-----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, VD1D/gevprSsUixYnclRyHuqy5+9AKpA1WNbMKtgto9p9ZXsfSOQptVjn4ExzrEQ REe+mcGeQn8VpatCKw40GQ== 0000950129-97-004203.txt : 19971016 0000950129-97-004203.hdr.sgml : 19971016 ACCESSION NUMBER: 0000950129-97-004203 CONFORMED SUBMISSION TYPE: SC 14D9/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19971015 SROS: NYSE SROS: PSE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: PENNZOIL CO /DE/ CENTRAL INDEX KEY: 0000077320 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 741597290 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9/A SEC ACT: SEC FILE NUMBER: 005-06319 FILM NUMBER: 97695595 BUSINESS ADDRESS: STREET 1: PENNZOIL PL STREET 2: P O BOX 2967 CITY: HOUSTON STATE: TX ZIP: 77252-2967 BUSINESS PHONE: 7135464000 MAIL ADDRESS: STREET 1: PENNZOIL PLACE STREET 2: P O BOX 2967 CITY: HOUSTON STATE: TX ZIP: 77252-2967 FORMER COMPANY: FORMER CONFORMED NAME: PENNZOIL UNITED INC DATE OF NAME CHANGE: 19680429 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PENNZOIL CO /DE/ CENTRAL INDEX KEY: 0000077320 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 741597290 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9/A BUSINESS ADDRESS: STREET 1: PENNZOIL PL STREET 2: P O BOX 2967 CITY: HOUSTON STATE: TX ZIP: 77252-2967 BUSINESS PHONE: 7135464000 MAIL ADDRESS: STREET 1: PENNZOIL PLACE STREET 2: P O BOX 2967 CITY: HOUSTON STATE: TX ZIP: 77252-2967 FORMER COMPANY: FORMER CONFORMED NAME: PENNZOIL UNITED INC DATE OF NAME CHANGE: 19680429 SC 14D9/A 1 PENNZOIL COMPANY (AMENDMENT #32) 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT (AMENDMENT NO. 32) Pursuant to Section 14(d)(4) of the Securities Exchange Act of 1934 PENNZOIL COMPANY (Name of Subject Company) PENNZOIL COMPANY (Name of Person(s) Filing Statement) COMMON STOCK, PAR VALUE $0.83 1/3 PER SHARE (including the associated Preferred Stock Purchase Rights) (Title of Class of Securities) 709903 10 8 (CUSIP Number of Class of Securities) LINDA F. CONDIT CORPORATE SECRETARY PENNZOIL COMPANY PENNZOIL PLACE, P.O. BOX 2967 HOUSTON, TEXAS 77252-2967 (713) 546-8910 (Name, address and telephone number of person authorized to receive notice and communications on behalf of the person(s) filing statement) Copies to: Moulton Goodrum, Jr. Charles F. Richards, Jr. Baker & Botts, L.L.P. Richards, Layton & Finger One Shell Plaza One Rodney Square Houston, Texas 77002-4995 P.O. Box 551 (713) 229-1234 Wilmington, Delaware 19899-0551 (302) 658-6541 2 This Amendment No. 32 (this "Amendment") amends and supplements the Solicitation/Recommendation Statement on Schedule 14D-9, as amended, originally filed on July 1, 1997 by Pennzoil Company, a Delaware corporation ("Pennzoil" or the "Company"), relating to a tender offer commenced by Resources Newco, Inc. ("Newco"), a wholly owned subsidiary of Union Pacific Resources Group Inc. ("UPR"), on June 23, 1997. All capitalized terms used in this Amendment without definition have the meanings attributed to them in the Schedule 14D-9. The items of the Schedule 14D-9 set forth below are hereby amended and supplemented as set forth below by adding the following: ITEM 2. TENDER OFFER OF THE BIDDER Item 2 of the Schedule 14D-9 is hereby amended and supplemented by adding the following: On October 7, 1997, Newco amended and supplemented its Offer to Purchase dated June 23, 1997 (the "Original Offer to Purchase"). The tender offer described in the Original Offer to Purchase (the "Original Offer") constituted an offer to purchase up to 50.1% of the Shares outstanding on a fully diluted basis for a purchase price of $84 per Share, net to the seller in cash, without interest thereon. According to the Original Offer, Shares not tendered and purchased pursuant to the Original Offer were to be converted by means of a merger into shares of Common Stock, no par value, of UPR as described in the Original Offer to Purchase. Under the terms and conditions described in the Supplement dated October 7, 1997 to the Original Offer to Purchase, Newco has amended and supplemented the Original Offer to Purchase to provide that Newco is offering to purchase all Shares (rather than 50.1% of the fully-diluted Shares), for a price of $84, net to the seller in cash, without interest thereon. The Supplement states that if the offer as so amended and supplemented (the "Revised UPR Offer") is consummated, Newco intends to effect a merger with Pennzoil (the "Revised Squeeze-Out Merger") in which all outstanding Shares not tendered in the Revised UPR Offer would be converted into the right to receive $84.00 per share, in cash, without interest. ITEM 4. THE SOLICITATION OR RECOMMENDATION Item 4 of the Schedule 14D-9 is hereby amended and supplemented by adding the following: RECOMMENDATION OF THE BOARD OF DIRECTORS. On October 14, 1997, the Board of Directors met to review the terms of and consider the Revised UPR Offer. The Board also received and -1- 3 considered updates of recent operational and financial developments concerning the Company, including updates to the Company's strategic plan. THE BOARD HAS UNANIMOUSLY DETERMINED THAT THE REVISED UPR OFFER IS INADEQUATE AND NOT IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY REJECT THE REVISED UPR OFFER AND NOT TENDER THEIR SHARES PURSUANT TO THE REVISED UPR OFFER. At the same meeting, the Board reaffirmed its determination that the Company's and its stockholders' interests would be best served if the Company remains an independent company. Copies of a letter to the stockholders of the Company communicating the Board's recommendation with respect to the Revised UPR Offer, and a press release announcing the Board's determinations, are filed as Exhibits 89 and 90 hereto, respectively, and are incorporated herein by reference. REASONS FOR RECOMMENDATION. The Board noted that with the exception of reasons related specifically to the coercive two-tier, front-end loaded structure of UPR's original proposal (which is eliminated by the Revised UPR Offer), the reasons for the Board's rejection of the Original Offer continue to apply. In reaching its determination and recommendation expressed above with respect to the Revised UPR Offer, the Board considered a number of factors, including, without limitation, the following: (a) The Board's familiarity with, and management's review of, the Company's business, financial condition, results of operations, business strategy and future prospects, including in particular the strategy and prospects reflected in the Company's strategic plan, and with the nature of the businesses in which the Company operates, and the Board's belief that the Revised UPR Offer does not reflect the long-term values inherent in the Company. In this connection, the Board particularly considered the progress made in the last two years toward restructuring and repositioning Pennzoil into a top-performing operating company, including the following operational improvements: (i) The Board's reduction in Pennzoil's annual dividend rate from $3.00 to $1.00 per share in late 1995 is providing Pennzoil with over $90 million per year to be reinvested in long-term growth, and Pennzoil's successful reduction of general and administrative expense since 1995 is providing an additional $80 million per year to be so invested. -2- 4 (ii) Pennzoil's successful program of restructuring its North American oil and gas operations to focus on core areas, reduce costs and increase return on assets has resulted in (1) per barrel operating costs being reduced from $5.93 in 1993 to $4.41 in 1996, with additional reductions to about $4.00 being expected, and (2) per barrel finding and development costs being reduced from nearly $6.00 in 1993 to $3.87 in 1996. (iii) Pennzoil's upgrading of its North American core assets and aggressive cost-cutting initiatives have resulted in 1996 net income of $134 million, or $2.88 per share, compared to a loss of $305 million, or $6.60 per share, in 1995 (which included a $265.5 million accounting charge); in addition, recurring net income for the first half of 1997 is 118% higher than comparable results for the first half of 1996; Pennzoil has had seven consecutive quarters of year-on-year recurring earnings improvement through the second quarter of 1997. (iv) Cash flows from operations (before working capital changes) rose significantly in 1996, reaching $432 million, a $132 million increase over 1995, and cash flows for the first half of 1997 continued to improve, reaching $279 million, compared to $221 million in the first half of 1996. (v) Pennzoil reduced debt by $266 million from the end of 1995 to the end of the first half of 1997. (vi) Pennzoil has installed experienced new senior management for its oil and gas operations that the Board believes will be capable of successfully implementing the initiatives for those operations included in the Company's strategic plan. As a part of its consideration of operational improvements, the Board reviewed and took into account updates in financial and operating performance and other developments since its determination with respect to the Original Offer, including the release of second quarter 1997 financial results and a review of expected results for the third quarter of 1997 and the year ending December 31, 1997. The Board also considered pending and completed initiatives included in the Company's strategic plan and received interim updates concerning significant developments in particular areas that had occurred since the Board's approval of a comprehensive update to the plan in June 1997. The interim updates involved both positive and negative revisions to reflect -3- 5 recent developments in the Company's oil and gas, manufacturing, marketing and franchise businesses and the current outlook for oil and gas prices. (b) Presentations by the Company's management (made at meetings of the Board in June and July 1997 and updated at the September 11 and October 14, 1997 meetings) as to the Company's prospects for future growth, profitability and share price appreciation, as reflected in the Company's strategic plan. (c) The Board's belief that the Company is just beginning to realize for its stockholders the values that will be unlocked as a result of the various strategic initiatives implemented over the past several years and others in the process of implementation, and that pursuit of the Company's strategic plan, including the refinements that may result from management's ongoing review, will produce greater long-term value for the stockholders than the Revised UPR Offer. (d) The Board's belief that the marketplace and many of Pennzoil's stockholders do not yet fully appreciate and recognize the benefits already achieved, and still to be achieved, under the Company's strategic plan. (e) A presentation by Lehman Brothers Inc. ("Lehman Brothers"), Evercore Group Inc. ("Evercore Group") and J.P. Morgan Securities Inc. ("J.P. Morgan"), financial advisors to the Company, concerning the Company, UPR and the financial aspects of the Revised UPR Offer, and the opinions of Lehman Brothers, Evercore Group and J.P. Morgan to the effect that, as of October 14, 1997, the consideration offered to stockholders of the Company pursuant to the Revised UPR Offer is inadequate from a financial point of view (such opinions having been expressed after review of many of the factors referred to herein and various financial criteria used in assessing the Revised UPR Offer, and having been based on various assumptions and subject to various limitations, which were reviewed for the Board as part of the presentation of Lehman Brothers, Evercore Group and J.P. Morgan). The full text of the opinions of Lehman Brothers, Evercore Group and J.P. Morgan are included as Exhibits 91, 92 and 93 hereto and may be read in their entirety. (f) The numerous conditions to which the Revised UPR Offer is subject, including many conditions that are in the reasonable discretion of Newco. (g) The absence of any commitments for the financing that would be necessary for UPR to consummate the purchase of Shares pursuant to the Revised UPR Offer. -4- 6 (h) Information obtained from UPR in the course of litigation discovery, including (i) UPR's representation to the Internal Revenue Service in 1996 that its drill site inventory was not sufficient to keep's UPR's "overall production and reserves from declining significantly in the near future" and that UPR needed to make strategic acquisitions of 750 million barrels of oil equivalent in the years 1997 through 2001 in order to maintain its goal of 10% production growth per year, (ii) internal UPR documents indicating UPR's recognition that Pennzoil's stock price was likely to improve because of favorable developments and that the timing of UPR's Original Offer involved an effort to "blur the market's perception" of the reasons for that improvement, (iii) estimates by UPR's own financial advisers in early 1997 that include valuations for Pennzoil higher than that reflected in the Revised UPR Offer and (iv) statements by UPR that it has additional valuations of Pennzoil in excess of $84 per share that it has withheld from Pennzoil and the public and that a court has ordered UPR to produce. (i) The Board's consideration of statements by UPR that it is better able to exploit Pennzoil's assets than Pennzoil is able to do on its own and the Board's judgment that (i) UPR's drilling strategy is more suited for its own less diversified reserve position, which involves heavy exposure to the Austin Chalk, where steep decline curves necessitate an extremely rapid drilling strategy and (ii) the Company's own management is fully capable of developing and implementing the best strategy for exploiting Pennzoil's existing assets, growing Pennzoil's production and reserve base and delivering the value inherent in Pennzoil to Pennzoil shareholders. (j) The Board's belief that the Revised UPR Offer poses a threat to the Company's stockholders in that UPR is seeking to usurp for itself the future growth in revenues, net income and cash flow and stock price appreciation that are only beginning to result from the Company's completed cost-cutting efforts and operational improvements and the Company's pending and completed strategic initiatives included in the Company's strategic plan. (k) The concern that the purchase of Shares pursuant to the Revised UPR Offer would involve illegal trading on the basis of material inside information concerning Pennzoil that was improperly obtained by UPR's financial adviser in the course of litigation discovery. (l) The disruptive effect of the Revised UPR Offer, including UPR's announcement of its intent to dispose of significant assets of Pennzoil and that it is engaging in discussions with others regarding the sale of such assets, on the Company's existing and prospective business relationships. -5- 7 (m) The advantages of the existing ability of Pennzoil to engage in acquisition transactions that might be structured as a tax-free pooling of interests or to effect certain transactions that would restructure the businesses of Pennzoil on a tax-free basis, such as a spin-off of one or more businesses. (n) The Board's consideration of a statement by the chairman of UPR that, while not part of the tender offer, if Pennzoil would begin negotiations with UPR, UPR would consider a transaction structure that would provide Pennzoil shareholders with the opportunity to benefit from a future increase in value of Pennzoil's international exploration and production assets, above the $600 million which UPR states that it has ascribed to those assets. The statement by UPR's chairman did not cause the Board to change any of its conclusions with respect to the Revised UPR Offer because (in addition to the suggestion's being only a general concept that is not part of the offer) the Board believes that the inadequacy of the Revised UPR Offer is not limited to an undervaluation of Pennzoil's international assets and realization of any incremental value under such a structure would be dependent on decisions by UPR's management and would at least to some degree involve risk associated with UPR taken as a whole. In any event, the Board believes that this is not the time to sell or negotiate for the sale of the Company. (o) The Board's and management's commitment to protecting the best interests of the stockholders of the Company and enhancing the value of the Company. The foregoing discussion of the information and factors considered and given weight by the Board is not intended to be exhaustive. In view of the variety of factors considered in its evaluation, the Board did not find it practicable to and did not quantify or otherwise assign relative weights to the specific factors considered in reaching its determinations and recommendation. In addition, individual members of the Board may have given different weights to different factors. The Revised UPR Offer is conditioned upon, among other things, the Rights having been redeemed by the Board or Newco being satisfied in its reasonable discretion that the Rights have been invalidated or are otherwise inapplicable to the Revised UPR Offer and (subject to waiver by Newco under certain conditions) the Revised Squeeze-Out Merger. In light of its decision discussed above, the Board has reaffirmed its determination not to take any action to redeem the Rights in response to