT EXHIBIT (c)(3) CONFORMED COPY STOCKHOLDER AGREEMENT dated as of May 4, 1998, among ATLANTIC RICHFIELD COMPANY, a Delaware corporation ("Parent"), and PETROLEUM ------ ASSOCIATES, L.P., a Delaware limited partnership, and KKR PARTNERS II, L.P., a Delaware limited partnership, such partnerships together, the "Stockholder"). ----------- WHEREAS, concurrently with the execution and delivery of this Agreement, Parent, Sub and Union Texas Petroleum Holdings, Inc., a Delaware corporation (the "Company"), have entered into an Agreement and Plan of Merger ------- (as the same may be amended or supplemented, the "Merger Agreement"; capitalized ---------------- terms used but not defined herein shall have the meanings set forth in the Merger Agreement) providing for the merger of Sub with and into the Company (the "Merger"); ------ WHEREAS the Stockholder owns or has sole authority with respect to the voting and disposition of 21,833,334 shares of Company Common Stock (such shares of Company Common Stock, together with any other shares of capital stock of the Company as to which ownership or voting or dispositive control is acquired by the Stockholder after the date hereof and during the term of this Agreement, being collectively referred to herein as the "Subject Shares"); -------------- WHEREAS, in furtherance of the Merger, Parent and the Company desire that as soon as practicable (and not later than five business days) from the announcement of the execution of the Merger Agreement, Sub shall commence a cash tender offer (the "Offer") to purchase at a price of $29.00 per share all ----- outstanding shares of Company Common Stock, including the Subject Shares, on the terms and subject to the conditions provided in the Merger Agreement; and WHEREAS, as a condition to their willingness to enter into the Merger Agreement, Parent and Sub have requested that the Stockholder enter into this Agreement. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Representations and Warranties of the Stockholder. The -------------------------------------------------- Stockholder hereby represents and warrants to Parent as of the date hereof as follows: (a) Authority; Execution and Delivery; Enforce ability. The --------------------------------------------------- Stockholder has all requisite partnership power and authority to execute this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by the Stockholder of this Agreement and consummation of the transactions contemplated hereby have been duly authorized by all necessary partnership action on the part of the Stockholder. The Stockholder has duly executed and delivered this Agreement, and this Agreement constitutes the legal, valid and binding obligation of the Stockholder, enforceable against the Stockholder in accordance with its terms except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefore may be brought. Except as would not materially impair or delay the ability of the Stockholder to consummate the transactions contemplated hereby, the execution and delivery by the Stockholder of this Agreement do not, and the consummation of the trans actions contemplated hereby and compliance with the terms 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, can celation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of the Stockholder under, any provision of any Contract to which the Stock holder is a party or by which any properties or assets of the Stockholder are bound or, subject to the filings and other matters referred to in the next sentence, any provi sion of any Judgment or Applicable Law applicable to the Stockholder or the properties or assets of the Stockholder. Except as would not materially impair or delay the ability of the Stockholder to consummate the transactions contemplated hereby, no Consent of, or registration, declaration or filing with, any Governmental Entity is required to be obtained or made by or with respect to the Stockholder in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, other than such reports under Sections 13(d) and 16 of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated hereby. (b) The Subject Shares. The Stockholder is the record holder of and ------------------- has the sole authority to transfer, dispose of, sell and convey the Subject Shares and the sole power to convey good and valid title to, the Subject Shares, free and clear of any Liens except for encumbrances or proxies arising pursuant to this Agreement. Neither the Stockholder nor any of its affiliates owns, of record or beneficially, or has voting or dispositive control over, any shares of capital stock of the Company other than the Subject Shares. The Stockholder has the sole right to vote the Subject Shares, and none of the Subject Shares is subject to any voting trust or other agreement, arrangement or restriction with respect to the voting of the Subject Shares, except as contemplated by this Agreement. SECTION 2. Representations and Warranties of Parent. Parent hereby ----------------------------------------- represents and warrants to the Stock holder as follows: Parent has all