the Revised UPR Offer. The Revised UPR Offer is also conditioned upon (subject to waiver by Newco under certain conditions) the acquisition of Shares pursuant to the Revised UPR Offer and the Revised Squeeze-Out Merger having been approved pursuant to Section 203 of the Delaware General Corporation Law ("Section 203") or the provisions of Section 203 being otherwise inapplicable to the acquisition of Shares pursuant to the Revised UPR Offer and the Revised Squeeze-Out Merger. In light of its decision discussed -6- 8 above, the Board has reaffirmed its determination not to take any action that would render Section 203 so inapplicable. The Revised UPR Offer is further conditioned upon (subject to waiver by Newco under certain conditions) the acquisition of Shares pursuant to the Revised UPR Offer and the Revised Squeeze-Out Merger having been approved pursuant to Article Sixth of the Restated Certificate of Incorporation of the Company ("Article Sixth"). In light of its decision discussed above, the Board has reaffirmed its determination not to take any action that would render Article Sixth so inapplicable. The Revised UPR Offer is also conditioned upon either (1) Newco's designees having been elected to the Board so that after such election, such designees constitute a majority of the Board or (2) the Company having entered into a mutually satisfactory definitive merger agreement with UPR and Newco to provide for the acquisition of the Company pursuant to the Revised UPR Offer and the Revised Squeeze-Out Merger. In light of its decision referred to above, the Board has determined not to take any action with respect to the election of designees of Newco to the Board or to attempt to negotiate any merger agreement with UPR or Newco. PENNZOIL'S STRATEGIC PLAN. Pennzoil began implementation of a new strategic planning process in 1994. The strategic plan developed then has been updated from time to time in order to reflect historical results, to take into account changes in economic assumptions and to reflect new projects and initiatives and changes in projects and initiatives previously included. A comprehensive update to the strategic plan was adopted by the Board during a three-day meeting in June 1997, and the plan has been updated by management since then to reflect developments and new information relating to particular areas. The primary purpose of the strategic plan is to provide an analytical tool for use in charting the Company's strategic direction through systematic identification and economic evaluation of strategic initiatives and projects and thereby create shareholder value by focusing management's attention on opportunities to improve and expand Pennzoil's basic businesses. The strategic plan is designed as a means for identifying projects and investments which will provide a return in excess of Pennzoil's weighted average cost of capital and allows management to determine whether the Company is working on enough initiatives of sufficient estimated value to create upward pressure on Pennzoil's stock price as those initiatives proceed. The plan is not intended to be, and is not, a valuation of the Company. The strategic plan includes a number of projects and initiatives that are designed to further Pennzoil's goals of becoming a global producer of oil and gas, a low-cost, efficient refiner of petroleum products, and a worldwide marketer of Pennzoil motor oil and other premium automotive products. Among the major projects and initiatives in the Strategic Plan are: (i) Pennzoil's 4.8% carried interest (i.e., all of the Company's future expenses are paid by the other parties until project payout) in the Azeri-Chirag-Gunashli unit in the Caspian Sea offshore Azerbaijan, with estimated -7- 9 recoverable reserves of at least 4.7 billion barrels of oil and an "upside" potential of 6 to 7 billion barrels of oil; (ii) five high-potential exploration concessions in Egypt, a 75% working interest in Block 8 offshore Qatar (which is adjacent to and surrounds a prolific oil field), two contracts to operate fields offshore Lake Maracaibo in Venezuela, as well as the Karabakh exploratory prospect offshore Azerbaijan which is now being evaluated as a natural gas development project; (iii) an exploration alliance with Enterprise Oil plc, which is expected to greatly expand and accelerate the Company's Gulf of Mexico exploration activity at little cost to Pennzoil; (iv) an aggressive marketing campaign to increase motor oil market share (Pennzoil brand motor oil is, and has been for 11 consecutive years, the number one selling motor oil in the United States, and commands a market share of 21%) and to expand internationally, as well as to increase sales of non-motor oil products and develop new products that can be leveraged under the powerful Pennzoil brand name; and (v) continued rapid growth of Jiffy Lube International, Inc., Pennzoil's franchise operation segment (which is the largest fast oil change service provider in the United States), including the completion of approximately 200 stores in Sears automotive centers by the end of 1997. The plan also envisions growth through strategic acquisitions in the oil and gas and marketing business units. Recently completed major initiatives include (i) Excel Paralubes, a lube-base oil plant partnership with Conoco, Inc. which is expected to make the Company one of the lowest cost producers of base oils in the world and the second largest producer of base oils in the United States; (ii) an upgrade to the Company's Shreveport refinery, adding a catalytic cracker and an alkylation unit to increase higher value fuels production; and (iii) the formation of Penreco, a partnership combining portions of the specialty petroleum products businesses of Pennzoil with those of Conoco, Inc. The results that Pennzoil has achieved and will achieve pursuant to its strategic plan have been and will continue to be affected by a variety of factors. Thus, Pennzoil's results are affected by, among other things: general economic, financial and business conditions; commodity prices for natural gas and crude oil; the effect of weather on natural gas demand and consumption; competition for drilling rights; the costs of exploration for and development of petroleum reserves; exploration risks; political risks affecting exploration and development; the availability of opportunities to acquire oil and gas and marketing assets and the cost at which such assets may be acquired; changes in demand for motor oil; competition in the motor oil and fast oil change businesses; margins and supply and demand in the base oil and speciality products businesses; the success and costs of advertising and promotional efforts; the ability to finance projects and initiatives on acceptable economic terms; mechanical failure in refining operations; unanticipated environmental liabilities; changes in and compliance with governmental regulations; changes in tax laws; and the costs and effects of legal proceedings. Pennzoil's strategic plan is a comprehensive document that contains a great deal of confidential business planning information, the disclosure of which would be harmful to Pennzoil and its shareholders. For example, disclosure of the assumptions contained in the strategic plan -8- 10 (such as natural gas and oil price assumptions and current and projected margins for motor oil, base oils, specialty products and the quick lube business) would give Pennzoil's competitors (such as UPR), customers' and suppliers' insight into Pennzoil's business planning (such as the Company's view of future market conditions), and also provide them with Pennzoil's planning estimates of its future costs and margins, pricing strategies and volumes. Disclosure of this information would put Pennzoil at a competitive disadvantage, because Pennzoil's competitors could use it to optimize their own profits and market share at Pennzoil's expense, while Pennzoil would not have the benefit of similar information from its competitors. In addition, if Pennzoil's customers and suppliers knew Pennzoil's current and projected margins, they could use that information in negotiations with Pennzoil to try to obtain better prices, thereby reducing Pennzoil's profits. The strategic plan also details Pennzoil's oil and gas exploration and exploitation plans and strategies, reveals Pennzoil's strategies for competing in the refined oil products manufacturing and marketing businesses, and reflects Pennzoil's business plans and strategies for the highly competitive fast change automotive motor oil business. Because disclosure of this information would assist Pennzoil's competitors to the detriment of Pennzoil and its shareholders, Pennzoil does not make public the contents of its highly confidential strategic plan. Pennzoil's policy of maintaining the confidentiality of its strategic plan is consistent with industry norms. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED Item 5 of Schedule 14D-9 is hereby amended and supplemented by adding the following: The Company has retained Abernathy MacGregor Group as a public relations advisor in connection with the previous UPR Proposal and the Revised UPR Offer. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED Item 8 of Schedule 14D-9 is hereby amended and supplemented by adding the following: On October 14, 1997, Pennzoil asked the Court for leave to file an amended counterclaim and third-party action in the litigation between Pennzoil and UPR pending in the United States District Court for the Northern District of Texas, Fort Worth Division. The third-party action is against Smith Barney Inc. ("Smith Barney"). The new claims seek preliminary and permanent injunctive relief barring UPR and Newco from trading in Pennzoil securities (including the purchase of shares pursuant to the Revised UPR Offer) because they are in possession of material non-public information regarding Pennzoil. The suit alleges that the non-public information was obtained by Smith Barney (UPR's financial advisor in connection with the Revised UPR Offer) in the course of litigation and is subject to a stipulation and court order prohibiting the use of highly confidential information for the purpose of providing financial advice to any party or otherwise for any purpose other than the litigation. In reliance on the stipulation and -9- 11 order, Pennzoil produced numerous highly confidential documents, including documents dealing with Pennzoil's long-term strategic plan. According to the suit, Smith Barney has acknowledged being provided with highly confidential documents produced in the litigation by Pennzoil in reliance on the stipulation and order, while at the same time Smith Barney continues to provide UPR with business and financial advice in connection with the Revised UPR Offer. Pennzoil alleges that UPR and Smith Barney cannot trade in Pennzoil securities by reason of possession of material inside information and that they are prohibited by the stipulation and order from making public disclosure of the information, which includes confidential business strategies and other commercially sensitive information. Pennzoil has asked the United States District Court to set the case for trial in February 1998. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
Exhibit No. - ----------- *89. Letter to stockholders of the Company dated October 14, 1997. 90. Text of press release dated October 14, 1997 issued by the Company. *91. Opinion of Lehman Brothers dated October 14, 1997 delivered to the Company. *92. Opinion of Evercore Group dated October 14, 1997 delivered to the Company. *93. Opinion of J. P. Morgan dated October 14, 1997 delivered to the Company. 94. Text of press release of the Company dated October 14, 1997. 95. Third Amended Counterclaim and Original Third-Party Action filed by Pennzoil Company (dated October 14, 1997, United States District Court for the Northern District of Texas, Fort Worth Division).
___________ * Included in material sent to shareholders. -10- 12 After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. PENNZOIL COMPANY Dated: October 14, 1997 By: /s/ James L. Pate ----------------------------------- James L. Pate Chairman of the Board, President and Chief Executive Officer 13 INDEX TO EXHIBITS
Exhibit No. Description - ----------- ----------- *89. Letter to stockholders of the Company dated October 14, 1997. 90. Text of press release dated October 14, 1997 issued by the Company. *91. Opinion of Lehman Brothers dated October 14, 1997 delivered to the Company. *92. Opinion of Evercore Group dated October 14, 1997 delivered to the Company. *93. Opinion of J. P. Morgan dated October 14, 1997 delivered to the Company. 94. Text of press release of the Company dated October 14, 1997. 95. Third Amended Counterclaim and Original Third-Party Action filed by Pennzoil Company (dated October 14, 1997, United States District Court for the Northern District of Texas, Fort Worth Division).
___________ * Included in material sent to shareholders. EX-99.89 2 LETTER TO STOCKHOLDERS DATED 10/14/97 1 [PENNZOIL LETTERHEAD] Dear Shareholder: On October 7, 1997, Union Pacific Resources Group Inc. (UPR) revised the tender offer it commenced three and a half months ago by changing it to an offer to acquire all of Pennzoil's shares for $84 per share in cash. Under UPR's proposal, shares not acquired in the tender offer would be cashed out in a subsequent merger for the same $84 cash consideration. ALTHOUGH THE REVISION TO UPR'S OFFER ELIMINATES THE COERCIVE TWO-TIER, FRONT-END LOADED STRUCTURE OF ITS ORIGINAL PROPOSAL, THE REVISED OFFER REMAINS, IN THE VIEW OF YOUR BOARD OF DIRECTORS, INADEQUATE AND NOT IN THE BEST INTERESTS OF PENNZOIL AND ITS SHAREHOLDERS. ACCORDINGLY, YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU REJECT UPR'S REVISED PROPOSAL AND NOT TENDER YOUR SHARES PURSUANT TO UPR'S OFFER. Your Board of Directors believes that the revised UPR offer does not reflect the long-term values inherent in Pennzoil and that the interests of Pennzoil and its shareholders will best be served if Pennzoil remains an independent company and continues pursuit of its own strategic initiatives and projects. Moreover, your Board of Directors believes that the revised UPR offer poses a threat to Pennzoil's shareholders in that UPR is seeking to usurp for itself the future growth in revenues, net income and cash flow and stock price appreciation that are only beginning to result from Pennzoil's completed cost-cutting efforts and operational improvement and Pennzoil's pending and completed strategic initiatives included in Pennzoil's strategic plan. In arriving at its determination regarding UPR's revised offer, the Board of Directors gave careful consideration to the factors described in the accompanying amendment to Pennzoil's Schedule 14D-9. THE BOARD ALSO REVIEWED UPDATED OPINIONS OF LEHMAN BROTHERS INC., EVERCORE GROUP INC. AND J.P. MORGAN SECURITIES INC., PENNZOIL'S FINANCIAL ADVISERS, THAT THE CONSIDERATION TO BE RECEIVED BY PENNZOIL'S SHAREHOLDERS PURSUANT TO UPR'S REVISED OFFER IS INADEQUATE FROM A FINANCIAL POINT OF VIEW. We urge you to read the enclosed amendment to the Schedule 14D-9 in its entirety. Pennzoil's consistently strong recent performance is solid evidence of Pennzoil's turnaround. Pennzoil's record of progress and continued improvement is unambiguous. Pennzoil has had seven consecutive quarters of year-on-year recurring earnings improvement through the second quarter of 1997, with recurring earnings up 118% to $2.04 per share in the first half of 1997. Earnings are on track to continue this trend through the third quarter as well. Pennzoil's cash flow has increased significantly, from $6.49 per share in 1995 to $9.31 per share in 1996, and is expected to exceed $12.00 per share in 1997. Pennzoil's recently completed refinery projects are already generating an expected $1 per share of cash flow in 1997 and even more is anticipated in 1998 and beyond. Pennzoil has cut G&A by $80 million since 1995, and reduced per barrel operating costs at the oil and gas segment by 17% since 1994. 2 Pennzoil delivered a total return of 42% to its shareholders--outperforming the E&P sector and more than doubling UPR's total return to shareholders--from October 1995 through June 20, 1997 (the last day of trading before the initiation of UPR's hostile tender offer). Stocks in the E&P sector have risen significantly since June 1997, when UPR's offer was first announced. Thus, even though Pennzoil outperformed the E&P sector from October 1995 to June 1997, if you assume only that Pennzoil performed in line with the E&P sector since June, Pennzoil's stock would have increased by 20% or more, constituting a significant portion of the so-called "premium" being offered by UPR. Pennzoil has built a high-potential, worldwide oil and gas portfolio in prolific hydrocarbon producing basins, like the U.S. Gulf of Mexico, Qatar, the Caspian Sea, Egypt, Venezuela and Australia. The enormous value of this portfolio--a portfolio that will substantially increase the company's proved reserves and create significant shareholder value--is just beginning to be tapped. This portfolio includes: in the Caspian Sea, a 4.8% carried interest in the giant Azeri-Chirag-Gunashli project, where there are estimated recoverable reserves of at least 4.7 billion barrels of oil, as well as a 30% interest in the Karabakh project; in Egypt, five prospective concessions covering 9.2 million acres in hydrocarbon charged basins; in Qatar, Block 8, where drilling is underway on the second of four exploration wells; in Venezuela, three producing blocks in one of the most exciting oil producing regions in the world; in Australia, a promising exploration project being drilled in the Whicher Range, south of Perth, where Pennzoil has a 44% working interest; and in the U.S. Gulf of Mexico, over 150 blocks in one of the most prolific areas in the U.S. to explore for and produce crude oil and natural gas, and where Pennzoil continues to be one of the most active drillers. As you may have read, litigation discovery has revealed estimates by UPR's own financial advisers that show valuations for Pennzoil considerably in excess of $84 per share. As you may not yet know, UPR has admitted to withholding from Pennzoil and the public additional UPR valuations of Pennzoil in excess of $84 per share, which a court has ordered UPR to produce. Moreover, UPR's own documents state that Pennzoil has undergone a "turnaround" and has "outperformed" other E&P companies since early 1996 and correctly predicted that there is "more likely good news than bad news" for Pennzoil. UPR claims that it can achieve better results from Pennzoil's properties by applying its own drilling model to them. We believe UPR's "drilling machine" strategy is a strategy borne out of necessity by reason of UPR's overexposure to the Austin Chalk, where steep decline curves demand an extremely rapid drilling strategy. Pennzoil, with its diverse operations onshore, offshore and in international areas, has experienced management far more familiar with Pennzoil's properties than UPR, and fully capable of developing and implementing the best strategy for exploiting Pennzoil's existing assets, growing Pennzoil's production and reserve base and delivering the value inherent in Pennzoil to Pennzoil shareholders. In its considerations, the Board of Directors also noted that, although UPR's offer is not by its terms subject to any financing contingency, UPR does not have any commitments for the financing that would be necessary for it to purchase shares pursuant to its revised offer, and therefore 3 its willingness and ability to finance this significant all-cash transaction is still in doubt. UPR's refusal to pay the fees necessary to secure financing raises questions about the seriousness of its offer. We remain committed to staying on the course Pennzoil has set for itself. That course is not consistent with allowing UPR, in an effort to solve its own problems, to capture the tremendous inherent and upside value of Pennzoil stock for an inadequate price. We urge you not to tender your shares to UPR. If you have already tendered, we urge you to withdraw your shares. October 14, 1997 On behalf of the Board of Directors, /s/ JAMES L. PATE James L. Pate Chairman, President and Chief Executive Officer EX-99.90 3 TEXT OF PRESS RELEASE DATED 10/14/97 1 EXHIBIT 90 [PENNZOIL LETTERHEAD] FOR IMMEDIATE RELEASE Contacts: Robert Harper Joele Frank/Brian Faw Corporate Communications Abernathy MacGregor Group 713/546-8536 212/371-5999 PENNZOIL BOARD REJECTS UPR'S REVISED TENDER OFFER Houston, TX, October 14, 1997 -- The Board of Directors of Pennzoil Company (NYSE: PZL) today unanimously voted to recommend that Pennzoil shareholders reject Union Pacific Resources Group Inc.'s (NYSE: UPR) revised hostile tender offer. James L. Pate, Chairman and Chief Executive Officer of Pennzoil, said, "After a thorough review, Pennzoil's Board unanimously concluded that UPR's offer is inadequate and not in the best interests of Pennzoil and its shareholders. Our track record over the last two years demonstrates that Pennzoil's turnaround is well underway, as UPR itself has acknowledged. UPR's attempt to acquire Pennzoil at this low valuation would rob Pennzoil shareholders of the full benefits to which they are entitled from the programs and projects already in place." In its recommendation to Pennzoil shareholders, the Board cited, among other things: o The opinions of Pennzoil's financial advisors, Lehman Brothers Inc., Evercore Group Inc., and J.P. Morgan Securities Inc., that the revised UPR proposal is inadequate. The Board believes that the offer does not reflect the fair value of Pennzoil, and that Pennzoil's continued pursuit of the projects and programs now underway will produce far greater value for Pennzoil shareholders than UPR's proposal. o Pennzoil's consistently strong recent performance is solid evidence of Pennzoil's turnaround. Pennzoil's record of progress and continued improvement is unambiguous. Pennzoil has had seven consecutive quarters of year-on-year recurring earnings improvement through the second quarter of 1997, with recurring earnings up 118% to $2.04 per share, in the first half of 1997. Earnings are on track to continue this trend through the third quarter, as well. Pennzoil's cash flow has increased significantly, from $6.49 per share in 1995, to $9.31 per share in 1996, and is expected to exceed $12.00 per share in 1997. -more- 2 -2- o Pennzoil delivered a total return of 42% to its stockholders -- outperforming the E&P sector and more than doubling UPR's total return to stockholders -- from October, 1995 through June 20, 1997 (the last day of trading before the initiation of UPR's hostile tender offer). Pennzoil's stock rose 5.5%, while UPR's was down more than 9.1%, from the beginning of 1997 through June 20. o Stocks in the E&P sector have risen significantly since June, 1997, when the UPR tender offer was announced. Even though Pennzoil outperformed the E&P sector from October, 1995 to June, 1997, assuming that, since June, Pennzoil had only performed in line with the E&P sector, its stock would have increased by 20% or more, constituting a significant portion of the so-called "premium" being offered by UPR. o Pennzoil's recently completed refinery projects are already generating an expected $1 per share of cash flow in 1997 and even more is anticipated in 1998 and beyond. Pennzoil has cut G&A by $80 million since 1995, and reduced per barrel operating costs at the oil and gas segment by 17% since 1994. o UPR's confidential planning documents show that it was well aware of the likelihood that Pennzoil's stock would be rising to reflect its improved performance. Indeed, UPR chose to advance its planned tender offer by several months to take advantage of this anticipated increase. o Pennzoil has built a high potential, worldwide oil and gas portfolio in prolific hydrocarbon producing basins, like the U.S. Gulf of Mexico, Qatar, the Caspian Sea, Egypt, Venezuela and Australia. The enormous value of this portfolio -- a portfolio that will substantially increase the company's proved reserves and create significant shareholder value -- is just beginning to be tapped. This portfolio includes: in the Caspian Sea, a 4.8% carried interest in the giant Azeri-Chirag-Gunashli project, where there are estimated recoverable reserves of at least 4.7 billion barrels of oil, as well as a 30% interest in the Karabakh project; in Egypt, five prospective concessions covering 9.2 million acres in hydrocarbon charged basins; in Qatar, Block 8, where drilling is underway on the second of four exploration wells; in Venezuela, three producing blocks in one of the most exciting oil producing regions in the world; in Australia, a promising exploration project has begun drilling in the Whicher Range, south of Perth, where Pennzoil has a 44% working interest; and in the U.S. Gulf of Mexico, Pennzoil continues to be one of the most active drillers in one of the most prolific areas in the U.S. to explore for and produce crude oil and natural gas. o Based on these and other factors, Pennzoil's Board concluded that the $84 per share offer was inadequate, and well below a realistic valuation of Pennzoil. UPR's internal documents reveal that Smith Barney, UPR's financial adviser, similarly arrived at valuations for Pennzoil well above $84 per share. -more- 3 -3- o UPR's claim that it would share Pennzoil's successful international E&P operations with Pennzoil shareholders as part of some undefined security is a true "red-herring," lacks substance and detail, and is impossible to evaluate. o UPR has not obtained the financing for its proposed acquisition of Pennzoil, and therefore its willingness and ability to finance this significant all-cash transaction is still in doubt. UPR's refusal to pay the fees that are necessary to secure financing raises questions about the seriousness of its offer. Pennzoil Company explores for and produces crude oil and natural gas, manufacturers and markets premium quality lubricants, including America's top selling motor oil, and is the parent company of Jiffy Lube International, the world's largest franchiser of fast oil change centers. ### EX-99.91 4 OPINION OF LEHMAN BROTHERS DATED 10/14/97 1 EXHIBIT 91 [LEHMAN BROTHERS LETTERHEAD] October 14, 1997 Board of Directors Pennzoil Company Pennzoil Place P.O. Box 2967 Houston, Texas 77252 Members of the Board: We understand that Resources Newco, Inc., a wholly owned subsidiary of Union Pacific Resources Group Inc. (together, the "Bidder"), has made a tender offer to the shareholders of Pennzoil Company (the "Company") to purchase all outstanding shares of common stock (the "Shares") of the Company, together with the associated preferred stock purchase rights (the "Rights") issued pursuant to the Rights Agreement dated as of October 28, 1994, between the Company and Chemical Bank, as Rights Agent, at a price of $84.00 per Share (and associated Right), net to the seller in cash, without interest thereon (the "Consideration"), upon the terms and subject to the conditions set forth in the Supplement (the "Supplement"), dated October 7, 1997, to the Offer to Purchase dated June 23, 1997 and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"). The Supplement states that if the Offer is consummated, the Bidder intends to effect a merger with the Company in which all outstanding Shares not tendered into the Offer will be converted into $84.00 in cash, without interest. The terms and conditions of the Offer are set forth in more detail in Amendment No. 27, dated October 7, 1997, to the Schedule 14D-1 originally filed by the Bidder with the Securities and Exchange Commission on June 23, 1997 (together, with any amendments or supplements thereto, the "Schedule 14D-1"). We have been requested by the Board of Directors of the Company to render our opinion with respect to the adequacy, from a financial point of view, to the shareholders of the Company of the Consideration offered to them by the Bidder pursuant to the Offer. In arriving at our opinion, we reviewed and analyzed: (1) the Supplement, the Schedule 14D-1 and the specific terms and conditions of the Offer, (2) such publicly available information concerning the Company which we believe to be relevant to our analysis, (3) financial and operating information with respect to the business, operations and prospects of the Company furnished to us by the Company, including, without limitation, certain projections of future financial performance of the Company prepared by the management of the Company, (4) a trading history of the Company's common stock and a comparison of that trading history with the trading histories of other companies that we deemed relevant, (5) a comparison of the historical financial results and present financial condition of the Company with those of other companies that we deemed relevant and (6) a comparison of the financial terms of the Offer with the financial terms 2 LEHMAN BROTHERS Board of Directors Pennzoil Company October 14, 1997 Page 2 of certain other transactions that we deemed relevant. In addition, we have had discussions with the management of the Company concerning its business, operations, assets, financial condition and prospects and have undertaken such other studies, analyses and investigations as we deemed appropriate. In arriving at our opinion, we have assumed and relied upon the accuracy and completeness of the financial and other information used by us without assuming any responsibility for independent verification of such information and have further relied upon the assurances of management of the Company that they are not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial projections of the Company, upon advice of the Company we have assumed that such projections have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of the Company as to the future financial performance of the Company, and we have relied upon such projections to arriving at our opinion. In arriving at our opinion, we have not conducted a physical inspection of the properties and facilities of the Company and have not made or obtained any evaluations or appraisals of the assets or liabilities of the Company. Our opinion necessarily is based upon market, economic and other conditions as they exist on, and can be evaluated as of, the date of this letter. Based upon and subject to the foregoing, we are of the opinion as of the date hereof that, from a financial point of view, the Consideration offered by the Bidder to the shareholders of the Company pursuant to the Offer is inadequate to such shareholders. We have, in the past, provided certain financial advisory and financing services to the Company and are acting as financial advisor to the Company in connection with the Offer. In addition, the Company has agreed to indemnify us for certain liabilities that may arise out of the rendering of this opinion. In the ordinary course of our business, we may actively trade in the securities of the Company and the Bidder for our own account and for the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities. This opinion is for the use and benefit of the Board of Directors of the Company. This opinion is not intended to be and does not constitute a recommendation to any shareholder of the Company as to whether to accept the Consideration offered to the shareholders in the Offer. Very truly yours, LEHMAN BROTHERS EX-99.92 5 OPINION OF EVERCORE GROUP DATED 10/14/97 1 EXHIBIT 92 [EVERCORE GROUP INC. LETTERHEAD] October 14, 1997 Board of Directors Pennzoil Company Pennzoil Place P.O. Box 2967 Houston, TX 77252 Gentlemen: We understand that on October 7, 1997 Resources Newco, Inc. (the "Purchaser"), a wholly owned subsidiary of Union Pacific Resources Group Inc. ("UPR", and together with the Purchaser, the "Bidder"), amended its tender offer under which it is now offering to purchase all outstanding shares of common stock, par value $0.83 1/3 per share (the "Shares"), of Pennzoil Company ("Pennzoil" or the "Company"), together with the associated preferred stock purchase rights (the "Rights") issued pursuant to the Rights Agreement dated as of October 28, 1994, between Pennzoil and Chemical Bank, as Rights Agent, at a price of $84.00 per Share (and associated Right), net to the seller in cash, without interest thereon (the "Consideration"), upon the terms and subject to the conditions set forth in the Offer to Purchase dated June 23, 1997 (the "Offer to Purchase"), as heretofore amended, the Supplement to the Offer to Purchase dated October 7, 1997, and in the revised Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"). If the Offer were consummated, UPR intends to effect a merger with Pennzoil in which all outstanding Shares would be converted into the right to receive $84.00 in cash. The terms and conditions of the Offer are more fully set forth in the Schedule 14D-1 (the "Schedule 14D-1") originally filed by Purchaser and UPR with the Securities and Exchange Commission on June 23, 1997, together with any amendments or supplements thereto, and the Supplement dated October 7, 1997. We have been requested by the Board of Directors of the Company to render our opinion with respect to the adequacy, from a financial point of view, to the shareholders of the Company of the Consideration offered to them by the Bidder pursuant to the Offer. 