requisite corporate power and authority to execute this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by Parent of this Agreement and consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of Parent. Parent has duly executed and delivered this Agreement, and this Agreement constitutes the legal, valid and binding obliga tion of Parent, enforceable against Parent in accordance with its terms. The execution and delivery by Parent of this Agreement do not, and the consummation of the trans actions contemplated hereby and compliance with the terms 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, can celation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of Parent under, any provision of any Contract to which Parent is a party or by which any properties or assets of Parent are bound or, subject to the filings and other matters referred to in the next sentence, any provision of any Judgment or Applicable Law applicable to Parent or the properties or assets of Parent. No Consent of, or registration, declaration or filing with, any Governmental Entity is required to be obtained or made by or with respect to Parent in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contem plated hereby, other than (i) compliance with and filings under the HSR Act in connection with the exercise of the Option (as defined in Section 4) and (ii) such reports under Section 13(d) of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated hereby. SECTION 3. Covenants of the Stockholder. Until such time as this ----------------------------- Agreement is terminated pursuant to Section 5 hereof, the Stockholder covenants and agrees as follows: (a) (1) At any meeting of the stockholders of the Company called to seek the Company Stockholder Approval or in any other circumstances upon which a vote, consent or other approval (including by written consent in lieu of a meeting of stockholders) with respect to the Merger Agreement, any other Transaction Agreement, the Merger or any other Transaction is sought, the Stockholder shall, including by executing a written consent if requested by Parent, vote (or cause to be voted) the Subject Shares in favor of granting the Company Stockholder Approval. (2) The Stockholder hereby grants to and appoints Parent, and the President of Parent and the Treasurer of Parent, in their respective capacities as officers of Parent, and any individual who shall hereafter succeed to any such office of Parent, and any other designee of Parent, each of them individually, the Stockholder's proxy and attorney-in-fact (with full power of substitution) to vote or act by written consent with respect to the Subject Shares in accordance with this Section 3. This proxy is coupled with an interest and shall be irrevocable during the term of this Agreement, and the Stockholder will take such further action or execute such other instruments as may be necessary to effectuate the intent of this proxy and hereby revokes any proxy previously granted by it with respect to the Subject Shares. (b) At any meeting of stockholders of the Company or at any adjournment thereof or in any other circumstances upon which the Stockholder's vote, consent or other approval is sought, the Stockholder shall vote (or cause to be voted) the Subject Shares against (i) any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, combination, sale of substantial assets, reorganization, recapitalization, dissolution, liquidation or winding up of or by the Company, (ii) any Company Takeover Proposal and (iii) any amendment of the Company Charter or the Company By-laws or other proposal or trans action involving the Company or any Company Subsidiary, which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify any provi sion of the Merger Agreement or any other Transaction Agreement, the Merger or any other Transaction or change in any manner the voting rights of any class of Company Capital Stock. The Stockholder shall not commit or agree to take any action inconsistent with the foregoing. (c) In order to induce Parent and Sub to enter into the Merger Agreement, the Stockholder shall validly tender (or cause the record owner of such shares to validly tender), and not to withdraw, pursuant to and in accordance with the terms of the Offer, in a timely manner for acceptance by Sub in the Offer, the Subject Shares; provided that there has been no modification or amendment to the terms of the Offer which would require the consent of the Company pursuant to Section 1.01 of the Merger Agreement as in effect on the date hereof, including, without limitation, any waiver or reduction of the Minimum Tender Condition which would require the consent of the Company pursuant to such Section 1.01. The Stockholder acknowledges and agrees that Parent's and Sub's obligation to accept for payment and pay for the Company Common Stock in the Offer, including the Subject Shares, is subject to the terms and conditions of the Offer. (d) The Stockholder shall permit Parent and Sub to publish and disclose in the Offer Documents and, if approval of the Company's stockholders is required under