2 October 14, 1997 Page 2 For purposes of the opinion set forth herein, we have: (i) reviewed the Offer to Purchase, the Schedule 14D-1, the amendments and supplements to the Schedule 14D-1 (including the Supplement dated October 7, 1997), and certain related documents; (ii) analyzed certain publicly available financial statements and other information of the Company; (iii) analyzed certain internal financial statements and other financial and operating data concerning the Company prepared by the management of the Company; (vi) analyzed certain financial projections for the Company prepared by the management of the Company; (v) discussed the past and current operations and financial condition and the prospects of the Company with senior executives of the Company; (vi) reviewed the reported prices and trading activity for the Company Shares; (vii) compared the financial performance of the Company and the prices and trading activity of the Company Shares to similar publicly available information for publicly-traded companies having lines of business similar to those of the Company; (viii) reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions; (ix) performed such other analyses and examinations and considered such other factors as we have in our sole judgment deemed appropriate. We have assumed and relied upon without independent verification the accuracy and completeness of the information reviewed by us for purposes of this opinion. With respect to the financial projections, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Company. We have not made any independent valuation or appraisal of the assets or liabilities of the Company, nor have we been furnished with any such appraisals. In addition, you have not authorized us to solicit, and we have not solicited, any indications of interest from any third party with respect to the purchase of all or a part of the Company's 3 October 14, 1997 Page 3 business. Our opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to us as of, the date hereof. Evercore Group Inc. has acted as financial advisor to the Board of Directors of the Company in connection with this transaction and has received a fee for its services. This opinion is for the use and benefit of the Board of Directors of the Company. This opinion is not intended to be and does not constitute a recommendation to any shareholder of the Company as to whether to accept the Consideration offered to the shareholders in the Offer. Based upon and subject to the foregoing, we are of the opinion as of the date hereof that, from a financial point of view, the Consideration offered by the Bidder to the shareholders of the Company pursuant to the Offer is inadequate to such shareholders. Very truly yours, EVERCORE GROUP INC. EX-99.93 6 OPINION OF J.P. MORGAN DATED 10/14/97 1 EXHIBIT 93 [JP MORGAN LETTERHEAD] October 14, 1997 The Board of Directors Pennzoil Company P.O. Box 2967 Houston, Texas 77252-2967 Attention: Mr. James L. Pate Chairman and Chief Executive Officer Ladies and Gentlemen: On June 23, 1997, Union Pacific Resources Group Inc. ("UPR") and Resources Newco, Inc., a wholly owned subsidiary of UPR ("Acquisition"), commenced a tender offer for up to 50.1% of the outstanding shares, on a fully diluted basis, of the Common Stock, par value $0.83 1/3 per share (the "Shares"), together with the associated preferred share purchase rights (the "Rights"), of Pennzoil Company (the "Company"), at a price of $84.00 per Share (and associated Right), net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated June 23, 1997 (the "Offer to Purchase"), and in the related letter of transmittal (which, together with the Offer to Purchase, constitute the "Offer"). According to the Offer to Purchase, UPR and Acquisition sought to negotiate with the Company a definitive acquisition agreement pursuant to which, upon consummation of the Offer, Acquisition or another direct or indirect subsidiary of UPR would effect a merger or similar business combination with the Company upon the terms set forth in the Offer (the "Proposed Merger" and, together with the Offer, the "UPR Acquisition Proposal"), and the Company would become a wholly owned subsidiary of UPR. In addition, according to the Offer to Purchase, at the effective time of the Proposed Merger, each Share that was issued and outstanding immediately prior to such effective time would be converted into shares of common stock of UPR in the manner set forth in the Offer to Purchase. On October 7, 1997, UPR and Acquisition amended the Offer to provide that it would be for all of the Shares (and associated Rights) at a price of $84.00 per Share (and associated Right), net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase, as amended and supplemented by the Supplement thereto, dated October 7, 1997 (the "Amended Offer to Purchase"), and in the related revised letter of transmittal (which, together with the Amended Offer to Purchase, constitute the "Amended Offer"). According to the Amended Offer to Purchase, if the Offer is consummated, Acquisition or another direct or indirect subsidiary of UPR would effect a merger or similar business combination with the Company upon the terms set forth in the Amended Offer (the "Amended Proposed Merger"), and the Company would become a wholly owned subsidiary of UPR. In addition, according to the Amended Offer to Purchase, at the effective time of the Amended Proposed Merger, each Share that is issued and outstanding immediately prior to such effective time would be converted into the right to receive $84.00 per Share (and associated Right), net to the seller in cash. 2 JP MORGAN Page 2 In arriving at our opinion, we have reviewed (i) the Amended Offer to Purchase and the related Amendment No. 27 to Tender Offer Statement on Schedule 14D-1 filed with the Securities and Exchange Commission (the "Commission") on October 7, 1997; (ii) certain publicly available information concerning the business of the Company and of certain other companies engaged in businesses comparable to those of the Company, and the reported market prices for certain other companies' securities deemed comparable; (iii) publicly available terms of certain transactions involving companies comparable to the Company and the consideration received for such companies; (iv) current and historical market prices of the common stock of the Company; (v) the audited financial statements of the Company for the fiscal year ended December 31, 1996, and the unaudited financial statements of the Company for the period ended June 30, 1997; (vi) certain internal financial analyses and forecasts prepared by the Company and its management, including the Company's most recent strategic plan, supporting financial projections relating to the business, operations, and financial condition and future prospects and operations of the Company; and (vii) the terms of other business combinations that we deemed relevant. In addition, we have held discussions with certain members of the management of the Company with respect to certain financial aspects of the Amended UPR Acquisition Proposal, and the past and current business operations of the Company, the financial condition and future prospects and operations of the Company, the effects of the Amended UPR Acquisition Proposal on the financial condition and future prospects of the Company, and certain other matters we believed necessary or appropriate to our analysis. We have reviewed such other financial studies and analyses and considered such other information as we deemed appropriate for the purposes of this opinion. In giving our opinion, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information that was publicly available or was furnished to us by the Company or otherwise reviewed by us and we have not assumed any responsibility or liability therefor. We have not conducted any valuation or appraisal of any assets or liabilities, nor have any such valuations or appraisals been provided to us. In relying on financial analyses and forecasts provided to us, including the views of the Company concerning the business, operational and strategic consequences of the Amended Offer, we have assumed that they have been reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by management as to the expected future results of operations and financial condition of the Company to which such analyses or forecasts relate. We have relied as to all legal matters relevant to rendering our opinion upon the advice of counsel. Our opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to us as of, the date hereof. It should be understood that subsequent developments may affect this opinion and that we do not have any obligation to update, revise, or reaffirm this opinion. We are expressing no opinion herein as to the price at 3 Page 3 which the Shares will trade at any future time. In addition, we were not authorized to and did not solicit any expressions of interest from any other parties with respect to the sale of all or any part of the Company or any other alternative transaction. We are acting as financial advisor to the Company with respect to the Amended Offer and will receive a fee from the Company for our services. In the ordinary course of their businesses, our affiliates may actively trade the debt and equity securities of the Company or UPR for their own account or for the accounts of customers and, accordingly, they may at any time hold long or short positions in such securities. On the basis of and subject to the foregoing, it is our opinion as of the date hereof that the consideration proposed to be paid to the holders of Shares pursuant to the Amended Offer is inadequate, from a financial point of view, to such holders. This letter is provided for the benefit of the Board of Directors of the Company in connection with and for the purposes of its evaluation of the Amended Offer. This opinion does not constitute a recommendation to any shareholder of the Company as to whether such shareholder should tender Shares in the Amended Offer. This opinion may not be disclosed, referred to, or communicated (in whole or in part) to any third party for any purpose whatsoever except with our prior written consent in each instance. This opinion may be reproduced in full in an Amendment to the Solicitation/Recommendation Statement on Schedule 14D-9 to be filed by the Company with the Commission. Very truly yours, J.P. MORGAN SECURITIES INC. By: /s/ FERRELL P. McCLEAN ----------------------------- Name: Ferrell P. McClean Title: Managing Director EX-99.94 7 TEXT OF PRESS RELEASE DATED 10/14/97 1 EXHIBIT 94 [Pennzoil Letterhead] FOR IMMEDIATE RELEASE Contacts: Robert Harper Joele Frank/Brian Faw Corporate Communications Abernathy MacGregor Group 713/546-8536 212/371-5999 PENNZOIL ASKS COURT TO HALT UPR'S TENDER OFFER BASED ON MISUSE OF "INSIDER INFORMATION" HOUSTON, TX, October 14, 1997 -- Pennzoil Company (NYSE: PZL) today filed suit in the U.S. District Court in Fort Worth against Union Pacific Resources Group Inc. (NYSE: UPR) and Smith Barney, Inc., seeking a permanent injunction against UPR's pending tender offer. The suit alleges that UPR is improperly conducting the tender offer in violation of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, while in the possession of material inside information regarding Pennzoil. The information was obtained by Smith Barney and UPR in the course of litigation pursuant to a definitive agreement and court order which restricts the use of highly confidential information to trial counsel for litigation purposes only, and expressly prohibits the use of such information for business or financial purposes. The suit alleges that UPR may not proceed with its tender offer since it is bound both contractually and by court order not to disclose the highly confidential inside information which it has improperly had the benefit of in revising its tender offer. Pennzoil has learned that Smith Barney has reviewed certain of Pennzoil's most highly confidential documents while at the same time the firm continues to offer business and financial advice to UPR in connection with its tender offer attempt. Thus, UPR cannot go forward with its tender offer since it cannot trade while in the possession of inside information and it cannot disclose the information because of the court order and contractual agreement that prevents it from doing so. Pennzoil has asked the U.S. District Court to set the case for a trial date in early 1998. The complaint requests that the Court permanently enjoin UPR's hostile takeover based upon this "insider" misuse of highly confidential information and consequent violation of the federal securities laws. Pennzoil Company explores for and produces crude oil and natural gas, manufactures and markets premium quality lubricants, including America's top selling motor oil, and is the parent company of Jiffy Lube International, the world's largest franchiser of fast oil change centers. ### EX-99.95 8 3RD AMENDED COUNTERCLAIM FILED BY PENNZOIL 1 EXHIBIT 95 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION UNION PACIFIC RESOURCES GROUP ) INC., and RESOURCES NEWCO, INC., ) ) Plaintiffs, ) ) v. ) CIVIL ACTION NO. 497-CV 509-Y ) PENNZOIL COMPANY, ) ) Defendant, ) ) v. ) ) SMITH BARNEY, INC., ) ) Third-Party Defendant. ) DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM TO THE HONORABLE UNITED STATES DISTRICT JUDGE: Pursuant to Federal Rule of Civil Procedure 13, Counter-plaintiff Pennzoil Company ("Pennzoil") files this Third Amended Counterclaim against Union Pacific Resources Group Inc. ("Resources") and Resources Newco, Inc. ("Newco" and together with "Resources," "UPR") and Original Third-Party Action against Smith Barney, Inc. ("Smith Barney"). I. NATURE OF THIS ACTION 1. This Third Amended Counterclaim and Original Third-Party Action is being brought pursuant to Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. Section 78n(e), the applicable rules and regulations of the Securities and Exchange Commission (the "SEC") promulgated thereunder (including SEC Rule 10b-5), and 2 applicable principles of state law. Pennzoil seeks preliminary and permanent injunctive relief barring Defendants Resources and Newco from trading in Pennzoil stock because they are in possession of material inside, non-public information regarding Pennzoil and because trading on that information would violate applicable principles of federal securities law. Furthermore, allowing UPR to trade on confidential Pennzoil information would violate a contractual Stipulation UPR and Pennzoil entered into (and to which Smith Barney contractually agreed to be bound by signing an Undertaking) pursuant to which highly confidential information was provided to Resources and Newco and would breach fiduciary obligations owed by Resources and Newco to Pennzoil and its shareholders as a result of their acceptance and use of such confidential information. Additionally, Pennzoil seeks preliminary and permanent injunctive relief requiring Resources and Newco to correct false and misleading statements made by them in connection with the hostile tender offer UPR announced on June 23, 1997, as amended (the "Tender Offer"). By signing the Stipulation and Undertaking, UPR and Smith Barney agreed not to disclose publicly Pennzoil's confidential information or to use that information for any purpose other than in connection with this litigation. UPR is thus contractually barred from making public disclosure and cannot purchase (or sell) Pennzoil shares, pursuant to the Tender Offer or otherwise, so long as the Pennzoil information Smith Barney has reviewed is commercially sensitive. 2. As more fully described below, UPR announced its Tender Offer on June 23, 1997. At the same time, UPR filed a Schedule 14D-1 with the Securities Exchange Commission ("SEC") in Washington, D.C. and mailed copies of that Schedule 14D-1 to Pennzoil's shareholders. UPR has amended its original Schedule 14D-1 numerous times, both to include information regarding communications made subsequent to June 23, 1997 and to disclose certain material information DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 2 3 that UPR misleadingly omitted from the Schedule 14D-1 when it was originally filed. Unless indicated otherwise, references in this Third Amended Counterclaim to the Schedule 14D-1 will refer both to the original Schedule 14D-1 and to all amendments. 