applicable law, the Proxy Statement (including all documents and schedules filed with the SEC) its identity and ownership or other rights with respect to the Company Common Stock and the nature of its commitments, arrangements and under standings under this Agreement. (e) Except as contemplated by this Agreement and the Merger Agreement, the Stockholder shall not (i) transfer (which term shall include, without limitation, any sale, gift, pledge or other disposition), or consent to any transfer of, any or all of the Subject Shares or any interest therein, (ii) enter into any contract, option or other agreement or understanding with respect to any transfer of any or all of the Subject Shares or any interest therein, (iii) grant any proxy, power-of-attorney or other authorization in or with respect to the Subject Shares, (iv) deposit the Subject Shares into a voting trust or enter into a voting agreement or arrangement with respect to the Subject Shares or (v) take any other action that would in any way restrict, limit or interfere with the performance of its obligations hereunder or the transactions contemplated hereby or by the Merger Agreement. (f) The Stockholder shall not, nor shall it authorize or permit any officer, director, partner, affiliate or employee of, or any investment banker, attorney or other advisor or representative of, the Stockholder to, (i) solicit, initiate or encourage the submission of, any Company Takeover Proposal, (ii) enter into any agreement with respect to any Company Takeover Proposal or (iii) participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Company Takeover Proposal. If the Company is engaged in discussions or negotiations with, or has furnished information to, a person making a Company Superior Proposal as permitted by Section 5.02(a) of the Merger Agreement, the foregoing provisions of this Section 3(f) shall not prohibit or restrict the Stockholder or any of its officers, directors, partners, affiliates or employees, or investment bankers, attorneys or other advisors or representatives, from participating in discussions or negotiations regarding, or furnishing any person any information with respect to, a Company Superior Proposal or any agreement (an "Alternative Stockholder Agreement") --------------------------------- regarding the voting or disposition of the Subject Shares proposed or requested by the person making such Company Superior Proposal to be entered into in connection with such Company Superior Proposal, during such time as the Company is permitted to furnish information and participate in discussions or negotiations regarding such Company Superior Proposal in accordance with Section 5.02(a) of the Merger Agreement; provided, however, that the Stockholder shall -------- ------- promptly advise Parent orally and in writing of the material terms of any Alternative Stockholder Agreement being proposed or requested by the Person making such Company Superior Proposal; and provided further that any information -------- ------- relating to the Company furnished pursuant to this sentence shall be subject to a customary confidentiality agreement if such an agreement would be required under Section 5.02(a) of the Merger Agreement. The Stockholder promptly shall advise Parent orally and in writing of any Company Takeover Proposal or any inquiry or request for information made to the Stockholder with respect to or that could reasonably be expected to lead to any Company Takeover Proposal and the identity of the person making any such Company Takeover Proposal or inquiry or request for information and the material terms of any such Company Takeover Proposal or inquiry or request for information. (g) The Stockholder shall not issue any press release or make any other public statement with respect to the Offer, the Merger and the other Transactions without the prior consent of Parent, except as may be required by applicable law. (h) The Stockholder shall 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 and the other Transactions. (i) The Stockholder hereby consents to and approves the actions taken by the Company Board in approving the Transaction Agreements, the Merger and the other Trans actions. The Stockholder hereby waives, and agrees not to exercise or assert, any appraisal rights under Section 262 of the DGCL in connection with the Merger. (j) Notwithstanding anything in this Agreement to the contrary, the covenants and agreements set forth herein shall not prevent (i) any of the Stockholder's designees, partners or affiliates serving on the Company's Board of Directors from taking any action, subject to applicable provisions of the Merger Agreement, while acting in such capacity as a director of the Company, or (ii) the Stockholder entering into an Alternative Stockholder Agreement in connection with a Company Superior Proposal at such time as the Company enters into a Company Acquisition Agreement with respect to such Company Superior Proposal in accordance with Section 5.02(b) of the Merger Agreement. SECTION 4. Option. (a) The Stockholder hereby grants to Parent an ------- irrevocable option (the "Option") to purchase all the Subject Shares at a ------ purchase price per share (the "Purchase Price") equal to the Offer Price in -------------- cash. The Option will become exercisable, in whole but not in part, by Parent if, and only if, the Stockholder shall have breached or otherwise failed to comply with Section 3(c) and Sub shall otherwise have accepted shares of Company Common Stock for purchase pursuant to the Offer. If the Option becomes exercisable, the Option may be exercised at any time during the period commencing with the acceptance by Sub of shares of Company Common Stock for purchase pursuant to the Offer and ending 30 days thereafter (the "Option ------ Period"), so long as there shall not be in effect any preliminary or permanent - ------ injunction or other order issued by any Governmental Entity prohibiting the exercise of the Option pursuant to this Agreement; provided, however, that if -------- ------- there shall be in effect any such injunction or order, in each case on the expiration of the Option Period, the Option Period shall be extended until five business days after the date of removal or lifting of such injunction or order. (b) If Parent wishes to exercise the Option, it may do so by giving written notice (the date of such notice being herein called the "Notice Date") ----------- to the Stockholder (in the manner set forth in Section 8(b)) specifying that all the Subject Shares are to be purchased and specifying the place, time and date (not earlier than one business day, nor later than 10 business days, from the Notice Date) for the closing of the purchase of the Subject Shares by Parent pursuant to such exercise. Such notice may be given prior to the commencement of the Option Period if the Option shall have become exercisable as provided in Section 4(a). (c) Parent represents that any Subject Shares purchased by Parent pursuant to the Option will be acquired for investment only and not with a view to any public distribution thereof, and Parent will not offer to sell or otherwise dispose of any Subject Shares so acquired by it in violation of the registration requirements of the Securities Act. SECTION 5. Termination. (a) This Agreement (including the Option) ------------ shall terminate upon the earlier of (i) the Effective Time and (ii) the termination of the Merger Agreement in accordance with its terms. (b) Upon any termination of this Agreement, this Agreement (including the Option) shall thereupon become void and of no further force and effect, and there shall be no liability in respect of this Agreement or of any transactions contemplated hereby or by the Merger Agreement on the part of any party hereto or any of its directors, officers, partners, stockholders, employees, agents, advisors, representatives, or affiliates; provided, however, that nothing herein -------- ------- shall relieve any party from any liability for such party's willful breach of this Agreement. SECTION 6. Additional Matters. The Stockholder shall, from time to ------------------- time, execute and deliver, or cause to be executed and delivered, such additional or further consents, documents and other instruments as Parent may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement. SECTION 7. Stop Transfer. The Stockholder shall not request that the -------------- Company register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any of the Subject Shares unless such transfer is made in compliance with this Agreement. In the event of a stock dividend or distribution, or any change in the Company Common Stock by reason of any stock dividend, split-up, recapitalization, combination, exchange of shares or the like, the term "Subject Shares" shall refer to and include the Subject Shares as well as all such stock divi dends and distributions and any shares into which or for which any or all of the Subject Shares may be changed or exchanged. SECTION 8. General Provisions. ------------------- (a) Amendments. This Agreement may not be amended except by an ----------- instrument in writing signed by each of the parties hereto. (b) Notice. All notices and other communications hereunder shall be ------- in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to Parent in accordance with Section 9.02 of the Merger Agreement and to the Stockholder at its address set forth below: Kohlberg Kravis Roberts & Co. 9 West 57th Street New York, NY 10019 Attention of Sal Badalamenti Copy to: Latham & Watkins 633 West Fifth Street, Suite 4000 Los Angeles, CA 90071 Attention of Edward Sonnenschein, Jr. (c) Interpretation. When a reference is made in this Agreement to a --------------- Section, such reference shall be to a Section to this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference pur poses 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". (d) Severability. If any term or other provision of this Agreement ------------- is invalid, illegal or incapable of being enforced by any rule or law, or public policy, all other conditions and provisions of this Agreement shall neverthe- less remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. (e) Counterparts. This Agreement may be executed in one or more ------------- counterparts, all of which shall be consid ered one and the same agreement. This Agreement shall become effective against Parent when one or more counter parts have been signed by Parent and delivered to the Stock holder. This Agreement shall become effective against the Stockholder when one or more counterparts have been executed by the Stockholder and delivered to Parent. Each party need not sign the same counterpart. (f) Entire Agreement; No Third-Party Beneficiaries. This Agreement ----------------------------------------------- (i) 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 (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. (g) Governing Law. This Agreement shall be governed by, and -------------- construed in accordance with, the laws of the State of Delaware regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof. (h) Assignment. Neither this Agreement nor any of the rights, ----------- interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise, by Parent without the prior written consent of the Stockholder or by the Stockholder without the prior written consent of Parent, and any purported assignment without such consent shall be void; provided, however, that Parent may assign any of its rights, interests or -------- ------- obligations under this Agreement to any wholly owned subsidiary of Parent without the consent of the Stockholder, but no such assignment shall relieve Parent of its obligations hereunder. Subject to the preceding sentences, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. If for any reason any of the Subject Shares are distributed or otherwise transferred to any general or limited partner of the Stockholder in violation of Section 3(e), such partner shall succeed to, and become bound by, the provisions of this Agreement with respect to such Subject Shares. (i) Enforcement. The parties agree that irreparable damage would ------------ occur in the event that any of the provi sions 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 provi sions of this Agreement in any Delaware state court or any Federal court located in the State of Delaware or the State of Delaware or in any Delaware state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (i) consents to submit itself to the personal jurisdiction of any Delaware state court or any Federal court located in the State of Delaware or any Delaware state court in the event any dispute arises out of this Agreement or any Trans action, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (iii) agrees that it will not bring any action relating to this Agreement or any Trans action in any court other than a Delaware state court or any Federal court sitting in the State of Delaware and (iv) waives any right to trial by jury with respect to any claim or proceeding related to or arising out of this Agreement or any transaction contemplated hereby. (j) Limited Liability of Partners. Notwithstanding any provisions ------------------------------ hereof (but subject to the last sentence of Section 8(h)), (1) none of the obligations of the Stockholder under or contemplated by this Agreement shall be an obligation of any limited partner or general partner of the Stockholder, or any of their respective officers, directors, stockholders, limited partners, general partners or owners, or successors or assigns, (2) the Stockholders shall be the only person or entity liable with respect to such obligations, and (3) any monetary liability of the Stockholder under this Agreement shall be satisfied solely out of the assets of the Stockholder. IN WITNESS WHEREOF, each party has duly executed this Agreement, all as of the date first written above. ATLANTIC RICHFIELD COMPANY, by /s/ Terry G. Dallas ------------------- Name: Terry G. Dallas Title:Senior Vice President and Treasurer PETROLEUM ASSOCIATES, L.P., by KKR Associates Its General Partner by /s/ Michael W. Michelson ------------------------ Name: Michael W. Michelson Title: General Partner KKR PARTNERS II, L.P., by KKR Associates Its General Partner by /s/ Michael W. Michelson ------------------------ Name: Michael W. Michelson Title: General Partner EX-99.(C)(5) 9 AMENDMENT TO RIGHTS AGREEMENT Exhibit (c)(5) AMENDMENT TO RIGHTS AGREEMENT BETWEEN UNION TEXAS PETROLEUM HOLDINGS, INC. AND FIRST CHICAGO TRUST COMPANY OF NEW YORK THIS AMENDMENT TO RIGHTS AGREEMENT (this "Amendment") is made as of this third day of May, 1998 by and between Union Texas Petroleum Holdings, Inc., a Delaware corporation (the "Company"), and First Chicago Trust Company of New York, a New York corporation, as rights agent (the "Rights Agent"). Capitalized terms used but not defined herein shall have the meanings give to such terms in the Merger Agreement (as defined below). WHEREAS, the Corporation is entering into an Agreement and Plan of Merger (as the same may be amended from time to time, the "Merger Agreement") among the Company, Atlantic Richfield Company, a Delaware corporation ("Parent"), and