3. Also on June 23, 1997, UPR commenced this lawsuit, seeking a broad declaration that everything contained in its Schedule 14D-1 was true, complete, and not misleading and that UPR had fully complied with its obligations under state and federal securities laws. At the same time, UPR commenced litigation in the Delaware Court of Chancery (the "Chancery Court") challenging Pennzoil's anticipated rejection of UPR's offer, and also in federal court in Louisiana challenging the constitutionality of a Louisiana takeover statute. In connection with the various lawsuits, and in order to facilitate merits discovery, UPR and Pennzoil entered into an Agreed Stipulation and Order Governing the Protection and Exchange of Documents and Confidential Information (the "Stipulation"). The purpose and intent of this agreement was to provide for sensitive business and financial information to be made available to trial counsel for the parties. The Stipulation thus protected the sensitive business information of both UPR and Pennzoil. Under the Stipulation, UPR and Pennzoil agreed that non-public information regarding Pennzoil would not be disclosed to UPR, and vice versa. In order to invoke the protections of the Stipulation, either party could, in good faith, designate material inside information and commercially sensitive documents as "highly confidential." Under the agreement, information designated "highly confidential" was to be provided to the attorneys for the other party solely for use in the litigation. Disclosure to the parties themselves (except for specifically designated in-house counsel) or their financial or business advisors or agents was expressly prohibited. As outlined below, UPR has violated the agreement. Smith Barney, UPR's financial advisor in DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 3 4 connection with the Tender Offer, executed an Undertaking agreeing to be bound by the Stipulation, and has been provided access to Pennzoil's highly confidential, non-public information since at least mid-July. Despite having seen highly confidential, non-public information regarding Pennzoil, Smith Barney has continued to provide financial advice to UPR in connection with the Tender Offer in direct breach of the Stipulation. With the financial advice and strategic assistance of Smith Barney, UPR recently announced a change in its offer, pursuant to which UPR has offered to pay cash for all shares of Pennzoil. UPR has vaguely suggested that if Pennzoil were to capitulate to UPR, UPR would "consider" issuing an undefined security to Pennzoil's shareholders the value of which would be tied to the pursuit of and success in developing Pennzoil's international business. UPR has also announced that it expects to finance part of the purchase price by selling unidentified Pennzoil business segments, a strategy known in the industry as a "bust-up" merger. This revised, bust-up offer was made at a time when UPR and its financial advisors were in possession of material inside information. UPR's knowledge and use of inside information regarding Pennzoil to make this revised offer violates both the express contract between the parties and federal securities laws. 4. Furthermore, UPR has made numerous misleading statements in connection with its Tender Offer and has failed to disclose material facts necessary to make the statements it has made not misleading. For example, the June 23, 1997 Schedule 14D-1 failed to tell Pennzoil's shareholders (1) that UPR announced its Offer on June 23, 1997 because it wanted to "blur the market's perception" regarding Pennzoil stock so that UPR could purchase the stock for less than its actual value; (2) that UPR's management viewed UPR's chances of winning the suit filed in Chancery Court as "nil" and that the suit was brought solely to "put pressure" on Pennzoil's DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 4 5 Board and to shop for a favorable forum for litigation of Pennzoil's claims against UPR; (3) that UPR was potentially liable to Union Pacific Corporation ("UPC"), UPR's former parent company, on a $2.5 billion tax indemnity agreement that might be triggered by the takeover of Pennzoil; (4) the extent to which consummation of the Tender Offer would affect UPR's earnings (and, thus, its future stock price and borrowing capacity); or (5) that UPR's future prospects without completion of the proposed merger are dismal, with UPR's management characterizing the steep anticipated production declines from UPR's own properties as the "Valley of Despair." 5. When it first announced its Tender Offer, UPR began a media campaign in which it communicated almost daily with Pennzoil's shareholders, telling them that they had to "beat the deadline" and urging them to tender their shares early. This campaign was characterized by a series of grossly misleading advertisements in which UPR falsely stated that Pennzoil had no meaningful Strategic Plan, that Pennzoil's management had failed to build shareholder value, and that Pennzoil was incapable of delivering value equal to UPR's offer. As outlined in UPR's internal documents, however, UPR believed that Pennzoil's management has "turned the company around," that Pennzoil's stock price has substantially outperformed the market in 1997 (unlike UPR, whose stock has under-performed the market), and that Pennzoil was worth more in June of 1997 than the $84 per share being offered by UPR. 6. UPR's announcement of its revised, purportedly "all cash" offer does not eliminate the disputes regarding the original two-tier offer UPR made on June 23, 1997. Rather, UPR has kicked off a new campaign to mislead Pennzoil's shareholders and the marketplace. For example, UPR has asserted in new advertisements that Pennzoil has suffered "seven years of failure." UPR's internal documents show that UPR has monitored Pennzoil's success in the marketplace. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 5 6 UPR's own documents reveal that Pennzoil's shares rose over 20% between January 1, 1997 and the announcement of UPR's tender offer, out-pacing the market substantially. By contrast UPR's shares had only risen 3%, significantly under- performing the market. Since the offer was announced, Pennzoil's success has continued unabated, while UPR's shares have continued to languish. And while UPR claims that there is no financing contingency in its offer, UPR has admitted that it has not yet obtained a firm financing commitment to pay for the offer. UPR's Schedule 14D-1 remains materially misleading because, among other things, UPR has not disclosed that its ability to obtain financing will be materially affected by its own questionable future prospects, that UPR's ability to finance the transaction may be affected by UPR's contingent liability to UPR, that UPR lacks the ability to both aggressively develop Pennzoil's domestic properties and continue its expansive drilling on its own acreage, that UPR's inability to obtain a financing commitment affects the likelihood that it will be able to close on its offer, or that Smith Barney's improper receipt of inside information regarding Pennzoil affects UPR's efforts to obtain financing (since it would violate the Stipulation and expose UPR and any lender to liability if material inside information is used to obtain financing for UPR's revised proposal). Furthermore, UPR's suggestion that it would consider issuing a security to Pennzoil's shareholders is misleading because UPR lacks the desire, the financial resources, and the expertise to pursue actively international prospects. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 6 7 II. JURISDICTION AND VENUE 7. This Court has jurisdiction over the subject matter of the action against UPR and Smith Barney pursuant to Section 27 of the Exchange Act, 15 U.S.C. Section 78aa, because the action arises under Sections 10 and 14 of the Exchange Act and the rules and regulations promulgated thereunder by the SEC. This Court also has jurisdiction over the subject matter of the action against UPR and Smith Barney by virtue of the federal question posed by UPR's and Smith Barney's violation of this Court's Order approving the Stipulation. 28 U.S.C. Section 1331. This Court also has jurisdiction under principles of supplemental jurisdiction, 28 U.S.C. Section 1367. 8. Venue is proper in this District pursuant to Section 27 of the Exchange Act because Resources, Newco and Smith Barney transact business in Texas. Acts and transactions constituting violations of the Exchange Act and the Stipulation occurred in Texas and elsewhere. 9. This Court has personal jurisdiction over the Defendants pursuant to Section 27 of the Exchange Act and by virtue of Smith Barney's contractual agreement to the personal jurisdiction of this Court. III. THE PARTIES 10. Plaintiff Pennzoil is an energy company engaged primarily in oil and gas exploration and production, in the processing, refining and marketing of oil, motor oil and refined products, and in franchise operations in the fast oil change business. Pennzoil's principal executive offices are located at Pennzoil Place, Houston, Texas. Pennzoil has approximately 46.9 DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 7 8 million shares of common stock outstanding which are traded on the New York Stock Exchange. Pennzoil's common stock is held by over 18,000 stockholders of record. 11. Pennzoil conducts its operations in three principal business segments. Pennzoil's oil and gas segment engages in the acquisition, exploration, exploitation, and development of prospective and proved oil and gas properties; the production and sale of crude oil, condensate, and natural gas liquids; and the production, treatment, and sale of natural gas. Pennzoil's motor oil and refined products business segment is a worldwide marketer of premium automotive and other branded products, including particularly Pennzoil brand motor oil, which has been the number one selling motor oil in the United States for 11 consecutive years and currently commands a market share of about 21%. Pennzoil's franchise operations segment includes the well-known and valuable Jiffy Lube fast oil change system and brand name. As discussed below, Pennzoil is in the early stages of implementing a long-term business plan which already has produced positive results in each of its business segments and which Pennzoil believes will produce even more positive gains for its stockholders in the coming years. 12. Defendant Resources is a Utah corporation whose principal executive offices are located at 801 Cherry Street, Fort Worth, Texas. Resources was formerly a wholly-owned subsidiary of UPC, which owns the Union Pacific Railroad Company. In October 1995, Resources sold 42.5 million shares of its common stock in an initial public offering (the "Offering"). In connection with the Offering, UPC announced its intention to distribute its remaining ownership interest in Resources to UPC's shareholders in the form of a tax-free distribution (the "Distribution"). The Distribution was authorized by UPC's board of directors on September 12, 1996, and effected on October 15, 1996. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 8 9 13. Defendant Newco is a Delaware corporation whose executive offices are located at 801 Cherry Street, Fort Worth, Texas. Newco, a wholly owned subsidiary of Resources, was formed by Resources to facilitate its attempted hostile takeover of Pennzoil. 14. Third-Party Defendant Smith Barney, Inc. ("Smith Barney") is a Delaware Corporation with its principal office in this state located at 200 Crescent Court, Dallas, Texas 75201 in Dallas County and may be served with process through its registered agent, C.T. Corporation System, 350 North St. Paul Street, Dallas, Texas 75201. UPR'S ORIGINAL TENDER OFFER 15. On June 23, 1997, UPR announced that it was commencing an unsolicited tender offer for 50.1% of the outstanding shares of Pennzoil stock on a fully diluted basis. UPR's stated intention was to obtain control of Pennzoil via the Tender Offer and then to force a merger between the companies. As originally structured, the offer was a classic, coercive two-tier offer--UPR offered cash for half of Pennzoil's stock, but stated that it intended to offer only shares of uncertain value to Pennzoil's shareholders for the balance of their stock. The consideration offered by UPR was subject to a "pricing collar" that would have reduced substantially the consideration Pennzoil shareholders received in the transaction if the price of UPR's stock fell below $25 per share. This structure was adopted for the clear purpose of coercing Pennzoil's shareholders into tendering. 16. This suit was originally filed by UPR on the same day the tender offer was announced as a preemptive declaratory judgment action. In its Original Complaint, UPR asked the Court to declare that every statement contained in the Schedule 14D-1 filing UPR made on June 23, 1997 was true, complete, and not misleading. At the time suit was filed, Pennzoil had DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 9 10 not even seen UPR's Schedule 14D-1, and thus did not know whether UPR had complied with federal securities laws in filing its Schedule 14D-1. Apparently uncomfortable with actually defending the misleading statements it made in its Schedule 14D-1, UPR has recently filed a motion trying to abandon these claims rather than allow discovery into the truth of UPR's public representations. 17. After reading UPR's Schedule 14D-1, the reasons underlying UPR's fear that it might be sued over the statements made in and disclosures omitted from that filing became apparent. The Schedule 14D-1 originally filed by UPR plainly failed to comply with federal securities laws. For example, UPR falsely suggested in the Schedule 14D-1 that Pennzoil's management supported a merger with UPR when UPR knew that Pennzoil had not indicated approval of UPR's offer and had, in fact, rejected an offer only weeks before the hostile tender offer was announced. The Schedule 14D-1 also failed to disclose a $2.5 billion contingent liability UPR assumed under a tax indemnity agreement entered into with UPC, UPR's former parent company. UPR did not disclose in its Schedule 14D-1 that it had projected that Pennzoil stock was going to rise substantially in the near future and that its offer was intended and designed to "blur the market's perception" regarding the reasons for that increase and, thereby, mislead the investing public regarding the value of Pennzoil's stock. Likewise, UPR failed to disclose that its own financial experts had valued Pennzoil on a break-up basis far in excess of the $84 per share bid nominally placed by UPR on its offer, notwithstanding UPR's contrary public statements regarding the value of Pennzoil's stock. Similarly, while UPR did disclose that its offer was contingent upon its success in a pending suit in Chancery Court, it failed to disclose its internal assessment that its chances of prevailing in that suit were "nil." UPR did not disclose that it needs DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 10 11 to purchase Pennzoil to avoid the Valley of Despair, concealing its internal assessment it must acquire 750 million barrels of oil equivalent to meet its needs, making a strategic acquisition such as the Tender Offer a "must" for UPR. Finally, UPR's Schedule 14D-1 misleadingly failed to disclose fully the effect purchase accounting would have on UPR's earnings, which affect significantly both UPR's stock value and its ability to finance ongoing operations or stock acquisitions. 18. On September 8, 1997, Pennzoil succeeded in forcing UPR to make public disclosure of some of the material facts UPR had omitted from its Schedule 14D-1. UPR did not at that time make the actual documents available to the public. Instead, by the 20th amendment to its Schedule 14D-1, UPR disclosed selected portions of certain critical documents. Understandably fearful of the market's reaction to the compelling evidence of UPR's outright duplicity contained in the documents it quoted, UPR withheld the actual documents and tried to bury its disclosures in a sea of disclaimers, while at the same time running a renewed advertising campaign to deflect attention from its admissions. At an injunction hearing held on September 10, UPR finally capitulated and agreed to make six critical documents public in their entirety, something it should have done at the very outset of its offer. 19. On October 6, 1997, UPR finally tacitly acknowledged that the two-tier structure of its offer was coercive and improper. On that date, UPR announced that it was converting its offer to an "all cash" transaction, stating that it would pay $84 per share in the second-step merger contemplated by UPR. UPR's disclosures relating to its revised offer, however, remain inadequate and misleading. For example, UPR represented in its announcement that there is no financing contingency to its offer. But UPR does not have a firm financing commitment to pay DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 11 12 for the shares to be acquired in the second-step merger. UPR has publicly stated that it intends to finance the offer through private borrowing and refinance through issuance of equity and asset sales. It does not, however, disclose matters that create substantial questions regarding UPR's ability to complete an all-cash offer on the terms announced. UPR's bankers have expressed concern regarding UPR's failure to disclose the "Valley of Despair" in connection with prior financing. UPR continues to conceal from the public the graphs, charts, and other data that would show whether UPR's projected decline curves prepared in May, June, or July of 1997 continued to reflect anticipated steep decline curves characteristic of the "Valley of Despair." While UPR claims that it has cured the "Valley of Despair" problem, it has yet to disclose--either publicly or through discovery--where it found the 750 million barrels of oil equivalent (or 4.5 trillion cubic feet of gas) that it told the IRS was required to solve the problem. UPR has failed to disclose fully the effect purchase accounting principles will have on its earnings, which will affect its ability to obtain financing either debt or equity to pay for Pennzoil's stock. And while UPR has disclosed some internal valuations, it continues to hide from public view other valuations it made of Pennzoil. 20. Furthermore, while UPR has implicitly acknowledged that Pennzoil's international prospects are of greater value than UPR has provided in its offer, UPR's suggestion that it might someday consider issuing an undefined security in connection with a negotiated transaction is grossly misleading.(1) In an effort to induce Pennzoil shareholders to tender their shares, UPR has - --------------- (1) In this regard, it is important for the Court to be aware of the fact that UPR has emphasized this issue in an effort to influence Pennzoil's shareholders, albeit without making anything close to an actual commitment. UPR reiterated this statement both in a meeting with market analysts on October 6, 1997, and in an advertisement it ran on October 8, 1997. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 12 13 suggested that it might issue a security to Pennzoil shareholders, the value of which would be tied to development of Pennzoil's international initiatives. UPR has failed to disclose, however, that it has an abysmal record historically in pursuing international development, that it has abandoned pursuit of international transactions because it lacked the expertise to compete, and that if it manages to finance its all-cash offer it will lack the financial resources to pursue and develop international initiatives. Disclosure of these and other facts are necessary to make UPR's illusory suggestion that it would pursue Pennzoil's international initiatives, and that Pennzoil shareholders might benefit thereby, not misleading. Full and complete disclosure of the financial matters outlined above--the "Valley of Despair," the tax indemnity problem, the purchase accounting issues, and UPR's declining domestic reserve base--is therefore required under the Williams Act. UPR'S MISLEADING REPRESENTATIONS REGARDING THE DISCUSSIONS BETWEEN PENNZOIL AND UNION PACIFIC 21. In its Original Complaint, Pennzoil outlined why the statement made by UPR in its Schedule 14D-1 and in its public advertisements and letters to Pennzoil's shareholders were inaccurate and misleading. UPR's original misleading statements regarding the 1995 discussion between Pennzoil and UPR have never been corrected, and continue to infect UPR's offer and the consideration of that offer by Pennzoil's shareholders. Indeed, despite repeated efforts by Pennzoil to point out to UPR the errors in its representations, UPR continues to imply misleadingly that UPR's tender offer was suggested by Pennzoil. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 13 14 22. In order to manufacture the illusion that Pennzoil supported the merger, UPR cites discussions between Pennzoil and UPC that occurred approximately two years before UPR's hostile tender offer was announced. UPR's statements regarding those discussions are materially misleading because UPR has failed to disclose facts required to make clear the significant differences between the transactions Pennzoil was exploring in 1995 and the hostile tender offer UPR has proposed. The historical facts UPR has failed to disclose show that the transaction Pennzoil was pursuing in 1995 was different, both because Pennzoil's needs in 1995 were different and because the parties' ability to structure a tax efficient transaction was different. 23. Beginning in 1995, Pennzoil took aggressive steps to improve its income and cash flow, reduce debt, dispose of non-core oil and natural gas reserves and acquire other reserves to strengthen the core areas, and otherwise bolster its oil and natural gas reserves. 24. In January 1995, when Pennzoil's restructuring initiatives were in their earliest stages and Resources was a wholly owned subsidiary of UPC, representatives of Pennzoil contacted representatives of UPC to discuss a possible tax-efficient acquisition by Pennzoil of Resources or its assets. At that time, such an acquisition at a favorable price would have facilitated Pennzoil's restructuring initiatives, and the discussions between the parties were in the context of Pennzoil's specific business objectives at the time. For example, Pennzoil needed additional cash flow to maintain its then $3.00 per share dividend and hoped to use cash flow from Resources' assets to provide the necessary funds. Resources also could have provided Pennzoil with additional core reserves to replace the non-core reserves which the Company was then selling off. A transaction involving Resources also would have assisted Pennzoil in achieving its goal of quickly reducing costs by creating economics of scale. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 14 15 25. Transactions proposed by Pennzoil for consideration in January 1995 included a stock-swap "merger of equals" following a tax-free spin-off of Resources by UPC. Under this alternative, the merger agreement would have been signed prior to the spin-off. Another alternative transaction would have involved a cash purchase of producing properties of Resources subject to a large production payment. At no time during these discussions did Pennzoil consider or discuss entering into any transaction in which Pennzoil would be the acquired company or which otherwise would result in a change of control of Pennzoil. 26. After these discussions with Resources, Pennzoil continued to pursue aggressively its restructuring initiatives, and has made substantial progress on a number of fronts. As a result of Pennzoil's strategic initiatives, Pennzoil has seen at least seven consecutive quarters in which its earnings have exceeded the previous years' earnings. As a result, Pennzoil's stock price has risen dramatically and would have continued to rise even without UPR's offer, as UPR acknowledges internally. 27. The Schedule 14D-1 disseminated by UPR in connection with the Tender Offer contains material misrepresentations and omissions regarding the background of the Tender Offer, and particularly regarding the parties' prior negotiations. The Schedule 14D-1 inaccurately characterizes the 1995 discussions between representatives of Pennzoil and UPC in order to create the misleading impression that Mr. Pate suggested -- and actually supported -- the transaction proposed by UPR. To foster this misleading impression, the Schedule 14D-1 quotes -- wholly out of context and without providing the additional information necessary to make the statements made in the Schedule 14D-1 not misleading in light of the circumstances in which they are made -- DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 15 16 certain statements made by Mr. Pate in January 1995 indicating that a combination of Pennzoil and Resources would "provide the best possible fit." 28. The Schedule 14D-1 fails to disclose that Mr. Pate's statements were made in the context of Pennzoil's then-proposed tax-efficient acquisition of Resources or its assets from UPC. Mr. Pate made it clear in 1995 that any transaction between Pennzoil and UPC involving Resources depended largely on the tax benefits available to UPC and Pennzoil in the context of a pre-spin-off agreement. The circumstances that existed in 1995 -- when Resources was a wholly owned subsidiary of UPC -- permitted great freedom in structuring a tax-efficient transaction. Those circumstances no longer exist. Nowhere are these facts disclosed by UPR to Pennzoil's stockholders, who are led to believe that the transaction proposed by Mr. Pate in 1995 is essentially the same as the transaction proposed by UPR today, and that the circumstances in which Mr. Pate's proposal was made have not changed. 29. The Schedule 14D-1 further fails to disclose that: (i) in 1995, Pennzoil was interested in a transaction involving Resources or its assets because Resources' assets would assist Pennzoil in its restructuring initiatives; and (ii) in 1997, Pennzoil has accomplished many of its initial restructuring objectives, and the Company's current business plans and strategic goals are very different from its plans and goals in 1995. Thus, the Schedule 14D-1 fails to inform Pennzoil's stockholders that the economic rationale underlying Pennzoil's desire to acquire Resources or its assets in 1995 no longer exists. 30. The Schedule 14D-1 states affirmatively that, "in October, 1996, UPR began a review of various possible strategic initiatives." (14D-1 at 21). The Schedule 14D-1 fails to connect the discussion between representatives of Pennzoil and representatives of UPC and UPR DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 16 17 in 1995 which related to a possible combination. Thus, the Schedule 14D-1 misleads the stockholders of Pennzoil into the false belief that Resources' interest in Pennzoil arose only within the last four months. In fact, UPR had concluded long before that due to the steep decline curves characteristic of UPR's core properties, UPR could not meet its stated goal of 10% production growth per annum by drilling on its own properties. UPR had concluded internally over a year before the Tender Offer was announced that smaller "tactical" acquisitions would be insufficient to meet its need for additional drill sites and that it would need to make a "strategic" acquisition of a company the size of Pennzoil by the end of 1997--and yet another such transaction by the year 2000--to meet its growth projections. Indeed, UPR stated that it would take over 160 "tactical" acquisitions to offset the Valley of Despair. 31. To bolster the misleading illusion that Pennzoil's management supported UPR's offer, UPR also made false statements and material omissions concerning Mr. Pate and certain of his actions and statements. For example, Schedule 14D-9 on page 22 states that, "Mr. Pate agreed to visit Ft. Worth ..." This statement is completely false. Likewise, the 14D-9 states at page 22 that "Mr. Pate also stated that he believed that Pennzoil's Common Stock could be trading in a range between $80 and $100 per share in the next four to five years...." This statement is also completely false and, because it concerns the value of Pennzoil stock, is materially misleading. THE SCHEDULE 14D-1 MISLEADS PENNZOIL'S SHAREHOLDERS REGARDING UPR'S DISMAL BUSINESS PROSPECTS 32. UPR has also made misstatements and omitted material information regarding its own business prospects. In a June 3, 1996 letter to the Internal Revenue Service ("IRS"), UPR DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 17 18 admitted that its management internally referred to the trend of steep declines in production from its existing properties as the "Valley of Despair," and further stated that UPR's goal of 10% reserve growth per year in the face of such declines was referred to as "walking up the down escalator." As a specific example of their rapidly declining reserve base, UPR pointed out to the IRS that "[d]ue to the steep decline of the production curve, Austin Chalk reserves are projected to drop at an average of 34% per year, and East Texas reserves by an average of 12% per year during the same period." UPR concluded that there was "significant uncertainty as to how much further the Austin Chalk production can be economically extended" since the "vast majority" of UPR's gas infill locations had been drilled. 33. UPR also failed to disclose that it had not a single employee that was an expert on international exploration and production activities, notwithstanding Pennzoil's significant portfolio of international exploration and production projects. Specifically, in a November 1995 memo which UPR disclosed to the IRS, UPR admitted: [T]he reality is that UPRG does not have any real international E&P experts on staff. The company needs to rapidly increase its collective knowledge of international E&P. While UPR trumpets in the Schedule 14D-1 its purported "expertise in advanced drilling and completion technologies," it omits to disclose its complete lack of international exploration and production expertise to Pennzoil's stockholders, notwithstanding the importance of Pennzoil's initiatives in Azerbaijan, Qatar, Egypt, Venezuela and Australia. 34. The facts UPR has failed to disclose regarding its "Valley of Despair" are plainly material. First, UPR has stated to the IRS that it must acquire a company bigger than Pennzoil and another company the same size in order to meet its promises to its own shareholders. UPR DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 18 19 is thus a forced buyer--it must acquire Pennzoil or admit publicly that it will not meet its production goals. Prior to the recent amendment to its offer, UPR continually urged Pennzoil's shareholders to put pressure on Pennzoil's Board of Directors to accept UPR's offer, even though Pennzoil's Board believed the original offer inadequate. By amending its offer, UPR has implicitly acknowledged that Pennzoil's assessment of the inadequacy of UPR's offer was correct. The day following announcement of its new, amended offer, UPR has once again begun a public relations campaign suggesting that Pennzoil shareholders tender their shares to pressure Pennzoil's Board. In assessing UPR's advertising campaign, Pennzoil's shareholders are entitled to know that UPR is in dire financial straits, that it must complete the Tender Offer, that it is trying to buy Pennzoil on the cheap and that it cannot finance the transaction because of its dismal business prospects. 35. UPR's admissions to the IRS regarding the "Valley of Despair" outline the magnitude of UPR's problems and the degree to which it requires a transaction such as the proposed takeover of Pennzoil. In the Sixth Supplement to Request for Revenue Ruling, UPR stated that it faced decline curves of up to 34% in core development areas, especially in the key Austin Chalk acreage that is the centerpiece of UPR's production efforts. UPR explained that its other production areas, such as its holdings in the Rockies, were "marginal" and could not offset the steep decline curves creating the "Valley of Despair." UPR unequivocally represented to the IRS that it needed to acquire 750 million barrels of oil equivalent via strategic acquisitions to meet its growth projections. While UPR has publicly stated that it has solved its "Valley of Despair" problem, it has refused to produce key evidence relating to those statements. UPR continues to hide from the public, from Pennzoil, and from the Courts the long-range Plan UPR adopted in DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 19 20 June of 1997. Nor has UPR produced projected decline curves prepared in May, June, and July 1997. Information regarding production from UPR's Austin Chalk acreage has been withheld, even as UPR proclaims that it will be able to produce ever larger amounts from the Chalk indefinitely. 36. As outlined above, information regarding UPR's deteriorating financial condition remains highly material to the offer. UPR does not have a firm financing commitment. Thus, Pennzoil's shareholders could find themselves captive to UPR by virtue of the Tender Offer yet unable to realize the promised second-step merger because of UPR's inability to finance that stage of its merger.(2) Among other reasons, since UPR has not yet obtained firm financing, its financial condition is material to the shareholders' consideration of its offer. UPR HAS FAILED TO DISCLOSE FULLY THE ADVERSE CONSEQUENCES PROPER APPLICATION OF PURCHASE ACCOUNTING PRINCIPLES WOULD HAVE ON UPR FOLLOWING CONSUMMATION OF THE PROPOSED MERGER 37. UPR's Schedule 14D-1 fails to disclose any information concerning the extent of the adverse accounting consequences of UPR's proposed transaction. If UPR were to acquire Pennzoil, the transaction would be subject to "purchase accounting," under which UPR would be required to offset or reduce future earnings with depreciation, amortization and other adjustments as a result of the proposed transaction. This reduction of earnings per share as a result of additional depreciation and amortization and other adjustments is commonly referred to as - --------------- (2) This Court certainly understands the perils inherent in being a minority shareholder in a company that is controlled by a single majority shareholder, especially when that majority shareholder faces significant financial problems. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 20 21 "dilution." UPR's conversion of its offer to a bust-up, "all cash" transaction may exacerbate the effect this will have on UPR's future earnings. 38. In public statements outside of the Schedule 14D-1, UPR has given incomplete, confusing, and conflicting statements about the effect of the proposed transaction on UPR's future earnings, earnings per share and dilution. In a conference call to analysts on June 23, 1997, after the commencement of the Tender Offer, Mr. Messman stated that: "values are not determined on a basis of earnings per share, but despite that, we believe we can eliminate the dilution, which is significant, within two years..." In the same call, Dick Eales, Executive Vice President of UPR, stated that: "Our estimates for 1998 ... will result in higher cash flow and higher earnings before the purchase accounting than the street now estimates." Mr. Messman later stated that: "[w]e haven't finished making the allocations yet of purchase price." Following Mr. Messman's comment, Mr. Eales stated that: "There are various ways to allocate purchase price ... we've looked at that in various ways and we haven't pinned that down." Finally, Mr. Messman stated: "We expect that we'll be the ... dilution and earnings per share.... We think in two years we'll be practically even with where we are today and then by the third year we'll be off and running into increasing where we are today." 39. Under purchase accounting, if the proposed transaction were completed, UPR would have to record the transaction at its fair value. In recording such fair value, UPR would have to increase the recorded value of Pennzoil's assets by (i) the excess of (a) the purchase price DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 21 22 for Pennzoil common stock in the proposed transaction over (b) the book value of Pennzoil's equity (the "Excess Cost"), and (ii) the amount of future tax liability attributable to the assets acquired as a result of the form of the transaction (the "Deferred Taxes"). In the transaction as proposed by UPR, the Excess Cost would be about $3.2 billion, and the Deferred Taxes would be about $1.1 billion. Accounting rules require the sum of $4.3 billion to be amortized or depreciated by UPR (i.e., deducted from income) ratably over the estimated useful lives of the assets acquired. Assuming an average useful life of seven years for the acquired assets (which approximates the average life of Pennzoil's proved oil and gas properties), the incremental reduction in earnings for UPR as a result of the required depreciation or amortization would total approximately $615 million annually on a pre-tax basis. 40. Furthermore, UPR has stated that it intends to finance its proposed acquisition largely with new debt. The additional negative impact on UPR's earnings by virtue of this interest obligation would be millions of dollars annually (the "Additional Interest"). Thus, the after tax annual negative impact resulting from the Excess Cost, the Deferred Taxes and the Additional Interest adjustments represents the amount of additional earnings UPR would have to generate annually above and beyond earnings that would otherwise be generated from the combined assets of UPR and Pennzoil in order to avoid dilution. UPR has improperly limited its discussion of the effect purchase accounting will have on its earnings to the "base year" projections. UPR is required to disclose the long-term nature of the earnings dilution it will suffer. Furthermore, and contrary to UPR's public representations, Pennzoil believes that UPR's earnings dilution will continue for more than five years following the proposed merger. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 22 23 41. The negative earnings and earnings per share impact of the proposed transaction have not been disclosed by UPR in its Schedule 14D-1. Pennzoil's stockholders are not informed that the accounting treatment of UPR's proposed transaction may be materially unfavorable and may adversely affect UPR's ability to obtain either debt or equity financing to pay for Pennzoil's stock. Furthermore, disclosure of this information is required to show that UPR's suggestion that Pennzoil's shareholders would benefit from future development of Pennzoil's international prospects is misleading. In light of the increased burden the all-cash structure will place on UPR's earnings, UPR will have a significant incentive to decrease or eliminate investment in international initiatives, where UPR lacks expertise and has shown no committed historical interest. UPR CONTINUES TO MISREPRESENT ITS VALUATIONS OF PENNZOIL AND TO CONCEAL MATERIAL FACTS REGARDING ITS DISCLOSURES FROM PENNZOIL, THE COURT, AND THE PUBLIC 42. UPR has also misled the markets regarding the value of Pennzoil's stock. When UPR announced its Tender Offer on June 23, 1997, UPR quickly went to the market to explain that UPR had both important information not publicly available and greater expertise in valuing exploration and production companies than the market had. In a telephone conference with market analysts, UPR's Jack Messman emphasized that the market would have to rely on UPR to value Pennzoil: [T]hat's a key point for us and I want to emphasize so that we make sure others remember the point; and that is, I said earlier, if you look at just the financial statement and the reserve reports and the street estimates for Pennzoil, you could not properly evaluate it because [UPR has] gone in and done a scientific evaluation to ascertain that the drill sites are there and we will significantly ramp-up their drilling activities after this deal is concluded . . . . So it would be difficult for [the market] to use the values that are on the street today and to make these decisions in terms of valuation and fairness. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 23 24 43. Having represented to the market that it was in possession of "secret" information and had unique expertise in valuation of such companies, UPR embarked on a campaign of disinformation designed and intended to mislead the investing public regarding the value of Pennzoil's stock. In various advertisements and letters to Pennzoil shareholders, which UPR incorporated into its Schedule 14D-1, UPR made numerous misrepresentations regarding the value both of its proposed transaction and of Pennzoil. Thus, in a July 1, 1997 UPR press release, UPR stated that it did not believe that Pennzoil's strategic plan "could deliver anything close to the value" of its proposed transaction. UPR has similarly publicly disclosed that: o "Pennzoil, by itself, cannot create sufficient shareholder value to compete with UPR's $84 per share bid and the long-term shareholder value the combined company will provide." June 27, 1997 letter from UPR to Pennzoil's Board of Directors, reprinted in Schedule 14D-1 Amendment No. 3. o "Since 1990, Pennzoil management has 'built' virtually zero value in the company." July 1, 1997 UPR press release, reprinted in Schedule 14D-1, Amendment No. 4. o "Pennzoil shareholders can conclude justifiably that any existing or new plan is likely to fail to deliver shareholder value given the poor track record of management." Id. UPR has further publicly stated that Pennzoil's position that the market has undervalued Pennzoil stock was an 'insult' to Pennzoil's shareholders, id., implying that the market value prior to the Tender Offer was an accurate reflection of Pennzoil's value. 44. UPR's public statements regarding the value of Pennzoil were false and misleading in that UPR in fact internally believed that Pennzoil's management had done a superb job and that Pennzoil's common stock was undervalued substantially by the market. On April 3, 1997, Dick DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 24 25 Eales, the Executive Vice President and Chief Financial Officer of UPR, advised the UPR board of directors that "[W]e currently think Pennzoil stock is worth as much as the high $70's or low $80's per share." In similar stark contrast to UPR's public statements are its internal assessments of Pennzoil reflected in a May 3, 1997 Project Mercury Briefing Report: o "[T]here is considerable risk to waiting until November if a hostile tender offer is required to motivate [Pennzoil's] board. There is more likely good news than bad news for [Pennzoil], and a rising stock price is ultimately their best defense. An early strike would somewhat preserve the perception of our large current premium. The existence of our offer would blur the market's perception of any subsequent increase in stock price, for which we would naturally take credit." o Pennzoil's management has done "a superb job of turning around the company" and "has the company on the right path." 45. On September 10, 1997, UPR made public certain documents it had previously provided only to Pennzoil. Despite this limited concession, UPR continues to conceal additional valuation studies it has performed that--by its own admission--show that Pennzoil stock has value materially higher than $84 per share and thus directly contradicts UPR's public statements. UPR has refused to produce these documents to Pennzoil despite several Court orders requiring it to do so. 46. On October 8, 1997, UPR ran yet another advertisement suggesting that Pennzoil has failed to produce shareholder value--i.e., to bring about an increase in Pennzoil's stock price--for "seven years." This representation is an overt falsehood--as UPR's internal studies show, Pennzoil's stock price has substantially outperformed the market over the last year while UPR's stock has under-performed the market. Furthermore, UPR's Dick Eales gave an interview to news services in which he stated that UPR's offer was at the top of the range of values generated internally at UPR. Given UPR's admission that it possesses valuations of Pennzoil in excess of DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 25 26 $84 per share, UPR's statement of value is demonstrably false. Thus, Pennzoil's shareholders are entitled to full disclosure of all internal valuations UPR has made, including the valuations in excess of $84 per share that UPR has admitted it possesses but which UPR is unwilling to produce to Pennzoil, despite the discovery rulings of this Court requiring production of those documents. 47. Plainly, representations regarding a target company's value and prospects are intrinsically material in the context of a hostile tender offer, especially if the speaker professes to be in possession of material non-public information and claims to be basing the opinion on expertise in the target's business. UPR has suggested that it was not required to include its internal valuations of Pennzoil in its Schedule 14D-1. But UPR plainly cannot make the representations to the public that its offer is at "the top end" of UPR's internal valuations while simultaneously possessing valuations far in excess of $84 per share. UPR's decision to make public representations inconsistent with their internal documents regarding the value of Pennzoil impose on it a duty to reveal all material valuation information in its possession, including UPR's internal valuation and analyses of Pennzoil's business and assets.(3) UPR HAS MADE MISLEADING STATEMENTS ABOUT ITS PROSPECTS OF WINNING IN CHANCERY COURT 48. UPR has also made misleading statements regarding the litigation it filed in connection with the Tender Offer. In its Schedule 14D-1, UPR claimed that it brought suit against Pennzoil in the Court of Chancery (the "Chancery Court lawsuit") because any refusal by the - --------------- (3) To the extent UPR has misused material inside information it obtained from Pennzoil in discovery to make such valuations, UPR is not at liberty to disclose Pennzoil's trade secrets and inside information. As outlined below, Smith Barney, UPR's financial advisor, has improperly reviewed Pennzoil's inside information, after which it advised UPR with respect to the revision of UPR's tender offer to all cash and represented UPR in negotiations to sell components of Pennzoil's business. Because it possesses confidential inside information regarding Pennzoil, UPR cannot purchase or sell Pennzoil shares. This issue is discussed more fully in paragraphs 54-60 below. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 26 27 Pennzoil Board to redeem its stockholder rights plan (the "Rights Plan") and approve UPR's proposed transaction "would constitute a breach of the Pennzoil Board's fiduciary obligations to Pennzoil stockholders under Delaware law." UPR similarly stated publicly that "Pennzoil is invoking every anti-takeover defense in the book to insulate an entrenched management . . . . By doing so, the Board is violating its fiduciary duty to Pennzoil shareholders." In the Chancery Court lawsuit, UPR has alleged that "[t]he Director Defendants' refusal to redeem the Rights Plan or render the Rights Plan inapplicable to the Tender Offer and merger has no economic justification, serves no legitimate purpose, is not a reasonable response to the Tender Offer . . . ." Schedule 14D-1, Amendment No. 1. 49. In direct contrast to its public statements regarding its Chancery Court lawsuit, UPR held the internal view that it had no chance of succeeding in the Chancery Court lawsuit. The Project Mercury Briefing Report states: o "The tender offer would be accompanied by litigation to remove the shareholder Rights Plan and to declare Delaware 203 unconstitutional. The likelihood of winning is nil, but the litigation applies pressure to [Pennzoil], and provides defense against an unfriendly venue if UPR gets sued." (Emphasis supplied). Thus, UPR privately believes that the Chancery Court lawsuit has no chance of success but has failed to disclose that fact to Pennzoil's stockholders in connection with their public proclamation that Pennzoil's Board of Directors would be breaching their fiduciary duties and acting in bad faith if they refused to disable the Rights Plan and other structural defenses. 50. Although UPR has made the Project Mercury Briefing Report public, it has disclaimed its own assessment in the Report that its prospects of winning are "nil." It claims that DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 27 28 this assessment was based on a misinterpretation of its counsel's advice, but it has refused to disclose either to Pennzoil or to the public precisely what its counsel said or on what the advice was based. Having made public disclosure of part of its counsel's advice, UPR has waived any privilege relating to that advice. Pennzoil's shareholders are entitled to full disclosure of UPR's assessment of its Chancery Court litigation so that they can assess the validity of UPR's selective disclosures regarding its assessment of that action. UPR'S MISLEADING OMISSIONS REGARDING ITS CONTINGENT LIABILITY TO UNION PACIFIC CORPORATION 51. As set forth above, Resources was a wholly owned subsidiary of UPC until October 1995, when Resources sold 42.5 million shares of its common stock in the Offering. In connection with the Offering, UPC announced its intention to distribute pro rata to its stockholders its remaining ownership interest in Resources by means of the Distribution. The Distribution was subject to certain conditions, including receipt by UPC of a ruling from the IRS that the Distribution would be tax free to UPC and its shareholders (the "Revenue Ruling"). In October 1995, UPC applied to the IRS for the Revenue Ruling. Among other things, UPC represented to the IRS that Resources had "not allowed any negotiations or discussions, or even any direct or indirect contact, with any possible acquisition target companies regarding an acquisition if [Resources'] stock might be used in the acquisition" and that, consequently, "there have been no negotiations, agreements, or arrangements with respect to any acquisitions that would involve [Resources] stock." 52. In connection with the Offering, Resources agreed to indemnify UPC for liabilities resulting from or arising out of "(1) the inaccuracy of any factual information provided by DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 28 29 Resources in connection with the ruling requested from the Internal Revenue Service on the tax-free nature of [the] Distribution or (2) any act or failure to act without the consent, direction or advice of UPC by Resources or its directors, officers, other employees or agents or other representatives, whether such act or failure to act occurs before or after [the] Distribution." In addition, the indemnity covers any liabilities the indemnified parties have to UPC's stockholders attributable to the spin-off Distribution if the Distribution is not tax-free as a result of an inaccuracy or act or failure to act as described above. As Resources has admitted in its publicly filed documents, in the event that Resources is required to indemnify UPC under the Indemnification Agreement, "such an indemnity payment could be very significant in amount." Recent admissions by UPR and UPC indicate that "very significant" is an understatement--the potential liability by UPC's own admission is $2.5 billion. 53. UPR failed to disclose Resources' potential liability to UPC under this multi-billion dollar indemnity agreement, even though UPR's offer as originally structured would have involved the issuance of stock. At the time of the Distribution, Resources made representations to the Internal Revenue Service regarding its existing negotiations and plans that were different from those disclosed in UPR's Schedule 14D-1. Thus, pursuit by UPR of the Tender Offer as originally structured would have involved a risk that the Revenue Ruling would be reconsidered, triggering UPR's obligations under the indemnity agreement. UPR'S AND SMITH BARNEY'S USE OF INSIDE INFORMATION 54. UPR's conduct since filing this suit has been equally culpable. On July 10, 1997, the parties entered into a contractual Stipulation governing the production of documents. See Exhibit "A," attached. Pursuant to the Stipulation, Pennzoil agreed to produce to UPR numerous DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 29 30 highly confidential documents dealing with the company's long-term Strategic Plan, as well as other confidential and highly confidential financial and other information. 55. The Stipulation expressly provided, inter alia, that highly confidential information was to be made available only to UPR's counsel and to experts hired by trial counsel for the purpose of the litigation only. Id. at paragraph 5. Paragraph 6(A) of the Stipulation specifically and expressly bars anyone who received Pennzoil's highly confidential information from using that information to provide financial advice to any party. The Stipulation states, in relevant part: Confidential or Highly Confidential Discovery Material may be provided to persons listed in Paragraphs 4(b) and 5(c) above only . . . provided that such expert or consultant (i) is using said Confidential or Highly Confidential Discovery Material solely in connection with the Litigations; and (ii) will not use any Highly Confidential Discovery Information for the purpose of providing financial advice to any party. . . The Undertaking, which any person who is to receive confidential or highly confidential information must execute, similarly provides, "I hereby certify . . . that I will not use any Highly Confidential Material for the purpose of providing financial advice to any party." Recently, Smith Barney has provided copies of eight such undertakings signed by Smith Barney agents and representatives. By executing the Undertaking, Smith Barney contractually agreed to the terms of the Stipulation. 