VWK Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Parent ("the Sub"), providing for transactions (collectively, the "Merger") pursuant to which, among other things, the Company will become a wholly-owned subsidiary of Parent and the former stockholders of the Company will receive the Merger Consideration; WHEREAS, the Company and the Rights Agent are parties to a Rights Agreement dated as of September 12, 1997 (the "Rights Agreement"); and WHEREAS, the parties desire to amend the Rights Agreement in connection with the execution and delivery of the Merger Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein set forth, the parties hereby agree as follows: 1. The definition of "Acquiring Person" set forth in Section 1 of the Rights Agreement is hereby amended by adding the following sentence to the end of that definition: Notwithstanding the foregoing, no Person shall be or become an Acquiring Person by reason of (i) the execution and delivery of the Agreement and Plan of Merger dated as of May 4, 1998 among the Company, Atlantic Richfield Company, a Delaware corporation ("Parent"), and , a Delaware corporation ("Sub"), (the "Merger Agreement") or the execution of any amendment thereto, (ii) the purchase of Common Stock by Parent or Sub pursuant to (A) the Offer or (B) Section 4 of the Stockholder Agreement dated May 4, 1998 among Parent, KKR Partners II, L.P., a Delaware limited partnership, and Petroleum Associates, L.P., a Delaware limited partnership (the "Stockholder Agreement") or (iii) the consummation of the other Transactions. 2. Section 7(a)(i) of the Rights Agreement shall be amended to read in its entirety as follows: (i) the earlier of (1) the consummation of the Offer (as defined in the Merger Agreement) or (2) the Close of Business on September 30, 2007. 3. The definition of "Stock Acquisition Date" included in Section 1 of the Rights Agreement shall be 2 amended by adding the following sentence to the end of such definition: Notwithstanding anything else set forth in this Agreement, a Stock Acquisition Date shall not be deemed to have occurred by reason of (i) the public announcement, public disclosure, execution and delivery or amendment of the Merger Agreement, (ii) the public announcement, public disclosure, execution and delivery or amendment of the Stockholder Agreement, (iii) the purchase of Common Stock by Parent or Sub pursuant to (A) Section 4 of the Stockholder Agreement or (B) the consummation of the Offer or (iv) the consummation of any of the other Transactions. 4. Section 3(a) of the Rights Agreement shall be amended by adding the following sentence to the end thereof: Notwithstanding anything else set forth in this Agreement, no Distribution Date shall be deemed to have occurred by reason of (i) the execution and delivery or amendment of the Merger Agreement, (ii) the execution and delivery or amendment of the Stockholder Agreement, (iii) the purchase of Common Stock by Parent or Sub pursuant to (A) Section 4 of the Stockholder Agreement or (B) the consummation of the Offer or (iv) the consummation of any of the other Transactions. 5. The first paragraph of Section 13(c) of the Rights Agreement shall be amended to read in its entirety as follows: The Company shall not consummate any consolidation, merger, sale or transfer referred to in Section 13(a) (other than any such transaction contemplated by the Merger Agreement or the Stockholder Agreement) unless the Principal Party shall have a sufficient number of authorized shares of its 3 Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and the Principal Party involved therein shall have executed and delivered to the Rights Agent an agreement confirming that the requirements of Section 13(a) and (b) shall promptly be performed in accordance with their terms and that such consolidation, merger, sale or transfer of assets shall not result in a default by the Principal Party under this Agreement as the same shall have been assumed by the Principal Party pursuant to Sections 13(a) and (b) hereof and further providing that, as soon as practicable after executing such agreement pursuant to this Section 13, the Principal Party will: 6. The Rights Agreement, as amended by this Amendment, shall remain in full force and effect in accordance with its terms. 7. This Amendment shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. This Amendment may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, 4 covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated. IN WITNESS WHEREOF, the parties herein have caused this Amendment to be duly executed and attested, all as of the date and year first above written. UNION TEXAS PETROLEUM HOLDINGS, INC., by ----------------------- Name: John L. Whitmire Title: Chairman of the Board and Chief Executive Officer Attest: _________________ Name: Title: FIRST CHICAGO TRUST COMPANY OF NEW YORK, RIGHTS AGENT, 5 by /s/ Gerard O'Leary ----------------------- Name: Gerard O'Leary Title: Vice President Attest: /s/ Mary E. Garcia ----------------- Name: Mary E. Garcia Title: Customer Servie Officer 6 -----END PRIVACY-ENHANCED MESSAGE-----