56. The clear purpose of the Stipulation was to protect against the possibility of UPR gaining access either directly or indirectly to material inside information about Pennzoil. Such protection was necessary for UPR as well as for Pennzoil. Under long-established principles of federal securities laws, UPR is barred from buying or selling Pennzoil stock so long as it possesses material inside information regarding Pennzoil. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 30 31 57. UPR hired Defendant Smith Barney to provide strategic financial advice to UPR's Board in connection with its hostile Tender Offer for Pennzoil. Despite the clear prohibition on the use of Pennzoil's inside information for the purposes of providing financial advice to any party, UPR's counsel furnished Smith Barney with Pennzoil's highly confidential documents. Smith Barney has recently admitted that UPR provided it with copies of the reports made to Pennzoil's board of directors by Pennzoil's financial advisors, Lehman Brothers, Evercore Partners and J.P. Morgan, analyzing UPR's Tender Offer. Furthermore, Smith Barney refused to answer questions at its deposition regarding whether Smith Barney had been provided access to Pennzoil's Strategic Plan. This conduct strongly implies that UPR has also furnished Smith Barney with access to Pennzoil's highly confidential Strategic Plan. This type of information is, under the Exchange Act, ethical principles, the standards of ordinary practice among financial advisors and importantly by the express provision of the Stipulation, regarded as off-limits to financial advisors like Smith Barney in the context of corporate takeovers. 58. Since Smith Barney received and reviewed Pennzoil's inside, highly confidential information, UPR has, on the advice and with the financial assistance of Smith Barney, changed its offer. UPR and Smith Barney have also been negotiating the sale of parts of Pennzoil's business to Pennzoil's competitors, have met with prospective lenders, and performed valuation analyses, all with knowledge of the non-public, inside information UPR has improperly obtained. By so doing, UPR and Smith Barney violated Sections 10 and 14 of the Exchange Act, industry norms, and their specific contractual obligations. Pennzoil has repeatedly asked UPR and Smith Barney to honor their obligations under the contract, but UPR and Smith Barney refuse to do so. UPR and Smith Barney have brazenly breached the Stipulation's terms and have stated their intent to continue to do so. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 31 32 59. UPR has repeatedly taken the position that information such as that contained in Pennzoil's Strategic Plan and in the other confidential information Smith Barney has reviewed is among the most commercially sensitive information a company like Pennzoil possesses. Disclosure of Pennzoil's sensitive trade secrets and business strategies would cause irreparable commercial injury to Pennzoil and its shareholders, providing Pennzoil's competitors with a wealth of inside and highly sensitive information that could and would be used to compete unfairly with Pennzoil. 60. Smith Barney and UPR have inflicted and will continue to inflict substantial harm on Pennzoil, its shareholders and the market by using Pennzoil's sensitive internal documents to aid UPR's hostile takeover bid. Smith Barney has advised UPR in connection with the recent revision of its Tender Offer while in possession of inside information; it has met with lenders to discuss the value of Pennzoil's assets; and it apparently has met with Pennzoil's competitors to negotiate the sale of various parts of Pennzoil's businesses. In light of the magnitude of the injury inflicted and the uncertainty of quantifying the loss of competitive advantage and opportunities that disclosure and use by Smith Barney and UPR of Pennzoil's Strategic Plan and other confidential information would entail, Pennzoil has no adequate remedy at law. Accordingly, Pennzoil asks for a temporary injunction and a permanent injunction barring UPR and Smith Barney from purchasing or selling Pennzoil stock so long as the information it improperly received remains commercially sensitive. In addition, Smith Barney should be enjoined from consulting with or DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 32 33 giving financial advice regarding Pennzoil or Pennzoil's business to any competitor or prospective purchaser of Pennzoil securities or assets, including UPR. IV. CAUSES OF ACTION COUNT I: VIOLATION OF SECTIONS 10(B) AND 14(E) OF THE SECURITIES EXCHANGE ACT (AGAINST UPR AND SMITH BARNEY) 61. Pennzoil realleges and incorporates by reference herein the allegations set forth in paragraphs 1 through 60 above as if fully set forth herein. 62. As set forth above, UPR, though its officers and/or agents including Smith Barney, is in possession of material, non-public information regarding Pennzoil and its business. Despite having such information, UPR seeks to purchase all of the stock of Pennzoil, a publicly-traded company. 63. Smith Barney has provided financial and strategic advice and assistance to UPR in connection with the Tender Offer, despite the possession and knowledge of material inside information regarding Pennzoil. 64. In making its offer and in announcing its revised offer, UPR has relied on the advice of Smith Barney, despite UPR's knowledge that Smith Barney is privy to material inside information regarding Pennzoil. 65. By seeking to purchase Pennzoil's stock while in the possession of material inside information, UPR, aided and abetted by Smith Barney, is violating Sections 10(b) and 14(e) of the Securities Exchange Act. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 33 34 66. UPR and Smith Barney are bound by the Stipulation to maintain the confidentiality of Pennzoil's highly confidential information. Thus, they cannot make the disclosures that would be required under the Securities Exchange Act before being permitted to purchase lawfully Pennzoil shares in the Tender Offer. 67. Pennzoil, its stockholders and the market are being irreparably harmed by UPR's and Smith Barney's use of highly confidential information. While in possession of material inside information regarding Pennzoil, Smith Barney has advised UPR to offer $84 per share in cash for all of Pennzoil's stock. This advice has been based upon, and influenced by, material inside information regarding Pennzoil not available to the investing public. UPR is prohibited by the Stipulation from revealing publicly, or otherwise using to advise UPR on its offers, the inside information to which Smith Barney and UPR have been privy, and is prohibited by federal securities laws from trading on the basis of material inside information. Allowing the Tender Offer to close would permit UPR to trade on the basis of material inside information in violation of the Securities Exchange Act. 68. This harm can not be remedied. UPR's takeover, once successful, would be difficult, if not impossible, to unravel. No action at law for damages could provide Pennzoil with adequate relief from Smith Barney's wrongful actions. 69. Because Pennzoil has no adequate remedy at law, it seeks equitable relief in the form of a temporary injunction and a permanent injunction prohibiting UPR from going forward with its Tender Offer so long as the information provided to Smith Barney and UPR remains commercially sensitive. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 34 35 70. Pennzoil also seeks a temporary injunction and permanent injunction barring Smith Barney from trading in Pennzoil stock and from providing financial advice to any party in the purchase or sale of Pennzoil stock until such time as the information provided to Smith Barney regarding Pennzoil is no longer commercially sensitive. UPR has stated in letters (Exhibits "B" and "C," attached) that it intends to continue using Smith Barney as its financial advisor for its attempt to take over Pennzoil, and it reasonably appears that Smith Barney intends to continue to provide UPR with such strategic financial advice, including with respect to the restructuring of UPR's offer and negotiations with third parties as referred to above. COUNT II. VIOLATIONS OF SECTION 14(E) OF THE SECURITIES EXCHANGE ACT 71. Pennzoil realleges and incorporates by reference herein the allegations set forth in paragraphs 1 through 70 above as if fully set forth herein. 72. UPR's Schedule 14D-1 makes untrue statements of material fact and fails to state material facts that are necessary to make the statements made in the Schedule 14D-1, in light of the circumstances in which they are made, not misleading. As outlined above, UPR has made materially misleading statements and has failed to disclose material information required to make the statements it has made not misleading. Among other things, UPR has made statements designed to foster the misleading impression that Pennzoil's management favors the Tender Offer; UPR has failed to disclose the effect purchase accounting will have on its future earnings; UPR has failed to disclose its contingent $2.5 billion liability to UPC under the tax indemnity; UPR has failed to disclose its historic failure and lack of expertise in the international oil & gas market; DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 35 36 and UPR has failed to disclose adequately the continuing problems it faces in the future as a result of the steep decline curves projected for its properties. 73. These false and misleading statements constitute violations of Section 14(e) of the Exchange Act and of the SEC's rules and regulations promulgated thereunder. 74. With knowledge of the falsity, and in furtherance of UPR's fraudulent scheme, Smith Barney has conspired with UPR and with media consultants hired by UPR to violate the Williams Act. 75. Pennzoil and its stockholders are being irreparably harmed by the false and misleading statements and omissions made by UPR. The purpose of the Williams Act is to ensure that shareholders in publicly-traded companies will not be forced to make investment decisions during the pendency of a tender offer without full and accurate disclosure of material information regarding the offer and the offeror. UPR and Smith Barney have conspired to engage in a campaign of disinformation in violation of the Williams Act, and are urging Pennzoil shareholders to tender their shares, despite the fact that UPR has not yet made disclosures required of it by law. Pennzoil and its shareholders will continue to be irreparably harmed unless UPR and Smith Barney are preliminarily and permanently enjoined (1) from making further false and misleading statements and omissions in connection with the Tender Offer and (2) to make corrective disclosures that cure all of the materially false and misleading statements and omissions made to date. Pennzoil's stockholders have been, and absent injunctive relief will continue to be, denied material information to which they are lawfully entitled and which is essential to making an informed decision on whether to tender their shares of Pennzoil stock to UPR. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 36 37 76. In order to correct UPR's prior violations of the Williams Act, and in order to prevent further violations by UPR of the Act, Pennzoil prays for an order: (a) preliminarily and permanently enjoining Union Pacific Resources Group Inc. and Resources Newco, Inc., and all persons acting in concert with them, from acquiring shares of stock of Pennzoil, through any purported tender offer or otherwise, until at least 30 days after dissemination of complete and accurate securities filings; (b) preliminarily and permanently enjoining Union Pacific Resources Group Inc. and Resources Newco, Inc., and anyone acting definitely or indefinitely in concert with them, (1) from making false and misleading statements and omissions in connection with the Tender Offer and (2) to make corrective disclosures that cure all of the materially false and misleading statements and omissions made by Union Pacific Resources Group Inc. and Resources Newco, Inc. in the Schedule 14D-1; (c) awarding Pennzoil its costs and attorneys fees in connection with this action; and (d) granting Pennzoil such other and further relief as the Court may deem just and proper. COUNT III: VIOLATION OF THE CONFIDENTIALITY AGREEMENT AND MISUSE OF CONFIDENTIAL INFORMATION 77. Pennzoil realleges and incorporates by reference herein the allegations set forth in paragraphs 1 through 76 above as if fully set forth herein. 78. Under the parties' agreement, UPR expressly promised that Pennzoil's highly confidential information would not be provided to or reviewed by UPR's financial advisors. UPR further promised that the information would be used solely for purposes of the litigation. Smith Barney, by signing the Undertakings, agreed to be contractually bound by the Stipulation. 79. Smith Barney and UPR are flagrantly breaching the contractual Stipulation and the Court's Order approving the Stipulation. Contrary to the express terms of the Stipulation, Smith Barney has received and reviewed Pennzoil's highly confidential information, including Pennzoil's DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 37 38 Strategic Plan and other commercially sensitive documents. With knowledge of the information contained in Pennzoil's highly confidential documents, Smith Barney rendered advice to UPR in connection with its revised offer of $84 per share all cash to Pennzoil's shareholders. UPR accepted and acted on Smith Barney's advice with actual knowledge that Smith Barney was in possession of Pennzoil's highly confidential information. 80. By their conduct, UPR and Smith Barney have breached the parties' contract. Furthermore, by this conduct UPR and Smith Barney have misappropriated Pennzoil's confidential information. 81. Pennzoil, its stockholders and the market are being irreparably harmed by UPR's and Smith Barney's use of Pennzoil's highly confidential information. While in possession of Pennzoil's commercially sensitive and highly confidential information, Smith Barney has advised UPR in connection with its offer of $84 per share in cash for all of Pennzoil's stock. This advice was based in part upon, and influenced by, highly confidential information regarding Pennzoil improperly provided to Smith Barney in blatant disregard of UPR's and Smith Barney's contractual agreements and obligations under the Stipulation. 82. This harm can not be remedied. UPR's takeover, once successful, would be difficult, if not impossible, to unravel. No action at law for damages could provide Pennzoil with adequate relief from UPR's and Smith Barney's wrongful actions. 83. Because Pennzoil has no adequate remedy at law, it seeks equitable relief in the form of a temporary injunction and a permanent injunction prohibiting UPR from going forward with its Tender Offer or taking any other action in an effort to acquire or obtain control of Pennzoil so long as the information provided to Smith Barney and UPR remains commercially sensitive. DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 38 39 84. Pennzoil also seeks a temporary injunction and permanent injunction barring Smith Barney from trading in Pennzoil stock and from providing financial advice to any party in the purchase or sale of Pennzoil stock until such time as the information provided to Smith Barney regarding Pennzoil is no longer commercially sensitive. UPR has stated in letters (Exhibits "B" and "C," attached) that it intends to continue using Smith Barney as its financial advisor for its attempt to take over Pennzoil, and it reasonably appears that Smith Barney intends to continue to provide UPR with such strategic financial advice, including with respect to the restructuring of UPR's offer and negotiations with third parties as referred to above. WHEREFORE, Pennzoil demands that upon hearing of the matters raised in this Third Amended Counterclaim and Original Third Party Action, that it have judgment against Union Pacific Resources Group Inc., Resources Newco, Inc. and Smith Barney, Inc. as outlined herein along with its costs and attorneys fees, and for such other and further relief to which it may show itself justly entitled. Respectfully submitted, Robin C. Gibbs State Bar No. 07853000 Gibbs & Bruns, L.L.P. 1100 Louisiana, Suite 5300 Houston, Texas 77002 Telephone No.: (713) 650-8805 Facsimile No.: (713) 750-0903 ATTORNEY-IN-CHARGE FOR DEFENDANT PENNZOIL COMPANY DEFENDANT PENNZOIL COMPANY'S THIRD AMENDED COUNTERCLAIM Page 39 40 OF COUNSEL: David Keltner Phillip T. Bruns Jose, Henry, Brantley, & Keltner Jeffrey C. Alexander 1300 Oil & Gas Building Jean C. Frizzell 309 W. 7th Street Gibbs & Bruns, L.L.P. Fort Worth, TX 76102 1100 Louisiana, Suite 5300 Telephone No.: (817) 877-3303 Houston, Texas 77002 Facsimile No.: (817) 338-9109 Telephone No.: (713) 650-8805 Facsimile No.: (713) 750-0903 Charles Alan Wright 727 East Dean Keeton Street Charles F. Richards, Jr. Austin, Texas 78705 Thomas A. Beck Telephone No.: (512) 471-7188 Daniel A. Dreisbach Facsimile No.: (512) 477-8149 Robert J. Stearn J. Travis Laster Richards, Layton & Finger One Rodney Square P.O. Box 551 Wilmington, DE 19899 Telephone No.: (302) 658-6541
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